The Carbon Farming Initiative: removing the obstacles to its success

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The Carbon Farming Initiative: removing theobstacles to its successAndrew Macintosha

a Centre for Climate Law & Policy, Australian National University, Canberra, ACT 0200,Australia.Published online: 10 Apr 2014.

To cite this article: Andrew Macintosh (2013) The Carbon Farming Initiative: removing the obstacles to its success,Carbon Management, 4:2, 185-202

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After almost two decades of debate, and five previ-ous attempts, the Australian carbon pricing scheme finally commenced on 1 July 2012. While welcomed internationally, the domestic response has been mixed. Most analysts have judged the scheme to be a sig-nificant (if not a substantial) advance, an opinion inf luenced by the compromises that were necessary to get the scheme through Parliament and unambi-tious nature of Australia’s likely 2020 mitigation tar-get (5% reduction on 2000 levels) [1–5]. Within the political sphere, the response has been polarized; the Labor Government and Australian Greens have hailed it as a great leap forward, the Liberal National Party Opposition have claimed it ‘will be like a wrecking ball’ through the economy and put ‘a python squeeze’ on growth [101,102].

In the background to the contentious carbon pric-ing debate has been the Carbon Farming Initiative (CFI). Like the Kyoto Protocol’s CDM, the CFI is a project-based, baseline-and-credit offset scheme. Under it, approved offset projects are able to gener-ate certified offsets, called Australian carbon credit units (ACCUs), from the land use, land use change and forestry (LULUCF), agriculture and waste sectors.

Where the removals and/or avoided emissions count towards Australia’s mitigation targets, the ACCUs (called Kyoto ACCUs) can be used to meet liabilities under the carbon pricing scheme, exchanged for Kyoto units (assigned amount units, emission reduction units or removal units) and sold into overseas compliance markets, or sold in voluntary markets (the latter is likely to be rare because of the lower prices in volun-tary markets). If the removals or avoided emissions do not count towards Australia’s targets, the project is known as a non-Kyoto offset project and receives non-Kyoto ACCUs, which can only be used in voluntary markets.

Conceptually, the CFI shares much in common with other carbon offset schemes. What makes it of interna-tional interest is its breadth, the statutory framework within which it operates and, most notably, the inno-vative design features developed to deal with integrity and perverse impact risks, and promote co-benefits. In drafting the ‘Carbon Credits (CFI) Act 2011’ (CFI Act), the Australian Government made particular efforts to respond to concerns that the scheme would suffer a failure to thrive due to the transaction costs that stem from project-level integrity requirements [6].

Carbon Management (2013) 4(2), 185–202

The Carbon Farming Initiative: removing the obstacles to its success

Andrew Macintosh*In December 2011, the Australian Government introduced the Carbon Farming Initiative (CFI), a project-based, baseline-and-credit offset scheme for emissions and removals from the land use, land use change and forestry, agriculture and waste sectors. The scheme is one of the most robust of its kind, having several innovative design features developed to deal with integrity and perverse impact risks, and promote co-benefits. Despite this, there are a number of issues undermining the capacity of the CFI to realize cheap abatement opportunities and improve environmental outcomes. This paper provides an overview of the CFI and an ana lysis of the obstacles to its success. Suggestions for improvements are made, including substituting a flexible permanence period–permanence deduction mechanism for the existing 100-year rule and modifying the risk of reversal buffer and leakage deduction processes to improve returns to project proponents.

Policy Focus

*Centre for Climate Law & Policy, Australian National University, Canberra, ACT 0200, Australia Tel.: +61 2 6125 3832; Fax: +61 2 6125 4899; E-mail: [email protected]

future science group 185ISSN 1758-300410.4155/CMT.13.9 © 2013 Future Science Ltd

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Despite this, the scheme faces a number of potential obstacles and concerns still linger that the CFI may not realize its full potential [7].

The object of this article is to review the design features of the CFI, analyze the major impediments to its success and identify potential solutions. The following section pro-vides an overview of the CFI. The article then reviews the mechanisms included within the CFI to deal with integrity and perverse impact risks, and to promote co-benefits. This is followed by an ana lysis of the obstacles to the scheme’s success, conclusions and a future perspective.

Overview of the CFIThe policy package that took effect in July 2012 – the Clean Energy Future (CEF) package – has three main components: the CFI, an ETS (with a 3-year fixed priced period) and a collection of equivalent car-bon prices (i.e., carbon taxes). The premise behind the design of the package was that most of Austra-lia’s emissions and removals should be subject to a direct or equivalent carbon price, or fall within the reach of the CFI [6]. The ‘Clean Energy Act 2011’ (CE Act), which contains the ETS, imposes a direct carbon price on selected emissions from the energy, industrial processes and waste sectors. To fill gaps left by the CE Act in the energy and industrial processes sectors, equivalent carbon

prices are imposed on certain emissions from these sec-tors via the fuel tax and ozone and synthetic GHG regu-lation regimes. The CFI is intended to compliment the carbon pricing scheme by allowing offsets to be gener-ated by avoiding emissions and enhancing removals in the agriculture, waste and LULUCF sectors.

