Loopholes and escape hatches: Government committed to CFI success

Carbon Credits (Carbon Farming Initiative) Amendment Bill 2014

The legislation for the Government’s new Direct Action Carbon Farming Initiative gives the Minister Greg Hunt unprecedented power to intervene in case his program needs tweaking. It appears that the program’s builders want as much wriggle room as possible to make this program work. Eg., It gives the Minister the power to make ‘legislative rules’ (308) which have the force of law. These ‘rules’ can prescribe anything that meets the aims of the Act.

The draft legislation is full of loopholes and escape hatches for maximum flexibility. For instance there is some concern about the ‘reverse auction’ system – with the Government as the sole buyer. The draft legislation not only allows for ‘a tender process’ but also ‘any other process’. (Division 3, 20F) Could ‘any other process’ include ‘banding’(similar projects compete against each other for funding). Banding on the basis of methodology groups or technology applications would level the playing field on costs.

The Government’s resolve to get a workable system is starkly displayed in this next example: Under the old Act a ‘methodology determination’ (the recipe for an activity, essential for carbon credits to be created) had to ‘comply’ with the ‘offsets integrity standards’ (eg. permanence, additionality, etc.). But the new Act requires only that it must be made ‘having regard to’ these standards. (23 Section 4) Is this just in case the integrity bar is set so high that there is no interest on the supply side? 

The vehicle for most ministerial massaging of the trading system is the ‘methodology determination’. The Minister is solely responsible for making or varying methodology determinations (recipes for abatement). When doing so, the draft Act says that he must ‘have regard to’ advice from an expert panel, the offsets integrity standards, and ‘certain other matters.’ (198 Section 105) This could mean anything. It is clear that these ‘other matters’ are not certain at this time. In another place ‘other matters’ is described as ‘such other matters (if any) as the Minister considers relevant’. (208 Subsection 114(2) Again, the Minister is given this power when deciding whether to vary a methodology determination.

The draft legislation spells out the ‘crediting period’ for eligible offsets projects (15  years for sequestration projects and 7 years for emissions avoidance projects). But while it lays down the law, it creates a large loophole in the form of a methodology determination which ‘may specify a different crediting period.’

Minister Hunt even has it within his power to eliminate the barrier many land managers see in the 100 Year permanence standard.  (Sequestration, or capture and hold projects, must be secured for 100 years.) Under existing Carbon Farming Initiative rules, a risk buffer of 5% is applied to such projects, meaning that for every 100 tonnes of carbon stored by a project, 95 Australian Carbon Credit Units are issued. This buffer means that a farmer does not have to replace credits if carbon stores are lost because of natural events such as a bushfire. Extending the CFI’s proposed 5% Risk of Reversal Buffer to 20% could remove the major barrier seen in a 100-year permanence option. The buffer units would be ‘banked’ in a ‘mutual society’-like account that can spread the risk across multiple farm businesses, multiple industries and multiple climate zones. The banked tonnes underwrite the primary tonnes against loss for any reason, removing the farmer’s liability to make good any losses. As the risk reduces with the passing of the years, a percentage of the value of the banked tonnes could be paid out in 5-year increments until the 100^th year. The Minister can vary the permanence period discount number if ‘another percentage is specified in the legislative rules in relation to a particular kind of project’. (89 Subsection 16(2)).

In an attempt to make sequestration projects more attractive, the Government has included a 25-year permanence option in the Emissions Reduction Fund. The number of Australian Carbon Credit Units (ACCUs) issued for these projects will be discounted by 20% relative to 100-year projects. This discount reflects the potential cost to Government of replacing carbon stores if 25-year projects are discontinued. There is no provision for the ‘banking’ of the ACCUs or the return of units over time. And the reduction of the size of the barrier it represents in the farmer’s mind is not as effective as its disappearance altogether. There is only one man can do it: the Minister.

With so much of his political reputation riding on the success of Direct Action, it is little wonder Minister Hunt has written into the script a leading role for himself in this drama.