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EXPLANATORY STATEMENT

Carbon Credits (Carbon Farming Initiative) Act 2011

Carbon Credits (Carbon Farming Initiative) Methodology (Facilities) Determination 2014

EXPOSURE DRAFT

Background: Emissions Reduction Fund

The Carbon Credits (Carbon Farming Initiative) Act 2011 (the Act1) enables the crediting of greenhouse gas abatement from emissions reduction activities across the economy. Greenhouse gas abatement is achieved either by reducing or avoiding emissions, or by removing carbon from the atmosphere and storing it in soil or trees.

In 2014, the Australian Government introduced the Carbon Farming Initiative Amendment Bill 2014, which establishes the Emissions Reduction Fund (ERF). The ERF expands on the Carbon Farming Initiative (CFI) by extending the scope of eligible emissions reduction activities and by streamlining existing processes. The ERF has three elements: crediting emissions reductions, purchasing emissions reductions, and safeguarding emissions reductions.

Emissions reduction activities are undertaken as offsets projects. The process involved in establishing an offsets project is set out in Part 3 of the Act. An offsets project must be covered by, and undertaken in accordance with, a methodology determination.

Subsection 106(1) of the Act empowers the Minister to make, by legislative instrument, a methodology determination. The purpose of a methodology determination is to establish procedures for estimating abatement (emissions avoidance or sequestration) from eligible projects, and rules for monitoring, record keeping and reporting. These methodologies will ensure that emissions reductions are genuine—that they are both real and additional to business as usual.

In deciding to make a methodology determination the Minister must have regard to the advice of the Emissions Reduction Assurance Committee (ERAC), an independent expert panel that will be established to advise the Minister on proposals for methodology determinations. The Minister will also consider any adverse environmental, economic or social impacts likely to arise as a result of projects to which the determination applies.

The Carbon Farming Initiative Amendment Bill 2014 also provides a process for an Interim ERAC to advise on draft methodology determinations before the Bill is passed by Parliament. In particular, clause 393 of Schedule 1 to the Carbon Farming Initiative Amendment Bill 2014 enables the advice of the Interim ERAC to be used in the place of advice of the statutory ERAC after the Bill commences. It is intended that consultation on this exposure draft be used to inform the advice of the Interim ERAC under that provision.

The ERAC (or Interim ERAC) must include in its advice to the Minister the Committee’s opinion on whether the proposed determination complies with the proposed offsets integrity standards to be set out in section 133 of the Act. The offsets integrity standards require that an eligible project should result in carbon abatement that is unlikely to occur in the ordinary

1 All references to ‘the Act’ in this document refer to the Carbon Credits (Carbon Farming Initiative) Act 2011, as if amended by the Carbon Farming Initiative Amendment Bill 2014 (as introduced into the Senate on 26 June 2014).

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course of events and is eligible carbon abatement under the Act. In summary, the offsets integrity standards also include that:

• amounts are measurable and capable of being verified;

• the methods used are supported by clear and convincing evidence;

• material emissions which are a direct consequence of the project are deducted; and

• estimates, assumptions or projections used in the determination should be conservative.

Offsets projects that are undertaken in accordance with the methodology determination and approved by the Clean Energy Regulator (the Regulator) can generate Australian Carbon Credit Units (ACCUs), representing emissions reductions from the project.

Project proponents can receive funding from the ERF by submitting their projects into a competitive auction run by the Regulator. The Government will enter into contracts with successful proponents, which will guarantee the price and payment for the future delivery of emissions reductions.

Further information on the ERF is available on the Department of the Environment website, www.environment.gov.au/emissions-reduction-fund. Background: Facilities The Government outlined in the Emissions Reduction Fund White Paper that facility-wide methods will be developed using existing data under the National Greenhouse and Energy Reporting Scheme (NGERS) to encourage emissions reductions from a wide range of activities.

In general, the intent of the Exposure Draft Carbon Credits (Carbon Farming Initiative) Methodology (Facilities) Determination 2014(the draft Determination) is to enable a broad range of sectors currently reporting under NGERS to participate in the ERF by achieving emissions reductions through a range of measures without being prescriptive about what these should be or how these should be undertaken. This will allow project developers to apply the draft determination to a wide variety of projects and encourage innovation in project design.

To reduce reporting burden, the draft Determination allows for project proponents to utilise data already reported under NGERS to calculate emissions reductions.

All eligible projects will be able to receive ACCUs for emission reductions from eligible NGER facilities for a seven year crediting period.

Application of the draft Determination The draft Determination sets out the detailed rules for implementing an eligible offsets project at a facility or group of facilities, reporting under the National Greenhouse and Energy Reporting Act 2007 (the NGER Act). These rules have been designed to help ensure that emissions reductions are real and additional to business as usual. Project proponents wishing to implement projects under the draft Determination, once it is made, must make an application to the Regulator under section 22 of the Act. They must also meet the general eligibility requirements for an offsets project set out in subsection 27(4),

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which include compliance with the requirements set out in the draft Determination, and the additionality requirements in subsection 27(4A) of the Act. The additionality requirements are:

• the newness requirement; and

• the regulatory additionality requirement; and

• the government program requirement. Subsection 27(4A) of the Act provides that a methodology determination may specify requirements in lieu of any of the above requirements. The draft Determination does not specify any requirements in lieu and so all three requirements in the Act apply to eligible facilities projects.

