Senator WATERS: Building on the discussion we had earlier about additionality in relation to land clearing and avoided land clearing under the ERF, I am interested in knowing particularly under whichever methodology or process you look at whether or not the land clearing for which somebody has a permit is likely to proceed on the basis of whether it would actually cost them more to clear the land and run stock than the cost of clearing the land? To cut a long story short, do you look at the economic viability and likelihood of those land clearing permits being utilised, before you consider them additional for the purposes of the ERF?
Mr Taylor: On a sector-wide basis, yes, but not on a project by project basis. The concept there is that with the methods there is a baseline setting process that looks at what the business's usual circumstance would be in most cases, in the absence of a project. As a consequence of that there is land clearing going on everywhere, where it is permitted, and you assume that people have gone to the expense, the effort and the economic driver of actually going out and securing those land-clearing permits, and on that basis they exercise those land-clearing permits. That is the basis for setting the baseline in the method. It is not an individual farmer—will they clear that particular piece of land on a project by project basis? It is set as a method baseline.
Dr Kennedy: I might be able to help you. There is an issue called 'financial additionality', which I think is the issue you are going to. It is often discussed around crediting or offset type arrangements. In addressing additionality you are really trying to address the issue Mr Taylor is talking about: is someone going beyond what would ordinarily have occurred in the ordinary course of business? Regarding the baseline, when we often talk about a baseline we are really trying to establish for an activity in a sector, be it in energy efficiency or a sequestration activity—the planting of mixed environmental species—what is the baseline against which to then compare the action? When we go through the processes that Mr Taylor and Ms Tilley can talk to you about, going through technical working groups to set these baselines, we focus on really trying to establish what the ordinary course of business is. We do not try to look into the minds of project proponents and ask if they would or would not have invested in this project if they were not issued units. That was a decision taken when the Carbon Farming Initiative was established back in 2010. It was an issue debated at the time. Senator Milne, who I remember briefing, was engaged in the discussion around whether we should have financial additionality as an aspect of trying to determine whether the activity is genuinely additional abatement. The decision at that time—and the government has maintained it as it has amended the CFI to effectively extend the CFI methods across other activities—was not to pursue this idea of financial additionality. The crux of the issue you are asking about is this: are we taking the individual financial considerations of a project into account? The answer to that is no. We are really looking to see if, in the ordinary course of business, the clearing activity, or planting activity or energy efficiency activity would have happened. In these crediting approaches, it is important that you monitor them on an ongoing basis. So, one of the aspects of the expansion from the CFI into the ERF is for regular reviews of these methods to ensure that whatever baseline we have set, that we are crediting above, remains relevant to the ordinary course of business. There is also the capacity, if we become concerned about the baseline leading to over-crediting, or potentially under-crediting, to refer that to the independent committee called the Emissions Reductions Assurance Committee, which we spoke about earlier today, to review a method. The last thing I would say is that all these methods go through their technical processes—if you like, we bring the experts together—but then we expose them to public consultation to give people an opportunity to put submissions in to say, 'I would regard that as the ordinary course of business. I do not think someone should or should not be credited for it.' We receive submissions around that and then this information is all passed on to those committees as they make their assessment to the minister. The minister can only make these methods as legislative instruments—and this was a process established under the Domestic Offsets Integrity Committee—if the committee advises him that the method satisfies the tests as set out in the legislation. So he or she cannot make a method unless the committee has advised that they are satisfied that it does. Then, of course, it is subject to parliamentary scrutiny. So we have a number of layers of scrutiny in these methods so that we can be as sure as possible that any credits that are being issued are for genuine abatement. But we would be the last to pretend that it is especially precise, down the nth degree, so we also include things like fixed crediting periods. So if we are crediting an activity, say an energy efficiency activity or other sequestration activities, there are other things that ensure the integrity. For sequestration activities there are permanence requirements, for example, that you maintain a planting for a number of years, and then we only credit, for example, under some methods, for, say, seven years. It may well be that some more abatement has been generated beyond seven years, but a seven-year window, if you like, is a conservative way of estimating the abatement. It ensures that if we have inadvertently missed that baseline slightly we are not crediting ad infinitum on an ongoing basis. It adds to the nimbleness of the crediting arrangement. Sorry it is a little long-winded, but these are—
Senator WATERS: I have a lot of follow-up questions from all of the things you have said, but carry on.
Dr Kennedy: These are practices that we have both learnt and adopted from the introduction of the Carbon Farming Initiative, but also from other crediting arrangements, such as the international crediting arrangements around the CDM mechanism and those sorts of things. These are schemes of a similar nature.
Senator WATERS: I will start with my list of questions that flowed from that information, and thank you for it. Do the ERF bidders not bid in on a project by project basis? If they do, why are you not assessing on a project by project basis whether or not that land clearing would have gone ahead anyway? Because you were saying you look at that on a sector-wide basis.
Dr Kennedy: The government establishes the method and then under that method any proponent can come forward to register a project using that method. The regulator has further additional criteria he has to ensure when he registers that project, such as that the project is new—
Senator WATERS: A fit and proper person et cetera.