As noted, the CFI divides projects and ACCUs into Kyoto and non-Kyoto, based on whether the avoided emissions or removals are reported against Australia’s mitigation targets under the Kyoto Protocol or a suc-cessor agreement to which Australia is a party. It also splits projects into ‘sequestration’ and ‘emissions avoid-ance’ offset projects. Sequestration offset projects are those whose emissions and removals are accounted for in the LULUCF sector. They involve the sequestration

of CO2 in biomass or soils and avoidance of CO

2, CH

4

and N2O emissions from the destruction or distur-

bance of biomass or soils. Emissions avoidance offset projects are those whose emissions are accounted for in the agriculture and waste sectors – the avoidance of CH

4 and N

2O emissions from agricultural activities

(e.g., livestock, rice production, savannah burning and crop residue burning) and legacy waste in landfill facili-ties (i.e., CH

4 and N

2O emissions from waste accepted

at a landfill facility before 1 July 2012). The CFI also provides for emissions avoidance projects involving feral animals (known as ‘introduced animal emissions avoid-ance projects’). CH

4 and N

2O emissions from feral ani-

mals are not provided for under current international accounting rules because they are non-anthropogenic [8]. Despite this, the CFI allows for non-Kyoto ACCUs to be generated for projects involving the avoidance of these emissions. The project types and coverage of emissions under the CFI is summarized in Table 1.

As noted in Table 1, in the first commitment period of the Kyoto Protocol Australia’s coverage of LULUCF activities was confined to afforestation/reforestation and deforestation. No Article 3.4 activities (grazing land management, cropland management, revegeta-tion and forest management) were elected because of concerns about the potential for debits to arise from major natural disturbances, particularly droughts and bushfires [9,10]. In the second commitment period, all Annex B parties are required to account for forest man-agement [11]. The other Article 3.4 activities, including the newly introduced wetland drainage and rewetting, remain optional. At the time of writing, the Australian Government had not indicated whether it would include any of these activities.

The five steps associated with the issuance of ACCUs under the CFI are summarized in Table 2.

Integrity & perverse impact risks, & capturing co-benefitsLike tradable permit schemes (e.g., ETS), the main ben-efit associated with offsets is that they lower abatement costs [6,12,13]. Many offset types also have the capacity to generate co-benefits [14–21]. For example, carbon off-sets involving reforestation can have positive impacts on biodiversity, heritage and hydrology, as well as seques-tering carbon. These characteristics have made offsets an attractive policy option, particularly in relation to the mitigation of GHG emissions, where many view sequestration-related offsets as a way of buying time for the development of zero- and low-emission energy sources [7,22,23]. While offering several benefits, offsets come with risks. In carbon offset schemes, the risks can be split into two groups: integrity risks and perverse impact risks.

Key terms

Carbon offsets: Reductions in emissions, or the maintenance or enhancement of carbon sinks, relative to a counterfactual reference case, which can be used to compensate for emissions from another source.

Perverse impacts: Secondary adverse impacts associated with offset projects, including negative impacts on biodiversity, hydrology, heritage, wildfire risk and communities.

Co-benefits: Complementary benefits associated with carbon offset projects (i.e., in addition to the climate benefits), including improved biodiversity, hydrological, heritage and socioeconomic outcomes.

Sequestration offset project: Carbon offset project involving the sequestration of CO2 in biomass or soils and/or the avoidance of CO2, CH4 and N2O emissions from the destruction or disturbance of biomass or soils.

Emissions avoidance offset project: Carbon offset project involving the avoidance of CH4 and N2O emissions from agricultural activities, legacy waste in landfill facilities or feral animals.

Additionality: The risk that offset credits may be issued for emission reductions or enhanced removals that would have occurred anyway.

Leakage: The risk that an offset project will trigger an increase in emissions from sources, or reduction in removals by sinks, that occurs outside the project boundary.

Permanence: The risk associated with sequestration offset projects that the carbon stored within the project area in biomass or soils will be fully or partially released as a result of future events.

Carbon Management (2013) 4(2) future science group186

Policy Focus Macintosh

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� Integrity risks Integrity risks relate to the potential for the actual abatement associated with an offset to be less than its face value (e.g., the offset is supposed to embody 1 tCO

2-e of abatement but the actual abatement is

only 500 kg). In carbon schemes, the main integrity risks stem from additionality, leakage and perma-nence [24–27]. Concerns about these issues has stif led the use of offsets in domestic schemes (most notably in the EU ETS), led to restrictive rules on reforesta-tion and afforestation projects in the CDM, and hin-dered the creation of an international offset scheme for deforestation and forest degradation in developing countries [28–31].

In most climate offset programs, if the offset credits do not represent their face value in abatement, the envi-ronment bears the cost – the use of the offset results in higher net emissions and a higher atmospheric concentration of GHGs. The same applies with non-Kyoto ACCUs under the CFI, but not necessarily with Kyoto offset projects. If Kyoto ACCUs do not repre-sent their face value in abatement, the impacts will usually be financial rather than environmental [6,32]. This is a product of the fact that Australia’s emissions are subject to a national cap under the Kyoto Protocol (and are likely to remain under a cap in a successor agreement). Where Kyoto ACCUs are issued for non-existent abatement, Australia’s net emissions will be unchanged, meaning there should be no change in the climate outcome. What will change, however, is that to account for the relative increase in emissions from the sectors that fall outside of the carbon pricing scheme but that Australia still counts towards its targets (the so-called ‘uncovered sector emissions’), the carbon pol-lution cap under the CE Act will have to be lowered,

thereby reducing the revenues received for carbon units issued by the Australian Government. Alternatively, if the carbon pollution cap is not reduced, the Australian Government will be required to purchase offsets from overseas. Either way, provided Australia’s emissions are capped under an international agreement, defects associated with the abatement value of Kyoto ACCUs will usually lead to the Government incurring costs or forgoing carbon revenue. This provides an inbuilt incentive for the Australian Government to minimize integrity risks. Arguably, this is reflected in the mecha-nisms that have been built into the CFI to deal with these issues.