Public Consultation The draft Determination has been developed by the Department of the Environment in collaboration with a technical working group comprising representatives from industry and the Regulator. The technical working group met 12 times over the period February 2014 to September 2014 to discuss how to appropriately calculate emissions reductions from a facility and the potential design of this draft Determination.

The exposure draft of the Determination has been published on the Department’s website for public consultation from 15 October 2014 to 12 November 2014. Details of how to make a submission are provided on the Department of the Environment website, www.environment.gov.au

Draft Determination Details The draft Determination will be a legislative instrument within the meaning of the Legislative Instruments Act 2003.

Details of the draft Determination are at Attachment A.

Note on this explanatory statement Numbered sections in this explanatory statement align with the relevant sections of the draft Determination.

Definitions for terms which are highlighted in bold italics can be found in the draft Determination.

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Attachment A

Details of the Methodology Determination

Part 1 Preliminary

1 Name of determination

Section 1 sets out the full name of the draft Determination, which would be the Carbon Credits (Carbon Farming Initiative) Methodology (Facilities) Determination 2014.

2 Commencement Section 2 provides that the draft Determination would commence on the day after it is registered.

3 Authority

Section 3 provides that the draft Determination would be made under subsection 106(1) of the Act.

4 Duration

Under subparagraph 122(1)(b)(i) of the Act, a methodology determination remains in force for the period specified in the determination.

Paragraph 4(a) provides that the draft Determination will be in force from the day it commences until the day before it would otherwise be repealed under subsection 50(1) of the Legislative Instruments Act 2003.

Instruments are repealed under that provision on the first 1 April or 1 October following the tenth anniversary of registration on the Federal Register of Legislative Instruments. Paragraph 4(b) ensures that the draft Determination would expire in accordance with subparagraph 122(1)(b)(i) of the Act.

If the draft Determination expires or is revoked during a crediting period for a project to which the draft Determination applies, the draft Determination will continue to apply to the project during the remainder of the crediting period under subsections 125(2) and 127(2) of the Act. Project proponents may apply to the Regulator during a reporting period to have a different methodology determination apply to their projects from the start of that reporting period (see subsection 128(1) of the Act).

5 Definitions

Section 5 defines a number of terms used in the draft Determination.

Generally, where terms are not defined in the draft Determination, they have the meaning given by section 5 of the Act.

Under section 23 of the Acts Interpretation Act 1901, words in the draft Determination in the singular number include the plural and words in the plural number include the singular.

Key definitions in section 5 of the draft Determination include those set out below.

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Excluded NGER fugitive emissions refers to fugitive emissions estimated under the following sections of the NGER (Measurement) Determination:

• Part 3.2 (fugitive emissions from coal mining);

• Division 3.3.2 (fugitive emissions from venting or flaring from oil or gas exploration activities);

• Subdivision 3.3.3.3 (fugitive emissions from crude oil production (flared));

• Subdivision 3.3.3.4 (fugitive emissions from crude oil production (non flared));

• Subdivision 3.3.5.2 (fugitive emissions from deliberate releases from process vents, system upsets and accidents during crude oil refining activities);

• Subdivision 3.3.5.3 (fugitive emissions released from gas flared from oil refineries);

• Division 3.3.9 (fugitive emission from venting or flaring from natural gas production or processing activities); and

• Part 3.4 (fugitive emissions from the transport of captured carbon dioxide). These emissions are excluded from calculations of the net abatement amount as these emissions are highly variable and are generally poorly correlated with production. This variability could lead to emissions reductions reported by the project to be either artificially enhanced or offset.

Major change refers to a significant event occurring at the facility that affects the comparability of data from before to after the major change. Significant events include ramp-up, significant expansions, plant shutdown, major maintenance activity, and the manufacture of a new production variable as defined in the draft Determination. This lack of data comparability will have implications for setting the crediting baseline.

Major maintenance activity refers to maintenance that occurs at a facility that results in a 10 per cent or more change in the emissions intensity of a production variable for the facility in the maintenance year in comparison to the NGER reporting year preceding or following the major maintenance activity. This would include repairs to equipment and preventative maintenance.

Plant shutdown refers to the period where all or part of a facility is not in operation and not operating for that period results in a 10 per cent or more change in the emissions intensity of a production variable for the facility in comparison to the NGER reporting year preceding or following the plant shutdown.

Production variable refers to a saleable output from a chemical or physical process undertaken at a facility where the change in the quantity of its production results in a change in the emissions from the facility. The production variable must also be expressed in a unit of measurement that complies with the National Measurement Act 1960 and must not be an intermediate product, by-product, or waste product. Proponents are required to calculate the emissions required to produce one unit of each production variable manufactured at the facility in order to set a crediting baseline. The calculations under Part 4 estimate emissions reductions resulting from the implementation of the project on the basis of the improvement in emissions intensity of manufacturing each production variable.

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If the criteria under section 14 are met a single key input or an intermediate product can be considered as a production variable. This is to reduce the burden on proponents by removing the need to apportion emissions between production variables as outlined in section 29.

6 Meaning of baseline period Section 6 provides the meaning of baseline period. Data in this period will be used to set the crediting baseline against which emissions reductions will be measured.