Dr Kennedy: Exactly. But in the design of the CFI and, subsequently, the ERF, looking at it on a project by project basis would be a very complex administratively—
Senator WATERS: Indeed. But it is free money you are dishing out.
Dr Kennedy: And it would lean very heavily against participation in the scheme, which is why we also, to ensure that the crediting is appropriate, have limited crediting periods and all the other steps that I spoke about in determining the method. We take a conservative basis on estimating the abatement likely to be undertaken from a method. One of the ways to manage the risk that you are talking about would be to go project by project, but that—
Senator WATERS: Perhaps for projects of a certain size. I get that for tiny ones, and those tiny ones would not be applying anyway, because it would not be worth their while. Presumably, the land clearing is of such a significant size that it is worth their while to even bid in the first place, which might indicate that it is worth your while to look at whether it is genuinely additional and whether they might not have been economically viable to act on that permit to clear anyway, if you get my drift.
Mr Taylor: I guess there is a further point. The methodology has set out a suite of eligibility criteria, and those eligibility criteria really quite clearly define, at a project level, whether you are eligible to participate. That is scrutinised on a registration by registration or project by project basis by the regulator at the time. But those eligibility criteria set the limits for everybody who applies around what is happening in the sector and the industry. So people have to be able to meet those eligibility criteria to come in. For example, they cannot have a permit that was issued after 2010, otherwise they could be in. They are the sorts of checks and balances that are in the eligibility criteria, that were built in through the public consultation and through the technical working groups and things like that to minimise the risk of overcrediting or crediting in a circumstance where people should not be eligible for crediting. So each project is assessed against the eligibility criteria at the time of registration by the regulator.
Senator WATERS: Okay.
Ms Tilley: May I add a conceptual point as well? Certainly in some of the internal and external discussions around, as Dr Kennedy said, 2010 and 2011 in the development of the carbon farming initiative, as well as in some reviews of international schemes such as the CDM that have either used financial additionality tests or considered using them, even if that seems to be the purest policy application intent, applying that policy intent is very difficult. So, from a government or a regulator's perspective, to be able to put yourselves in the shoes and the minds or the boardrooms of people who are making decisions about whether they would do a project as a normal course of business or only if they received an incentive for it is a very difficult thing to do, and in situations where you ask a project proponent to provide verification documentation evidence as to their costs, there is information asymmetry. The proponent is in a position of power to provide the evidence that backs their argument, rather than the government or the regulator being able to have a very transparent decision-making process about financial additionality for an individual project.
Senator WATERS: So you take their word for it.
Ms Tilley: My reading, even prior to taking on this job, about financial additionality tests is that they are fraught.
Dr Kennedy: We looked at this issue when I was the head of secretariat for Ross Garnaut's update of the climate change review, where Ross was particularly interested in the issue of financial additionality for offset arrangements and the CFI, and initially Ross and I were both attracted to this notion. But, as Kristin pointed out, when you have a test that really starts to look like you are putting yourself in the mind of the person making the decision, it is very hard then to establish what the underlying motive is, which is why we—and then in subsequent legislation it was implemented—have come back to these checks where we try and take, if you like, a more objective, sector-wide look at what is the baseline of activity but not leave it there. We look at these other checks and balances and monitor closely any crediting that is being undertaken, and, as I said earlier, if there was any evidence of crediting, there are these quick steps to quickly relook at the method and reset the method if required.
Senator WATERS: Okay, thank you. I will look into those additional checks and balances further. But I have just one final question on this before I move on to a different line of questioning. You mentioned that, in setting the baseline, you would look at the permits that had been obtained and effectively assume that people had all obtained their permits and set the baseline according to that. Hopefully I have not misconstrued you there. What about illegal clearing, which in Queensland has been quite rampant at times? How do you factor in illegal clearing when you are setting your baseline for the purposes of assessing additionality?
Mr Taylor: For the method we have been speaking about with the permits—since we were here last I have gone back and had a look—I do not think there are any projects registered in Queensland. The nature of the permits that are required to be eligible—to meet the requirements of the method—do not exist in Queensland.
Senator WATERS: Is that the case for all methods? Pardon my interruption, but we started going here last time.
Mr Taylor: There are two different avoided-land-clearing methods. One can be used anywhere in Australia and the other, as it turns out—it is not limited by state or anything like that, but the permits that meet the eligibility criteria by default do not occur in Queensland.
Senator WATERS: But there is that one that could apply anywhere, which would include Queensland?
Mr Taylor: There is another method that Queenslanders could use. To date I do not think there have been any projects registered using that method in Queensland. That method, though, sets a baseline in a different way. There are different parts of the eligibility and the additionality. One is this concept of regulatory additionality. If you have to do something by law, you are not eligible. That is one part of it. If you have cleared illegally or by law you cannot clear, you disqualify yourself.
Senator WATERS: Sure, but more in the setting of the baselines?