Additionality mechanismsAdditionality refers to the risk of offset credits being issued for emission reductions or enhanced removals that would have occurred anyway [6,33–35]. The CFI has two main mechanisms for dealing with this issue: the ‘additionality test’ and the baseline and measurement requirements.

The additionality test is aimed at excluding projects that would have occurred without the incentive pro-vided by the capacity to generate ACCUs. It applies to the approval of methodologies (methodologies cannot be approved unless the projects covered by the method will pass the test) and eligible offsets projects (projects cannot be approved as eligible offsets projects unless they pass the test). Other carbon offset schemes, includ-ing the CDM, use a project-level additionality test, which requires an assessment of whether each project would have been undertaken in the counterfactual. Although considered initially, this approach was dis-carded in preference for a ‘project-type’ test based on two requirements:

Table 1. Relationship between sequestration and emissions avoidance projects, and Kyoto and non-Kyoto projects.

Carbon sequestration Emissions avoidance

Kyoto offset projects � Sequestration projects on lands accounted for by Australia under the Kyoto Protocol. In the first commitment period, this was confined to afforestation/reforestation and deforestation. In the second commitment period, this will also include forest management and possibly other Article 3.4 activities (grazing land management, cropland management, revegetation and wetland drainage and rewetting)

� Agricultural emissions avoidance projects – projects to avoid CH4 and N2O emissions from savannah burning, grassland burning, crop residue burning, agricultural soils, livestock urine and dung, and CH4 emissions from livestock and rice production

� Landfill legacy emissions avoidance projects – projects to avoid CH4 and N2O emissions from waste deposited in landfill prior to 1 July 2012

Non-Kyoto offset projects

� Sequestration projects on lands not accounted for by Australia under the Kyoto Protocol

� Introduced animal emissions avoidance projects – projects to avoid CH4 and N2O emissions from introduced animals

Data taken from [6].

The Carbon Farming Initiative: removing the obstacles to its success Policy Focus

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� The projects must be included on a so-called ‘positive list’ contained in regulations;

� Projects must not be required under a law of the Commonwealth, or a law of a state or territory.

The positive list is intended to include activities that are not ‘common practice’ within an industry or region (CFI Act, s 41[3]). If the practice is not common, it is pre-sumed that it would not have been undertaken without the incentive provided by the CFI [36]. At the time of writ-ing, the list consisted of 15 broad project types, including the establishment of permanent plantings (reforestation), avoided regrowth clearing (deforestation), capture and combustion of CH

4 from legacy waste (waste), and early

dry season burning of savannah areas and reduction of emissions from ruminants by manipulation of their digestive processes (agriculture) [103].

The Government’s intent in using a project-type test was to reduce transaction costs [6,36]. The downside of this approach is the relative ease with which legitimate projects can be excluded and non-additional projects included. This is partly due to the breadth of the powers to make

and modify the positive list. The list is embodied in regu-lations made under the CFI Act, which can be remade at any time by the Governor General at the direction of the Climate Minister [103]. Before these regulations are made, the Climate Minister must consider advice from the Domestic Offsets Integrity Commission and have regard to whether the project type is common practice, or would not be common practice but for the incentive provided by ACCUs. The regulations are also subject to legal scrutiny by the Senate Standing Committee on Regulations and Ordinances and can be disallowed by either House of Parliament. While acknowledging that the regulation-making process ensures the positive list is subject to some oversight, there is effectively no statutory restriction on what can be included on, or excluded from, the list. Regulations can even be made waiving the requirement that a project not be required under a law of the Com-monwealth or a state or territory. In some respects, the flexibility inherent in the additionality test is a strength as it allows the list to be adapted to particular events and to evolve with land use and waste management practices. However, it also potentially leaves it open to manipulation.

Table 2. Steps in generating Australian carbon credit units.

No. Step Nature of requirement Responsible authority

1 Approval of methodology

Provide the basis for determining the number of ACCUs that a project generates and can include specific project requirements (e.g., reporting, incident notification and record-keeping)

All methodologies must be endorsed by the Domestic Offsets Integrity Committee then approved by the Climate Minister (the approval is made via a ‘methodology determination’)

2 Approval as a recognized offset entity

All persons wanting to undertake a CFI project must be a ‘recognized offset entity’

The CE Regulator makes a decision on the basis of whether applicants are a ‘fit and proper person’

3 Approval of eligible offsets project

For a project to generate ACCUs, it must be approved as an ‘eligible offsets project’. The major requirements are that:

� The project must be covered by a methodology determination and meet its requirements

� The applicant must be responsible for carrying out the project and have the legal right to undertake it

� The project must meet the ‘additionality test’ � The project must not be on the ‘negative list’

For sequestration projects: � The project must not involve the clearing of native forest

or use of material obtained as a result of the clearing or harvesting of native forest

� The applicant must hold the applicable carbon sequestration right

� All people with interests in the land must have consented to the application

The CE Regulator must be satisfied that the project meets the statutory and regulatory requirements

4 Reporting Project proponents must prepare and submit offset reports within 3 months of the end of a self-selected reporting period of between 1 and 5 years

The offset reports are required to be submitted to the CE Regulator (usually they must be audited prior to submission)

5 Crediting After submitted an offset report, a proponent can apply for a certificate of entitlement, which triggers the issuance of ACCUs

The CE Regulator is responsible for calculating the unit entitlement for the project and issuing the ACCUs

ACCU: Australian carbon credit units; CE: Clean Energy; CFI: Carbon Farming Initiative.