The baseline period is the four consecutive NGER reporting years preceding the start of the project. However, if the facility undergoes a major change in those four years, such as a plant shut down or a significant expansion, the data prior to the change might not be comparable to the data reported once the project has commenced. If the significant change occurred in the first year of the baseline period, proponents can use the data from the last three years to set their crediting baseline. If the change occurred in the second year of the baseline period, proponents can use the data from the last two years to set their crediting baseline. This rule also applies to proponents that do not have access to emissions and production variable data due circumstances such as a change in ownership.

7 Meaning of ineligible emissions reduction measure Ineligible emissions reduction measure for a facilities project refers to an emissions reduction measure that was not in operation at the facility during the whole of the baseline year and:

• is in operation as part of another offsets project that has been registered under the CFI;

• does not meet the additionality requirements set out in subsection 27(4A) of the Act;

• would be an excluded offsets project and would have a material effect on the project emissions reduction on its own, or in combination with one or more other measures mentioned in section 7(3) or section 7(4);

• would be a project covered by the Carbon Credits (Carbon Farming Initiative) Methodology (Landfill Gas) Determination 2014 and would have a material effect on the project emissions reduction on its own, or in combination with one or more other measures mentioned in section 7(3) or section 7(4); or

• would directly increase emissions outside the boundary of a facility, but only if

o the increase is such that, if it were to occur inside the boundary, it would, either on its own or in combination with one or more other measures mentioned in section 7(3) or section 7(4), have a material effect on the project emissions reduction; and

o the measure is not an input or output quality change.

These ineligible emissions reduction measures are excluded to ensure that credits are only provided for genuine and additional abatement projects, are not issued twice for the same project, and are not issued for projects that result in emissions increasing at other facilities thereby potentially offsetting emissions reductions achieved by the project. Emissions reductions achieved by landfill gas projects are also ineligible as the Carbon Credits (Carbon Farming Initiative) Methodology (Landfill Gas) Determination 2014 has

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been specifically designed to capture emissions reductions from these projects and takes into account variables that cannot be controlled for under this draft Determination. The reference to measures that would not meet the additionality requirements set out in subsection 27(4A) of the Act, includes activities that have been, or have begun to be, implemented and thus do not meet the newness test in subsection 27(4A)(a)(i), as well as activities that would fail the regulatory additionality requirement in subsection 27(4A)(b)(i) or the government program requirement in subsection 27(4A)(c)(i). For instance, a grant to install energy efficiency equipment that began to be installed in the middle of the baseline year would be an ineligible emissions reduction measure as it would not satisfy either the newness requirement or government program requirement. This assumes that the equipment had a material effect (on its own or in combination with other measures) on the project emissions reduction in an NGER reporting year during which the equipment was in operation.

8 Meaning of significant expansion Section 8 provides the meaning of significant expansion. This concept is referred to in the draft Determination under section 20. Where a significant expansion takes place at a facility, emission reductions from that facility are reduced to zero for all subsequent NGER reporting years. This is because there is no historical data from the expansion to allow crediting baselines to be determined.

9 Meaning of significant production variable change Section 9 provides the meaning of a significant production variable change. This concept is referred to in the draft Determination under section 20. Where a significant production variable change takes place at a facility, emission reductions from that facility are reduced to zero for all subsequent NGER reporting years. This is because there is no historical data relating to the new production variable that can be used to calculate crediting baselines.

Facilities that install a CHP plant as their project and export electricity generated by the plant are not considered to have undertaken a significant production variable change even though electricity was not produced by the facility during the baseline period. Division 7 sets out how emissions reductions should be calculated in this instance.

10 Meaning of material effect Section 10 provides the general meaning of material effect. This concept is introduced in the draft Determination to reduce the burden on proponents by only requiring specific adjustments be made or action undertaken when something has, or would have, a material effect on the project emissions reductions (the carbon dioxide equivalent net abatement amount).

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Part 2 Facilities projects 11 Facilities projects

The effect of paragraphs 27(4)(b) and 106(1)(a) of the Act is that a project must be covered by a methodology determination, and that the methodology determination must specify the kind of offsets project to which it applies.

Section 11 provides that the draft Determination would apply to an offsets project that aims to reduce greenhouse gas emissions from an eligible facility. Greenhouse gas is a term defined under the NGER Act. It also provides that a facility may reduce its direct emissions (scope 1) or emissions associated with electricity consumption resulting in a reduction of scope 2 emissions.

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Part 3 Project Requirements 12 Operation of this Part

The effect of paragraph 106(1)(b) of the Act is that a methodology determination must set out requirements that must be met for a project to be an eligible offsets project. Under paragraph 27(4)(c) of the Act, the Regulator must not declare that a project is an eligible offsets project unless the Regulator is satisfied that the project meets these requirements.

Part 3 of the draft Determination specifies a number of requirements that must be met in order for a project to be an eligible offsets project.

13 Project must implement measures that aim to reduce emissions from a facility

Section 13 provides eligibility requirements for a project to be declared as an eligible offsets project. These requirements ensure that proponents have access to the appropriate level of comparable data to undertake the calculations provided under Part 4.

The draft Determination does not apply to transport facilities as the Carbon Credits (Carbon Farming Initiative) Methodology (Transport) Determination 2014 has been specifically designed to capture emissions reductions from these facilities and takes into account variables that cannot be controlled for under this draft Determination.

