The ERF has passed – now what?

With the Emissions Reduction Fund passing the Senate, industry can expect a 15-fold increase in scale of emissions reductions projects.

The Emissions Reduction Fund is national scheme which provides $2.55 billion over three years to purchase emissions reductions. This $2.55 billion is budgeted to cover 2014-15 to 2017-18.

Based on the average budget expenditure, this means the ERF will purchase about 65 million tonnes of CO2-e per annum over the next five years. Knowing that in two years, the Carbon Farming Initiative (CFI) has delivered just over 8.6 million tonnes of CO2-e, industry can expect to see a 15-fold increase in the number of abatement produced over the next five years.

The program will be administered by the Clean Energy Regulator, who will facilitate Government purchasing of Australian Carbon Credits Units (ACCUs). The ERF rewards emissions reduction above a certain baseline, much like the former national Greenhouse Friendly scheme.

Commonwealth Environment Minister Greg Hunt has previously said the test of emission reduction under the ERF is that they must be “real, additional and permanent”.

ERF methodologies

All ERF projects must fall under an approved methodology, which is essentially the set of rules which govern that project.

Pertaining to waste and recycling, the current approved methods include:

  • Reducing greenhouse gases from facilities
  • Thermal oxidation of landfill gas
  • Diversion of materials to an AWT,
  • Reducing emissions via transport fuel efficiency

The Commonwealth Government is also looking to develop other methods, with the following currently under consideration:

  • Biogenic oxidation of landfill methane emissions using phytocovers
  • Diversion of source separated organics using a FOGO kerbside system, or diversion of garden organics from landfill where it is not common practise.
  • Diversion of calorific materials to a waste to energy facility
  • Application of compost to land
  • Avoided emission via the recycling of materials with a high embodied energy
  • The use of biofuels in transport
  • Facility wide energy efficiency

Baseline and credit schemes for the waste sector

The success of the ERF – like the CPM before it – partly relies on the Government’s assumption that emissions from the waste sector will remain relatively stable at 15 million tonnes of CO2-e through to 2030.

Waste generation is expected to grow, so improvements in methane capture and the diversion of organic waste from landfill will be necessary to limit emissions growth.

The ERF scheme will penalise existing CFI projects, which currently (and until February 2015) benefit from a strong carbon price of about $24 per tonne of CO2-e. This is because the price is currently underpinned by the carbon tax.

The auction process

Project proponents will be able to submit confidential bids to the Clean Energy Regulator (CER), offering to supply a quantity of ACCUs, for a nominated price, with auction rounds to be held regularly. Auctions are currently scheduled to be held four times a year.

The Clean Energy Regulator would also apply a ‘benchmark price’, being the maximum amount it will pay per tonne of emissions reduced, with only bids costing less than the benchmark price being considered. The benchmark would be confidential to Government.

According to the 2014 budget papers, the regulator will accept the lowest 80% of bids that are below a ‘benchmark price’ in each round.

The government has previously said that it will not disclose the auction price, but assuming that emissions are to fall by 431 million tonnes by 2020 (a 5% reduction below 2000 levels), the average price the government would pay to reach this target is $5.35 per ACCU.

The availability of real emissions reduction

However, as noted above the CFI has only delivered 8.6 million tonnes of emissions abatement in two years, with the majority of these abatement projects coming from the waste sector.

Therefore, the availability of projects fitting approved methodologies may be well below 431 million tonnes, and thus the limited availability of “real, additional and permanent” projects could greatly increase this price.

For example, if the ERF only doubles the size of the CFI, then the program would deliver 68.8 million tonnes of emissions abatement in four years. This would put the average price of an ACCU sold to the ERF at approximately $375 per tonne.

While the Government could reject such bids as above the benchmark price, conservative bidding will maximise return. Given the repeat auction rounds offered by the ERF, project proponent may benefit from starting with very high, then slowly reducing bid prices.

Opportunities under the Emissions Reduction Fund

Now that the ERF has passed the senate, two key opportunities are available. Firstly, the development and approval of new methodologies, plus the negotiation of baselines, could position the sector to maximise the value of the ERF.

Secondly, once methodologies are approved, both public and private operators must prepare, aggregate and submit bids to the CER.

There also are provisions to facilitate the aggregation of emissions reductions across projects and activities, and allow for CFI professionals (known as ‘project aggregators’) to act on behalf of a group of project proponents.

That’s great news for a range of small to medium landfills in regional settings that cannot afford the capital expenditure of a landfill gas capture system, or even the administrative costs of participating in the scheme.

The intent behind the green paper is that these small landfills could now claim credits through project aggregators for their small scale GHG mitigation efforts such as organics diversion (think Groundswell or MAF composting) and/or landfill biofilters and/or phytocaps.

MRA Consulting Group is currently working with clients to facilitate both of these processes.