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Some of the risks associated with the project-type additionality test can be addressed by the baseline and measurement requirements. Under the CFI Act (sec-tion 107), all methodologies must provide for the setting of project baselines calculated on the assumption that the project was not carried out. The methodologies are also required to meet specified ‘offsets integrity standards’, including that relevant emissions and removals be mea-surable and verifiable, that all estimates, assumptions and projections be conservative, and that the methods be ‘supported by relevant scientific results published in peer-reviewed literature’ and consistent with those in Austra-lia’s National Inventory Report (CFI Act, section 133). Hence, even if a suspect project passes the additionality test, its capacity to generate ACCUs should be limited.

Leakage mechanismLeakage refers to the risk that an offset project will trig-ger an increase in emissions from sources, or reduction in removals by sinks, that occurs outside the project boundary, thereby reducing the associated net abate-ment [6,24–25,33]. Unlike the other integrity risks, there is the potential for leakage associated with Kyoto ACCUs to have adverse environmental impacts. Where there is leakage from a Kyoto (or non-Kyoto) offset project into a country whose emissions are not subject to a national cap, there will be a relative increase in global emissions. However, this risk is not unique to CFI projects. Mitiga-tion in any trade exposed sector has the capacity to lead to leakage of this nature [24].

To the extent there is domestic leakage from a Kyoto offset project, the impacts are purely financial. Because of the existence of the national cap, and the fact that the relevant emissions and removals fall within it, leakage from a Kyoto offset project should not change Australia’s net emissions outcome; it merely changes the spatial and/or temporal distribution of emissions by causing a relative increase in uncovered sector emissions.

The main mechanism for dealing with leakage under the CFI is the methodologies. The CFI Act’s offset integ-rity standards require all methodologies to provide for a deduction to be made in calculating a project’s credit entitlement to account for “GHGs that are emitted from any source or sources as a consequence of carrying out the project” (CFI Act, section 133[1][e]). The breadth of this provision means that it covers both direct and indirect leakage, and project-related emissions.

PermanencePermanence concerns the risk associated with sequestra-tion offset projects that the carbon stored within the project area in biomass or soils will be fully or partially released as a result of future events (e.g., wildfires, drought and deliberate clearing of the vegetation) [6,24,25,33].

Three mechanisms were built into the CFI to deal with this issue. First, a risk of reversal buffer (usually set at 5% of a project’s credits) is required to be deducted from all sequestration projects. Second, all sequestration proj-ects are required to maintain the relevant carbon stores for 100 years (known as the ‘100-year rule’), or another period set by regulation. Third, the offsets integrity standards require that methodologies be conservative and include provisions to account for ‘significant cycli-cal variations’ in the amount of carbon sequestered in the relevant carbon pool on the project area over the 100-year period (or the alternative period set in the regulations) (CFI Act, section 133[1][f]).

� Perverse impacts Perverse impact risks refer to secondary adverse impacts associated with offset projects. With the CFI, much of the public debate surrounding perverse impacts has con-centrated on potential negatives associated with forestry projects, particularly monoculture plantations and their capacity to have adverse hydrological, wildfire, biodiver-sity and socioeconomic affects [6]. After the introduction of tax incentives for plantations in the 1990s (mostly through ‘forestry managed investment schemes’) and launch of the ‘Plantations for Australia: the 2020 vision’ statement in 1997 (which aimed to treble the effective area of Australia’s plantation estate by 2020) [37,38], there was a large increase in reforestation in parts of southern Australia and isolated areas in the north. Between 1990 and 1997, the average rate of reforestation in Australia was 45,217 ha year -1. The average over the 8 years follow-ing the release of the ‘Plantations for Australia: the 2020 vision’ was 67,122 ha year -1, a 48% increase [Data from

Annual Area Planted: Based on Table 5A from the National Inven-

tory Report 2011, Australian Government]. The majority (in excess of 80%) of reforestation since late 1997 has been in the form of monoculture hardwood and softwood plan-tations [Data from Annual Area Planted: Based on Table 5A from

the National Inventory Report 2011, Australian Government]. These plantations have attracted controversy and been opposed by many because of their impacts (perceived and real) on rural communities and the environment [39]. Farm lobby and environmental groups expressed concern during the initial deliberations over the CFI that the scheme could lead to the permanent retention of the existing plantations and spread of similar monocultures across the landscape [6].

The CFI Act contains several mechanisms for deal-ing with these and other potential perverse impacts, the most important of which is the power for regulations to be made prescribing ‘excluded offset projects’ (known colloquially as the ‘negative list’). This purpose of the list is to exclude projects that could have significant adverse impacts on water availability, biodiversity conservation,



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employment, local communities and land access for agri-cultural production, or that could otherwise undermine the efficient operation of the scheme. At the time of writ-ing, the list consisted of seven project types, including the planting of weed species, establishment of a forestry managed investment scheme, avoiding harvest of a plan-tation and establishment of vegetation on land that has previously been illegally cleared [103].