It is also a requirement that the emissions reduction measures that are implemented do not include ineligible emissions reduction measures. If the project does involve an ineligible measure, emissions reductions resulting from the ineligible measure must be excluded from the calculation of the net abatement amount in accordance with section 21.

14 Relevant production variables must be nominated

To apply this method, proponents must nominate one or more production variables, as defined in section 5.

Section 14 sets out the circumstances where a facility that produces multiple outputs can be considered to be producing or processing a single production variable. Using a single production variable will reduce the burden on proponents by removing the need to apportion emissions between production variables as outlined in section 29.

This includes situations where the emissions intensities associated with the production of the multiple outputs are materially similar. That is, the average emissions per unit of production of each production variable during the project’s baseline period are no more than five per cent greater than the average emissions per unit of production of the other production variables during that period.

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Part 4 Net abatement amount 15 Operation of this Part

Paragraph 106(1)(c) of the Act provides that a methodology determination must specify how to calculate the carbon dioxide equivalent (CO2-e) net abatement amount for the project in relation to a reporting period.

Division 2 Method for calculating net abatement amount 16 Carbon dioxide equivalent net abatement amount

The net abatement amount from a facilities project is calculated as the sum of the project emissions reduction from each NGER reporting year that ends in the reporting period in tonnes of CO2-e. Emission reductions from each of these NGER reporting years must be added together for each facility where the project is carried out. The intention under the draft Determination is that reporting periods coincide with NGER reporting years. The option is available under section 20 of the draft Determination for those periods to differ, however the calculation is more complex.

Division 3 Method for calculating project emissions reduction 17 Summary

Under the draft Determination, the project emissions reduction is the level of abatement achieved from the implementation of the project in an NGER reporting year.

18 Timing of calculation

Section 18 specifies that emission reductions must be worked out after the NGER reporting year has ended in relation to the whole of that year. This will minimise complexities that arise if the reporting period does not coincide with NGER reporting years. Section 20 sets out the approach for calculating facility emissions reductions when these two periods do not coincide.

19 Calculation of project emissions reductions

Project emissions reductions for the NGER reporting year are calculated as the sum of each facility's emissions reduction and any electricity emissions reduction from a new CHP plant achieved by each of the facilities where a project is carried out in the reporting period.

Subsection 19(2) specifies that if required, adjustments must be made to the facility emissions reduction amount to exclude ineligible emissions reductions as outlined under section 21. This adjustment is undertaken to ensure that credits are only provided for additional and genuine abatement. The adjusted emissions reduction will be used to calculate project emissions reductions.

20 Facility emissions reductions

The facility emissions reduction for an eligible offsets project is set out in equation 1. A facility’s emissions reduction in a reporting period is calculated as its crediting baseline,

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worked out using equation 4 in section 23, minus its NGER emissions, as calculated in using equation 13 in section 36.

Subsection 20(2) provides that where the crediting period for the project ends part way through the final NGER reporting year, rather than at the end of the final reporting year, equation 2 must be used to apportion facility emissions reductions based on the number of days in the final NGER reporting year that fall within the crediting period. As outlined in section 18, this calculation will need to be undertaken at the end of the NGER reporting year.

For example if a project commenced on 1 January 2016 the standard seven year crediting period would end on 31 December 2023. Facility emissions reductions would be calculated for each whole NGER reporting year from 1 July 2015 to 30 June 2023 using equation 1 and the facility emissions reductions occurring from 1 July 2023 – 31 December 2023 will be calculated at the end of the NGER reporting year using equation 2. Subsection 20(3) specifies that if a facility undergoes a significant expansion or a significant production variable change during the relevant NGER reporting period then the facility emission reduction in the reporting period is zero. This is because there is no historical data for the expansion or new production variable to use to calculate crediting baselines.

21 Adjusted emissions reduction

The calculation of the adjusted emissions reduction provides that project emissions reductions are adjusted to exclude abatement achieved through the operation of ineligible emissions reduction measures at a facility during the NGER reporting year as set out in equation 3. Adjusted emissions reductions will only need to be calculated where the facility undertakes an ineligible activity during the reporting period and emissions reductions from the ineligible activity are not already fully reflected in the baseline year. This is to ensure the crediting baseline and the NGER emissions in the reporting year can be compared.

Subsection 21(2) provides that ineligible emissions reductions can either be excluded based on:

• the level of emissions reductions calculated for another reason and reported to a government body (for example, as reported under a state energy efficiency scheme); or

• an estimation using an appropriate emissions reduction estimation approach that adheres to the criteria outlined under subsection 21(3).

Subsection 21(3) sets out the criteria for approaches to estimate ineligible emissions reductions. These criteria apply when project proponents determine the assumptions and procedures they intend to use to estimate ineligible emissions. The criteria are intended to ensure that estimates are consistent with other well established approaches, such as those set out in other methodology determinations, and are credible and robust.

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Division 4 Method for calculating crediting baseline 22 Summary

The crediting baseline represents the emissions that the facility would have released had the emissions reduction project not been implemented. The crediting baseline will be used to determine the emissions reductions achieved by the facility in the reporting period.