Mr Taylor: In the setting of the baseline for the Queensland method, the way it works is you have to be able to demonstrate a historical suite of clearing cycles—the land has demonstrated some sort of economic or primary agricultural use that requires ongoing clearing. This method, having established that that is the pattern of land use in that area, then rewards a change in land use. So you have to have that physical evidence of that baseline being established, then the project starts and that cycle is broken. Then you enter into this permanence period. It is quite a robust method.
Senator WATERS: I can conceive of that when the situation is like what we discussed earlier—where you do not need a permit, such as for much regrowth clearing in Queensland. I am sorry for labouring the point, but I am still not quite clear about how at times immense rate of unpermitted illegal clearing are factored in when you set your sector-wide baselines above or below which you can then calculate your additionality.
Mr Taylor: The concept is set using legal operations. If you have landholders who have had the right to legally clear their land and they have this pattern of clearing land, they are eligible. If you have landowners who either have illegally cleared their land or do not have a right to clear their land, they are not eligible. They are out of the equation for the ERF projects.
Dr Kennedy: Another way of putting that is that any sort of illegal activity going on is not impinging on the baseline for the person who has been in a regular clearing cycle and is about to change their behaviour. When we are looking at measuring the abatement on that block of land, we ask: has that block of land had a regular clearing cycle and are they now about to change that regular clearing cycle?
Senator WATERS: And so somebody else's illegal clearing has no bearing on that. I understand that.
Dr Kennedy: Exactly, and an important aspect of the regulatory issue is that methods cannot be introduced to start crediting for a loosening of a regulatory set of arrangements, although they can be tightened if regulatory arrangements are tightened up. To make that clearer: if, in a state based framework, regulatory arrangements change such that land clearing is more enabled than it was previously and then someone changed their behaviour, we would not begin to credit the behaviour.
Senator WATERS: It is not regulatory additionality.
Dr Kennedy: There would otherwise be a perverse incentive in there to change. However, if the regulatory regime tightened up, we would have to look again at the method, to look at changing it—because now it is not satisfying the test. So it is a one-way tightening test.
Senator WATERS: Thank you. I appreciate your having gone into such detail on that.
CHAIR: Senator Waters, how much longer are you going to go with this?
Senator WATERS: I am sorry; it did take much longer than I had anticipated.
CHAIR: I am going to have to stop you in a minute, so you can either speed it up or—
Senator WATERS: I only have three more questions, so I will try to go super fast. I am interested in the existing abatement from the previous CFI projects and how that has been carried forward to ERF for the purposes of carbon accounting—the double-dipping, effectively, to use that most recently extremely controversial term.
Dr Kennedy: There are a series of CFI projects that have transitioned across and the government took the decision to reset the crediting periods on those transitioning methods. Ms Tilley can talk to those. Is that what you are thinking of?
Senator WATERS: I think so, yes. I am still learning about the interaction of all of these programs.
Ms Tilley: Ms Munro from the Clean Energy Regulator gave some statistics on projects that were existing projects prior to the new legislation. We can answer from a policy design perspective.
Senator WATERS: Yes. I am interested in how they are counted. Were they counted when they were CFI projects against national greenhouse accounts and, if so, how are we now counting them? Is that the transition process?
Dr Kennedy: Do you mean in the projections exercise, in tracking towards the target? These were projects that were previously getting credits under the CFI. They are now getting credits under the amended CFI, or the ERF. Some of them will get credited for a longer period, potentially, than was initially anticipated. That is a little unclear because they could have applied for second crediting periods under the CFI. But now they have transitioned to the ERF and those protects will generate units for as long as their crediting periods allow them to. In some cases that is seven years; in other cases that is much longer, for sequestration projects. Many of the units were purchased in the first auction. That is the abatement that flows from those projects. The inventory—the measurement of Australia's greenhouse gases, which Mr Parker and his colleagues can talk to—is measured entirely independently from this exercise. The greenhouse gas inventory is the estimate of Australia's emissions, a fully independent assessment of Australia's emissions. So the extent to which these policies are changing Australia's overall emissions will be reflected in the credits, but the final test for our international obligations will be in what the accounts say. They are two separate exercises, if you like. One is the policy, the crediting exercise trying to drive emissions down, but then, appropriately, entirely independently, our greenhouse gas accounts are measured, audited and then internationally submitted. I think it is the latter that you are interested in.
Senator WATERS: It is. I am trying to get at whether the projects that are now being delivered through ERF contracts will count towards our five per cent national greenhouse gas emission reduction target, on top of what they would have when they were CFI projects. When did they get accounted for?
Dr Kennedy: They will not count twice. To the extent that they have driven down emissions in Australia, they will count once, and that will be measured independently. If for other reasons Australia's emissions rise outside these projects, then that is entirely a separate matter. Or if, for example, the policy design is not quite right and we are not crediting appropriately then the ultimate test will be the greenhouse gas accounts and whether we track to and meet the target. The policy instrument provides the incentives to drive emissions down, but in a measurement sense they are not directly linked. The units that we are generating under the CFI, now ERF, are not the same units or the same accounting that is used in the international accounting to meet our greenhouse gas accounts. One is an independent measurement exercise, if you like, and one is a policy instrument.
Senator WATERS: Thank you.