The negative list is complemented by three other perverse impact management mechanisms:

� Projects must not involve the clearing a native forest or using material obtained from clearing or harvesting a native forest;

� Projects are required to have all necessary Common-wealth, State and Territory regulatory approvals con-cerning land use and development, water and the environment;

� The Register of Offset Projects must note whether a project is consistent with any applicable regional natural resource management plan.

� Capturing co-benefitsAs noted, some offset projects have the capacity to gen-erate co-benefits related to the environment and other dimensions of sustainable development. In order to promote projects that are likely to generate these ben-efits, the CFI Act allows for these attributes to be noted on the Register of Offset Projects. The Register must include details of all eligible offsets projects and, at the request of the proponent, it can also include informa-tion on their environmental or community benefits, provided the requested information meets require-ments prescribed in the regulations. Although still to be released, the Government has indicated it will develop a co-benefits index that will be used to rate and record the co-benefits of projects on the Register [36]. These mechanisms are designed to facilitate the bundling of environmental benefits in offset projects and creation of a related market for ‘premium’ ACCUs, similar to the CDM’s Gold Standard [40–42].

Obstacles to the success of the CFIThe primary objective of the CFI is to lower the costs associated with meeting Australia’s mitigation targets by realizing cheap abatement opportunities in the sectors that are not subject to a carbon price. Other secondary aims are to increase abatement in ways that are consis-tent with the protection of the environment and that improve resilience to climate change, and to encourage offset projects in sectors that are not counted towards Australia’s emissions total.

Although the CFI has many admirable design fea-tures, a number of issues could threaten the uptake

of CFI projects and stifle the capacity of the scheme to achieve its aims. These can be grouped under four headings:

� Carbon price uncertainty;

� Transaction costs;

� Path dependencies;

� Integrity- and perverse impact-related restrictions.

� Carbon price uncertaintyThe success of the CFI is dependent, to a large extent, on the existence of a secure source of demand. Under the existing policy framework, demand for Kyoto ACCUs is provided by the carbon pricing scheme and, poten-tially, international compliance markets. Demand for non-Kyoto ACCUs is intended to be provided by volun-tary carbon markets and the Australian Government’s CFI non-Kyoto Carbon Fund, a 6-year AU$250 mil-lion fund that was established with the sole purpose of purchasing credits from non-Kyoto projects.

As alluded to in the introduction, the Liberal National Party Coalition is opposed to the carbon pricing scheme and has promised to repeal it if it wins the 2013 federal election. Under its existing policy, the CFI would remain, with demand for both Kyoto and non-Kyoto ACCUs being provided by a government fund and voluntary markets. At the time of writing, the Opposition had provided few details of the fund or what projects might be eligible to participate in its scheme. This has created uncertainty for project propo-nents and concern about future eligibility requirements and project returns.

These political uncertainties are layered on top of those concerning international and domestic carbon markets and prices. Under the CE Act, the price of Australian carbon units is fixed for the first 3 years of the scheme (from 2012–2013 to 2014–2015). During this period (the ‘fixed charge period’), liable entities are allowed to surrender Kyoto ACCUs but there is a cap of 5% on their use, which is designed to protect government revenues from the sale of carbon units. From 1 July 2015, the scheme becomes a standard cap-and-trade ETS (the ‘flexible charge stage’). In the first 3 years of this stage, there will be a price ceiling, starting at $20 above the ‘expected international price’ (presum-ably the price of CERs) and rising by 7.5% per annum in the following 2 years. There will also be a 50% cap on the use of international units and 12.5% cap on the use of eligible Kyoto units (CERs, emission reduction units and removal units) but no limits on the use of Kyoto ACCUs. The initial scheme included a floor price, how-ever, it was abandoned in late 2012 and replaced with an undertaking to link the Australian carbon pricing



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scheme with the EU ETS. The design features of the carbon pricing scheme expose CFI proponents to the uncertainties associated with the EU ETS and inter-national climate negotiations. Until there is greater certainty about future carbon markets and prices, it is likely that proponents will be wary of undertaking CFI projects. Sequestration projects are particularly susceptible to these factors because of the permanence requirements, which effectively ‘lock in’ proponents for a century once the project is commenced.

� Transaction costsAs the likes of van Oosterzee and Cacho et al. have highlighted, the transaction costs associated with car-bon offset projects can be significant and act as a major deterrent to project activities [7,26]. Under the CFI, standard projects will typically incur costs associated with becoming a registered offset provider, obtaining project approval, measuring abatement, preparing offset reports, auditing offset reports, obtaining a certificate of entitlement for ACCUs, and registering and transferring ACCUs. Depending on the project type, project propo-nents can also be required to prepare, submit and refine methodologies. For sequestration projects, the propo-nent must hold the applicable carbon sequestration right (i.e., the exclusive registered legal right to obtain the benefit of sequestration of carbon in the relevant carbon pools) and have the consent of all people with an inter-est in the land (e.g., those with a freehold or leasehold interest, native title holders and any person or institution with a mortgage or charge over the property). In addi-tion, projects will often be subject to other regulatory requirements, including in relation to financial services, planning, water and environmental issues, and can incur stamp duty and other taxes.