23 Crediting baseline

The calculation of the crediting baseline for a facility with an eligible offsets project is set out in equation 4. It represents the hypothetical scenario of what emissions would have been in the NGER reporting year in the reporting period had the project not been implemented. This is calculated as the sum of the emissions attributed to the production of each production variable manufactured at the facility. Emissions attributed to a production variable are calculated as the production variable’s baseline emissions intensity multiplied by its quantity of production in an NGER reporting year. The method for calculating baseline emissions intensity is set out in Division 5.

Division 5 Method for calculating baseline emissions intensity Subdivision A – Baseline emissions intensity 24 Summary

The baseline emissions intensity for each production variable will be set at the lowest emissions intensity ratio during the baseline period. The year with the lowest emissions intensity ratio for one production variable will be the same year for all production variables produced at a facility due to the approach to apportion emissions set out in section 29. The lowest emissions intensity ratio has been selected to calculate the crediting baseline to reduce the risk of crediting normal fluctuations in emissions, or emissions reductions projects that have already been implemented.

Once identified, the baseline emissions intensity will only change if a recalculation is required under Subdivision C that has a material effect on the level of project emissions reductions achieved in an NGER reporting year.

25 Baseline emissions intensity and baseline year

The baseline emissions intensity of a production variable is measured in tonnes of CO2-e per unit, in accordance with Subdivision B. Project proponents must calculate this for each NGER reporting year in the baseline period, in order to identify the year with the lowest emissions intensity. This number is the production variable’s baseline emissions intensity.

Using emissions intensity to calculate the crediting baseline allows emissions reductions arising from genuine effort to be distinguished from those caused by changes in production levels.

Subdivision C sets out circumstances where the baseline emissions intensity of a production variable needs to be adjusted to ensure data from the baseline year and an NGER reporting year are compared on a consistent basis.

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Subsection 25(3) sets out that the original baseline year will not change if an adjustment is required to the baseline emissions intensity due to the use of a new factor or a change to input and output quality.

If an adjustment is required due to a miscalculation in the original data used to set the baseline emissions intensity, the adjustment is only required to be undertaken to the data in which the error relates; however, proponents will need to assess whether this adjustment will result in a change to the baseline year.

Subdivision B – Calculations relating to emissions intensity 26 Emissions intensity of a relevant production variable

The calculation of emissions intensity of a relevant production variable is set out in equation 5. It represents the average tonnes of emissions released to produce a unit of the relevant production variable during an NGER reporting year in the baseline period.

27 Baseline NGER emissions attributable to a relevant production variable

In order to determine the baseline emissions intensity, the amount of NGER baseline emissions occurring during each NGER reporting year in the baseline period will need to be calculated for the facility using equation 6. Baseline NGER emissions must be apportioned in accordance with section 29 in situations where the facility produces more than one production variable.

28 Total baseline NGER emissions

The calculation of baseline NGER emissions for a facility is set out in equation 6. Baseline NGER emissions from the facility are calculated by adding the amount of eligible direct (scope 1) emissions and emissions from electricity imported to the facility (scope 2). To calculate the emissions from imported electricity, the number of megawatt hours of electricity imported and used at the facility is multiplied by the applicable electricity emissions factor.

Electricity emission factors will be set out in the National Greenhouse Accounts Factors published by the Department and will apply for the full crediting period from the date of project declaration. If the electricity is from a source other than an electricity grid included in the National Greenhouse Accounts Factors then the project should apply the factor provided by the supplier of the electricity. If that factor is not known, the factor for off-grid electricity as set out in the National Greenhouse Accounts Factors should be used.

Emissions factors expressed as kilograms of CO2-e per kilowatt hour are equivalent to tonnes of CO2-e per megawatt hour. Multiplying megawatt hours of electricity imported by the applicable electricity factor yields a tonnes of CO2-e figure.

This approach to electricity emissions applies to all relevant emission reduction methodologies. The approach differs to the approach taken in existing CFI determinations, which refer to state based factors published in the NGER (Measurement) Determination 2008.

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Fugitive emissions listed under section 5 are excluded from the total baseline NGER emissions because these emissions are highly variable and are generally poorly correlated with production. This variability could offset emissions reductions reported by the project or artificially enhance them without changing the level of genuine and additional emission reductions achieved.

29 Apportioning of total baseline NGER emissions

This section applies to facilities that produced more than one production variable during the NGER reporting years in the baseline period. Under equation 7, a proportion of total baseline NGER emissions are allocated to each production variable. This is then used to calculate baseline emissions intensity under Subdivision A.

For facilities that produce multiple outputs, total emissions are apportioned between production variables to identify emissions attributable to each of them. This is intended to diminish any distortionary impacts from relative changes in the production mix on a project’s emission reductions. For example, if a facility shifts production from high emissions intensity outputs to lower emissions intensive outputs in response to market demand, it would artificially enhance the emission reductions reported by the project without changing the quantity of genuine and additional emissions reductions achieved. The calculations under section 29 normalise for changes in the production mix so data between the baseline period and the reporting period is comparable.

Equation 8 under subsection (2) determines the percentage of total baseline NGER emissions that should be allocated to the production of the relevant production variable. Proponents can use either a default apportioning metric or a facility-specific apportioning metric to allocate emissions between products.

The default apportioning metric set out under subsection (3) is based on data submitted for the purpose of determining allocative baselines for emissions-intensive trade-exposed (EITE) activities under the Jobs and Competitiveness Program. If facility-specific EITE baseline data is available this must be used to determine the weighted average emissions per unit of production using equation 9. Electricity consumption data from 2006-07 and 2007-08 must be converted to scope 2 emissions using the applicable electricity emissions factor. Direct (scope 1) emissions and scope 2 emissions from 2006-07 and 2007-08 are added together and divided by the total production over the same period to calculate the facility specific weighted average emissions per unit of production.

Where proponents do not have access to this data, the industry average baselines set out under Schedule 1 can be used with equation 10 to calculate the total industry average emissions intensity for a relevant production variable. The industry average electricity intensity per unit of production listed under column 4 of Schedule 1 must be converted to emissions per unit of production using the applicable electricity emissions factor. This figure is then added to the industry average scope 1 emissions intensity of production listed under column 3 of Schedule 1 to determine the total industry average emissions intensity for a relevant production variable.

Alternatively, proponents can develop a facility-specific apportioning metric to allocate emissions between production variables. This facility-specific apportioning metric will need to adhere to the criteria outlined under subsection (5).

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Subdivision C – Recalculating emissions intensity 30 Application of Subdivision

Emissions reductions calculated under this draft Determination measure improvements in emissions intensity achieved in the reporting period in comparison to the baseline period.

To ensure that data between the baseline period and the reporting period are comparable, there may be instances where baseline emissions intensity will need to be adjusted.

Baseline emissions intensity will need to be revised in situations where, in the calculation year, new factors are used to calculate NGER emissions, there are changes to the input or output quality of a production variable, or where errors in data used to calculate the baseline emissions intensity are identified and these result in a material effect on the emissions reductions from the project. Subsection (2) sets out the definition of a new factor and subsection (3) sets out the definition of an input or output quality change.

These adjustments are necessary to ensure the level of abatement reported reflects genuine abatement achieved rather than, for example, changes to the way emissions have been calculated over time. Similarly, a facility might change the input or output quality of the goods it produces which materially impacts on emissions. These changes to emissions are likely to be the result of a business reacting to market forces rather than an intention to reduce emissions, and would not be additional.

31 Recalculating emissions intensity

Section 31 sets out the sections that proponents should use to recalculate the original emissions intensity previously set and the order in which these should be applied for situations where new factors are used, there are input and output quality changes, and there are error correction changes.

32 Recalculating because of a new factor

If the baseline emissions intensity needs to be recalculated due to the application of new factors, such as default energy content or default emissions factors, Global Warming Potentials, or moving to a higher order NGER measurement method, the total baseline NGER emissions data as calculated under section 28 will need to be adjusted to reflect the new factors as if they had been used during the baseline period. This adjusted data will then be used to calculate baseline emissions intensity for each production variable at the facility.

Factor changes that occurred during the reporting period will only need to be reflected in the NGER emissions reported under the baseline year identified under section 25. Proponents will not need to recalculate the baseline emissions intensity for each year in the baseline period.

33 Recalculating because of an input or output quality change

If the baseline emissions intensity needs to be recalculated due to a change in input or output quality during the calculation year proponents can use either a default or facility-specific method. This adjustment will need to be applied to emissions allocated to each production variable in the baseline year identified under section 25.

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Under the default method, proponents will use equation 11 to estimate the change in the level of processing required resulting from the change in input or output quality. This equation compares the processing undertaken in the calculation year (measured as the difference in the purity of the input and output) to the difference in processing undertaken in the baseline year.

Under equation 12, this change in processing factor is applied to the emissions apportioned to the relevant production variable under section 29 to calculate the adjusted emissions. This adjusted data will then be used to calculate baseline emissions intensity for each production variable at the facility.

Alternatively, proponents can develop a facility-specific method for recalculating baseline NGER emissions data for a change in input and output quality. This facility-specific method must be consistent with the criteria outlined under subsection (5).

34 Recalculating because of an error

Where an error has been identified in the data originally used to calculate baseline emissions intensity, proponents must recalculate the baseline emissions intensity for the NGER reporting year in which the error occurred. Proponents will then need to identify whether the recalculation changes the baseline year identified under section 25.

Division 6 Method for calculating NGER emissions 35 Summary

In order to determine the level of abatement achieved by the project, the NGER emissions that occurred during the reporting period must first be calculated for each facility to which the project applies.

36 NGER Emissions

The calculation of NGER emissions for a facility is set out in equation 13. NGER emissions from the facility are calculated by adding eligible scope 1 emissions from the facility to emissions from purchased electricity. Direct emissions are obtained from NGER reporting data and emissions from purchased electricity are calculated as follows.

To calculate the emissions from purchased electricity, the number of megawatt hours of electricity imported and used at the facility is multiplied by the applicable electricity emissions factor.

The emissions associated with electricity, heat or cooling generated by a CHP plant and exported from the facility must be subtracted from the calculated NGER emissions in the following circumstances:

• if a new CHP plant is installed at the facility as part of the project and electricity from the plant is exported to a grid;

• if a new CHP plant is installed and the facility exports a material amount of electricity from the plant other than to an electricity grid;

• if a new CHP plant is installed and the facility exports a material amount of heat or cooling from the plant; or

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• if a facility has an existing CHP plant and exports a material amount of electricity, heat or cooling that it did not export in the baseline year.