One potentially significant source of transaction costs is the measurement requirements imposed on project proponents. If field data and modeling requirements are excessive, the costs of abatement measurement could reduce the commercial viability of projects and under-mine the cost–effectiveness of carbon markets. On the other hand, unduly lax requirements could jeopardize the credibility of ACCUs and the scheme more broadly. A compromise needs to be reached that balances these competing factors. A crucial issue that should shape the nature of this compromise is that, as discussed, while Australia’s national emissions remain subject to a cap, any overestimation of project-level abatement from Kyoto offset projects will not affect the climate outcome. The climate outcome is determined by the national cap and the methods used to account for emissions and removals in the national accounts. The CFI methodologies and measurement requirements merely determine how the financial benefits associated with the relevant avoided

emissions or enhanced removals are distributed between the Australian Government and project proponents. Due to this, ideally, the CFI measurement requirements for Kyoto offset projects should be no more onerous or tech-nically complex than those in the national accounts. This applies even where there are knowledge gaps and uncer-tainties concerning the emissions from, and removals by, particular sources and sinks (e.g., native forests and soil carbon). As the impacts of measurement errors are distributional, imposing requirements above and beyond those in the national accounts will only deter projects rather than improve climate outcomes.

To date, the Australian Government has been reason-ably responsive to concerns about transaction costs. This is most evident in the project-type test inherent in the CFI’s positive list and the existing methodologies, par-ticularly the permanent environmental plantings (refor-estation) methodology, which is wholly reliant on a mod-eling approach derived from that applied in the national accounts [104]. Despite this, further reform may be neces-sary as the transaction costs associated with many project types are still likely to be prohibitive. An obstacle to this process is the nature of the Australian federation and distribution of powers within the Commonwealth. Australia has three layers of government: federal, state/territory and local. Broadly, the states and territories, and local government, are responsible for most real property, land use planning, water and environmental issues, while the federal government is responsible for most taxation, corporate and financial regulation, and issues for which there is a sufficient nexus to international affairs. Mak-ing modifications to the regulatory and taxation regimes that affect the CFI is likely to be impeded by the need for cooperation amongst the different levels of government and government agencies.

� Path dependenciesThere has been extensive debate within the social sci-ences about the precise meaning of path dependency [43–45]. Here it is used in the general sense advocated by David to describe dynamic processes where outcomes, and/or the likelihood of different outcomes, are a func-tion of the process’ own history [45]. In the context of the CFI, there is concern that land use and other resource allocation decisions relevant to the uptake of offset projects may exhibit path dependency; that is, there could be a degree of irreversibility (or inertia) in land use practices that arise from past decisions and the costs of undoing them. These costs could stem from the need to retrain and obtain new skills, replace equipment and restructure businesses in order to initiate offset proj-ects. One factor that could play an important role is the sunk cost fallacy – landholders may reject the option of undertaking an offset project due to an economically



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irrational attachment to the sunk costs associated with their existing practices. The cultural implications of initiating offsets could be equally important. Many Australian farmers feel a sense of obligation to pass on their land to their children, free of encumbrances. Initiating sequestration projects that restrict land use options for a century could therefore be rejected as a result of the associated emotional, cultural and repu-tational costs [46]. Indigenous landholders could face similar (although possibly more acute) barriers because of cultural practices and capacity issues.

To help lower transaction costs and overcome the path dependencies that could obstruct the uptake of off-set projects, the Australian Government has established several education, training, demonstration and financial assistance programs. These include the following [105]:

� The Carbon Farming Futures Program ($429 million over 6 years), which, amongst other things, funds demonstration projects and an outreach program to provide “technical information and support to farmers, land managers and their key influencers to assist them to participate in land sector emissions management activities and the CFI” [105];

� The Indigenous Carbon Farming Fund ($22 million over 5 years), which is assisting indigenous communi-ties to participate in the CFI. The majority of the funding available through this program is directed toward capacity building and business support;

� Regional Natural Resource Management Planning for Climate Change Fund ($44 million over 5 years), which is providing support to Australia’s regional natural resource management organizations to help them update natural resource management plans and guide the location of CFI projects;

� Carbon Farming Skills program ($4 million over 5 years), which funds training and accreditation of carbon service provides so as to ensure landholders have access to relevant CFI-related services.

� Integrity- & perverse impact-related restrictionsAs described above, the CFI has mechanisms to deal with all of the major integrity and perverse impact risks associated with offsets. While these risks are real and need to be managed, a vulnerability that stems from the existing mechanisms is that they could unnecessarily impede the uptake of projects. The most significant issues relate to the 100-year permanence rule, abatement measurement and additionality requirements.

The 100-year ruleThe integrity mechanism that has attracted the most public attention is the 100-year rule. Farm lobby groups

and other landholders have expressed concern about ‘locking up’ land for this period of time because of the associated financial and cultural impacts [6]. The Liberal National Party Opposition has responded by undertaking to reduce the permanence requirement to 25 years if they win office, a proposal that has been attacked by the Labor Government and others [106,107].

The 100-year rule appears to have been based on the atmospheric lifetime of CO

2 (the time it takes for an

increase in the atmospheric concentration of CO2 caused

by a pulse of emissions to be reduced to 37% of its initial amount), which is estimated at approximately 100 years [6,26,33,47–50]. This can be derived from the parameterized decay function for CO

2 (i.e., the rate at which a pulse

of CO2 emissions decays in the atmosphere) from the

IPCC’s Fourth Assessment Report [51,52]:

Equation 1Where P

t = the proportion of the pulse remaining at

time t; a0 = 0.217; a

1 = 0.259; a

2 = 0.338; a

3 = 0.186;

t1 = 172.9 years; t

2 = 18.51 years; and t

3 = 1.186 years.