The emissions attributable to exported electricity must be calculated using equation 20. Where emissions attributable to exported heat or cooling must be subtracted from the calculated NGER emissions for a facility, those emissions must be worked out using an approach that is consistent with the approach for attributing emissions from a CHP plant to exported electricity in Division 7.

These emissions are excluded to allow comparability between the NGER emissions in the reporting year and the NGER emissions in the baseline period.

Division 7 Method for calculating electricity emissions reduction from a new CHP plant 37 Summary

A different approach must be taken for calculating emissions reductions for projects that involve the installation of a CHP plant that exports electricity to an electricity grid. This is because exporting electricity from a facility creates a new production variable that was not produced in the baseline period.

This Division outlines how to quantify emissions reductions that occur when low emissions intensity electricity produced in a CHP plant displaces higher emissions intensity electricity in an electricity grid. The difference between the emissions intensity of the CHP plant and the emissions intensity of the electricity grid is used to calculate the emissions reduction from the CHP plant.

The approach used in Division 7 to calculate emissions from the CHP plant attributable to electricity generation is based on the ‘efficiency method’ detailed in the Allocation of GHG Emissions from a Combined Heat and Power(CHP) Plant protocol (version 1.0) developed by the World Resources Institute.

38 Application of Division

The method for calculating electricity emissions reduction from a CHP plant should only be applied if a CHP plant has been installed at the facility and electricity from the CHP plant has been exported to an electricity grid as part of the emissions reduction project. The method should not be applied to a facility that exported electricity generated by an existing CHP plant to an electricity grid during the baseline period. This division does not apply where a facility had a CHP plant during the baseline period that did not export electricity, but commenced exporting electricity from the CHP plant after the baseline period. However, the project proponent can reduce total NGER emissions from the facility by the emissions associated with the exported electricity under section 36.

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39 Electricity emissions reduction from a CHP plant

Installing a CHP plant that exports electricity at a facility can deliver emissions reductions in two forms. It can reduce the facility’s scope 1 emissions and it can displace higher emissions intensity electricity generation in an electricity grid. Equation 14 calculates the emissions reduction associated with exporting electricity to a grid. The equation calculates the difference between the relevant electricity emissions factor for the grid to which the facility is connected and the emissions intensity of the CHP plant, and multiplies this difference by the quantity of electricity exported to the grid. If the emissions reduction calculated using Equation 14 is negative, the emissions reduction from this subsection is considered to equal zero.

40 Emissions intensity of electricity generated

The emissions intensity of the electricity generated by the new CHP plant is needed to calculate emissions reductions associated with exporting electricity from the plant. Equation 15 calculates the emissions intensity of electricity generated by the new CHP plant by dividing the emissions attributable to electricity generated by the new CHP plant by the quantity of electricity generated by the new CHP plant.

41 Emissions apportioned to electricity generated by CHP plant

The emissions associated with electricity generation from a new CHP plant are calculated using equation 16. To calculate the emissions, this equation takes the ratio of electricity produced by the new CHP plant in gigajoules to the total gigajoules of energy produced by the plant and applies this ratio to the total emissions from the plant. If the plant does not produce any cooling, then the quantity and efficiency of cooling should be equal to zero.

In accordance with subsection 36(3), if the emissions associated with exported heat and/or cooling need to be calculated, an adjusted form of this equation should be used, where efficiency ratio of the exported substance produced by the CHP plant would be in the numerator of equation 16.

42 Quantity of heat and cooling generated

The quantity of heating and cooling generated is needed to calculate the total emissions from electricity generation from the new CHP plant. These quantities may also be required to calculate the emissions from heating and/or cooling if these emissions are required to be deducted from total NGER emissions in accordance with section 36(3).

Unlike electricity, heating and cooling are difficult to measure directly. For this reason, this method uses a standard equation that uses the physical relationship between inputs and outputs to identify the quantity produced.

The quantity of heat produced is determined by calculating the difference between the energy contained in the steam produced by the CHP plant and the energy contained in the feedwater. This equation is divided by one million to convert the result into gigajoules.

Similarly, the quantity of cooling is determined by calculating the difference between the energy contained in the return water that goes into the absorption chiller and the energy contained in the water outflow from the absorption chiller. This figure must also be divided by one million to convert the result to gigajoules.

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43 Efficiency of electricity, heat and cooling generation

A measure of the efficiency of the electricity, heat and cooling generation is required to complete the calculation in equation 16. Efficiencies can be worked out using equation 19, or where the measurement of thermal efficiencies is excessively costly or not economically feasible, estimated using the efficiency curves or data provided by the manufacturer. If the manufacturer’s efficiency curves or data are adopted, then the specific load value representing the average capacity over the course of the NGER reporting year should be used.

Equation 19 divides the quantity of an output generated by the CHP plant by the quantity of the fuel consumed by the CHP plant, and multiplies it by 100 to determine the percentage of total fuel used to generate the output calculate the thermal efficiency of an output.

These efficiencies may also be required to calculate the emissions from heating and/or cooling if these emissions are required to be deducted from total NGER emissions in accordance with subsection 36(3).

44 Emissions apportioned to electricity exported to an electricity grid

Emissions associated with electricity exported to an electricity grid must be excluded from a facility’s NGER emissions in the NGER reporting year to ensure comparability between the baseline period and the reporting period. To calculate these emissions, equation 20 multiplies the total emissions associated with electricity generated by the CHP plant by the proportion of exported electricity from the CHP plant to the total electricity generated by the CHP plant.