According to Equation 1, 36% of a CO2 emission

pulse should remain in the atmosphere after a century (Figure 1). This is a simplification – in truth, CO

2 does

not have a single atmospheric lifetime and it will vary depending on the magnitude and timing of the emis-sion pulse, the background CO

2 concentration and car-

bon cycle dynamics [48,53,54]. Another notable feature of the rate of decay of CO

2 is its long tail; between

20 and 40% of the initial pulse persists in the atmo-sphere for thousands of years [48]. Despite these issues, the 100-year atmospheric lifetime appears to have been used as the basis of the permanence period, seemingly on the grounds that, if only approximately 37% of an emissions pulse remains after a century, any reversal of the sequestered carbon after this time is of no, or little, consequence [6,33,49,50,55].

Due to the presence of the cap on Australia’s national emissions (and assuming the cap remains), the risk that the Australian Government manages through the 100-year rule for Kyoto offset projects is not environ-mental but rather the threat to its future revenues. As a consequence, the primary policy question in this con-text should be: what is the most cost-effective way to minimize the financial risk to the Australian Govern-ment that is associated with the potential future release of carbon stored by sequestration offset projects? The atmospheric lifetime of CO

2 is not relevant to this issue.

By structuring the permanence rule around this 100-year period, not only does it deter potential project proponents, but it does not fully eliminate the risks to government. Moreover, there are more effective ways

P a a et 0 ii 1

3t/ i= + $

=

- x/



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of managing the residual financial risk associated with sequestration projects without the need for reliance on a 100-year permanence period [26,27,32,56–59].

This can be illustrated using a hypothetical refor-estation project involving permanent environmental plantings on 10 ha in the Southern Tablelands (New South Wales) that commences in 2012–2013. Under the existing methodology for permanent environmental plantings, which uses the CFI Reforestation Model-ing Tool, the only carbon pools that are accounted for are live above- and below-ground biomass and debris [104,108]. The estimated increase in the carbon stock in these pools over 100 years is 2152 tCO

2. After the

deduction of the risk of reversal buffer (5%), and assum-ing no further deductions are made for leakage or other emissions associated with the project, the project propo-nent receives a total of 2045 ACCUs, or an average of 20.4 year -1. It is conservatively assumed for these pur-poses that the risk of reversal buffer accurately reflects temporary carbon losses from the project area due to natural disturbance events (e.g., fire and drought).

The residual financial risk faced by the Australian Government is that, at the end of the permanence period, the project area may be deforested. Assume for current purposes that the entire area is deforested in 2113 and that there is an instantaneous release of all carbon stored in the carbon pools. Under this scenario, the financial exposure of the Government is represented by the net present value (NPV) of future lost carbon revenues. This was calculated using the Australian Government’s

recommended discount rate for regulatory interventions (7% real) [60] and three carbon price scenarios:

� The CEF-price scenario, where the carbon price fol-lows the statutory price until the end of the fixed price period (2014–2015), tracks the Australian Treasury’s CEF-price path over the period 2015–2016 to 2049–2050, and then increases at 4% year -1 real to 2112–2013;

� A low-price scenario, where the carbon price follows the statutory price until the end of 2014–2015, falls to $10 (nominal) in 2015–2016 and then grows at 2.5% real through to 2112–2013;

� A high-price scenario, where the carbon price follows the statutory price until the end of 2014–2015, tracks the Australian Treasury’s high-price path through to 2049–2050 and then increases at 4% year -1 real to 2112–2013 (Figure 2) [61].

The 4% real carbon price growth rate in the CEF- and high-price scenarios was based on the Hotelling rule [62]. The 2.5% real growth rate in the low-price scenario was an arbitrary choice based on the assumption that there is ongoing uncertainty in domestic and interna-tional policy settings. Sensitivity ana lysis on several key parameters, including the discount rate (the Australian Government’s Office of Best Practice Regulation rec-ommends that sensitivity ana lysis be undertaken using discount rates of 3 and 10% [60]), was not conducted because of the illustrative nature of the ana lysis.

Years

0 50 100 150 200 250 300 350 400 450 500

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Fra

ctio

n o

f C

O2

rem

ain

ing

in a

tmo

sph

ere

Figure 1. IPCC rate of decay of CO2 emissions pulse in the atmosphere. Data taken from [49].



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As the results in Table 3 demonstrate, the 100-year per-manence rule does not eliminate the financial risk to the Government. The NPV of the future foregone revenues ranges between $253 and $8683 (2013 $), depending on the carbon price scenario.

To eliminate the financial risk associated with the potential reversal of the sequestered carbon, an annual permanence deduction could be required on top of the 5% risk of reversal buffer. With a permanence deduction of 3% per annum, the NPV of future foregone revenues under the low-price scenario is reduced to zero. Under the CEF- and high-price scenarios, the same result can be achieved with a permanence deduction of 13%. If the permanence period was reduced, the annual permanence deduction would have to be increased if there was a desire to eliminate the risk to the Government. Table 4 shows the permanence deduction necessary under the three price scenarios to ensure the NPV of future foregone revenues is zero with four permanence periods (25, 50, 75 and 100 years), and assuming a 7% real discount rate.

The hypothetical ana lysis contained in Tables 3 & 4 is based on particular assumptions about the carbon price, rate of removals, date of the reversal of the car-bon stores and discount rate. Alternative assumptions produce significantly different results, as the scenarios used here illustrate. The central point is merely that a fixed 100-year rule is not necessary to manage the finan-cial risks associated with the potential non permanence of sequestration projects. Moving to a discount-based approach for Kyoto offset projects, whereby proponents would be able to select different permanence periods and a permanence deduction would then be calculated on the basis of the project characteristics and length of the period, could achieve the desired policy objective of protecting the Government’s revenues from carbon reversals without the need to ‘lock up’ land for 100 years. In doing so, it could reduce the concerns of landholders about the legacy effects of undertaking sequestration projects and thereby increase project initiation. Other similar insurance mechanisms could also be used for these purposes [26,27,32,56–58].