In accordance with subsection 36(3), if the emissions associated with exported heat and/or cooling need to be calculated, an adjusted form of this equation should be used. The adjusted equation would use the quantity of the exported substance from the CHP plant to the quantity of the substance produced by the CHP plant and multiply it by the emissions apportioned to the generation of that substance calculated using the adjusted equation 16.

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Part 5 Reporting, record keeping, and monitoring requirements Subsection 106(3) of the Act provides that a methodology determination may require the project proponent of an eligible offsets project to comply with specified monitoring, record keeping and reporting requirements.

Under Parts 17 and 21 of the Act, a failure to comply with these requirements may constitute a breach of a civil penalty provision, and a financial penalty may be payable.

The monitoring, record keeping and reporting requirements specified in Part 5 of the draft Determination are in addition to any requirements specified in the Act, Regulations2 and legislative rules.

Reporting periods

The Act and subordinate legislation provide for flexible reporting periods between six months and two years in duration. Project proponents should be aware that the Act and subordinate legislation may also specify other reporting and notification requirements affecting the draft Determination, including to allow shorter reporting periods.

Record keeping requirements

No record keeping requirements are specified in the draft Determination. The Act and legislative rules will specify offset report and record keeping requirements that apply to all ERF projects. The Regulations currently include several record keeping requirements and the intention is to transfer these requirements from Regulations to legislative rules over time.

Changed audit requirements

The Act provides for a risk-based approach to auditing emissions reductions. Subsections 13(1) and 76(4) of the Act provide for legislative rules to be made by the Minister, specifying the level of assurance, frequency and scope of the audit report that must be provided with project reports for different types of projects. Division 1 Offset report requirements Subdivision A – Requirements relating to timing 45 Operation of this Subdivision

The effect of subparagraph 76(4)(e)(ii) of the Act is that a methodology determination may specify the time period by which an offsets report under the facilities method must be submitted to the Regulator.

2 The Carbon Credits (Carbon Farming Initiative) Regulations 2011 can be accessed at http://www.comlaw.gov.au/Details/F2012C00466. It is intended that these requirements in Regulations will be revised and transferred to legislative rules for the Emissions Reduction Fund over time.

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46 Timing for final offsets report

Section 46 of the draft Determination applies if the crediting period for a facilities project ends part way through the NGER reporting year. Under these circumstances, the offsets report for to the final NGER reporting year in the reporting period must be submitted to the regulator within six months after the end of the final NGER reporting year.

Subdivision B – Other requirements 47 Operation of this Division

The effect of paragraph 106(3)(a) of the Act is that a methodology determination may set out requirements to be included in each offsets report.

48 Information that must be included in an offsets report for non-NGER reporting facilities

Section 48 sets out information that must be included in each offsets report, in addition to legislative requirements, where a facility reported under the NGER Act during the baseline period but is no longer required to report during a reporting period.

If this section applies, the proponent must include in the offset report the same information about greenhouse gas emissions, energy production and energy consumption from the operation of the facility as it would be required to include in an NGER report. This section may apply if, for example, a facility reduces its emissions below the NGER reporting threshold for facilities. It may also apply if there is a change in ownership such that the facility no longer forms part of a business structure that exceeds the NGER corporate group threshold and does not exceed the facility reporting threshold on its own. This will allow the Regulator to continue to issue credits for abatement achieved through the offsets project.

Division 2 Notification requirements 49 Operation of this Division

The effect of paragraph 106(3)(b) of the Act is that a methodology determination must set out the notification requirements for a facilities project that is an eligible offsets project.

50 Notification requirements

If a facility falls below an NGER reporting threshold and is no longer required to provide an NGER report to the Regulator, the project proponent must notify the Regulator as soon as they are aware of this. This allows the Regulator and the project proponent to agree on alternative arrangements for reporting facility emissions for the purposes of calculating the emissions reduction from the project.

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Division 3 Monitoring requirements 51 Operation of this Division

The effect of paragraph 106(3)(d) of the Act is that a methodology determination must set out the monitoring requirements for a facilities project.

52 Requirement to monitor operation of facilities

The specific monitoring requirements for a facilities project are set out in section 52 of the draft Determination. Under the draft Determination, project proponents are required to monitor their greenhouse gas emissions, energy production and energy consumption in accordance with the NGER Act. If the NGER Act no longer applies to a project proponent, they must comply with section 48 of the draft Determination.

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Part 6 Dividing a facilities project 53 Operation of this Part

Part 6 sets out requirements for dividing a facilities project that is an eligible offsets project.

54 Requirements for division of project

A project proponent may only divide a facilities project in parts if it meets two criteria. The project must relate to two or more facilities and each part must consist of at least one facility. This requirement ensures that an NGER report for a single facility is never divided into sections.

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Schedule 1 – Industry Average Emissions Intensities 1 Industry average emissions intensities

Clause 1 sets out that Schedule 1 provides the industry average emissions‑intensive trade‑exposed emissions intensity baseline which can be used by proponents to calculate an apportioning metric that represents the emissions resulting from the production of each unit of a production variable at the facility, consistent with the calculations under section 29.