This ana lysis is based on the assumption that Austra-lia’s emissions remain subject to a national cap. In the event that the ‘targets-and-timetables’ approach that underpins the Kyoto Protocol is abandoned in prefer-ence for a ‘capless’ structure, any integrity-related defects in Kyoto offset projects, including nonpermanence, will have environmental consequences (the same applies with all non-Kyoto offset projects). The difficulty with

2013

AU

$/tC

O2-

e

2013 2023 2033 2043 2053 2063 2073 2083 2093 2103 2113

4000

3500

3000

2500

2000

1500

1000

500

0

Year

Low

HighClean Energy Future

Figure 2. Clean Energy Future, low and high carbon price scenarios, real 2013 AU$/t CO2-e. Data taken from Australian Treasury [35] and author estimates.

Table 3. Residual risk to the Australian Government with the existing 100-year rule, real 2013 AU$.

Price scenario (2013 AU$)

Low Clean Energy Future High

Foregone revenues in 2113 219,272 3,727,065 7,534,235Net present value of foregone revenues

253 4295 8683



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the 100-year rule is that, even in this scenario, where national emissions are not capped, it does not address the risks it is supposed to manage.

The climate benefit derived from a sequestration off-set project is that it removes CO

2 from the atmosphere

that would have otherwise have been removed by nor-mal biological and chemical processes roughly in accor-dance with Equation 1 (Figure 1) [50,53,54,63]. Due to this, the climate benefits of a sequestration project decline through time, reflecting the rate of decay of CO

2 in the

atmosphere. The relevance of this can be illustrated with a hypothetical example of a sequestration offset project that removes 1 tCO

2 in 2013. The net climate impact of

this removal in 2013 is -1 tCO2 (there is one less tonne

of CO2 in the atmosphere in 2013 than there would

have been had the removal not occurred). Thirty years later, and assuming the carbon store remains intact, the net climate benefit of the removal will fall to -0.5 tCO

2

because, in its absence, approximately half of the CO2

would have been removed from the atmosphere by other processes. For the same reason, after 100 years, the net impact falls to -0.36 tCO

2. If the 1 tCO

2 that

was initial sequestered is released into the atmosphere immediately after the end of the permanence period, the net climate impact in that year will be 0.64 tCO

2

(there will be 0.64 tCO2 more in the atmosphere in that

year compared with the scenario where the project was not undertaken).

This hypothetical can be extended to include the use of the associated ACCUs. Assume for these purposes that one ACCU is issued in 2013 to reflect the removal (ignoring the risk of reversal buffer), which is then used in the same year to permit the release of 1 tCO

2 by a

fossil fuel-based electricity generator. The net climate impact of this fossil fuel emission pulse is 1 tCO

2 in

2013 but it falls through time due to the drawdown of CO

2 by biological and chemical processes. As a result,

as long as the CO2 removed by the sequestration off-

set project remains sequestered, the net climate impact of the fossil fuel emission and offset project should be zero. However, if the sequestered carbon is released, the net climate impact will be 1 tCO

2 at the time of the

reversal. That is, the real impact of the offset will be to alter ‘when the atmosphere sees’ the effect of the 1 tCO

2

emission (i.e., it alters its temporal distribution). This is shown numerically in Table 5.

Although highly simplified (see Kirschbaum and Korhonen et al. for more comprehensive coverage of this issue [53,54,63]), this example illustrates why the 100-year rule does not fully address the risks associated with non-permanence. In this hypothetical, if the carbon stores are released at the end of the period, the climate impact should be largely the same as if the fossil fuel emission was not offset, only it will occur later (in reality, the net impact over time will depend on a number of climatic variables and the extent of any discounting applied to the ACCUs, including through the risk of reversal buf-fer). The primary benefit, therefore, is that by chang-ing the temporal distribution of the impact, the offset should lower the costs of the associated climate change because of discounting (social time preference) [50]. The extent to which it does so will depend on the choice of discount rate; a subject over which there is much con-troversy [50,64–69]. This highlights the arbitrary nature of the 100 years and why, even where national emissions are not capped, there is no compelling policy reason to stick to it as the basis of the permanence period. Shorter periods could be used to encourage uptake with-out further sacrificing climate outcomes. However, any arbitrary permanence period is incapable of overcom-ing the problems associated with the long tail of the CO

2 lifetime. Discounting the ACCUs, other than at

extreme levels, also does not solve the problem. The only real solutions are requiring true permanent sequestra-tion, temporary crediting (as occurs for forestry projects under the CDM) or retaining caps on national emis-sions, which, in theory, ensure that any future reversals are compensated through reductions in other emissions.

Abatement measurementAs discussed, the CFI Act contains several layers of integrity mechanisms that are designed to mini-mize permanence and leakage risks. These include the requirement of conservatism in methodologies and that methodologies not be inconsistent with the National Inventory Report, the risk of reversal buf-fer, and the need for methodologies to provide for a deduction for GHGs ‘emitted from any source’ as a

Table 4. Required permanence deduction to eliminate residual risk with different permanence periods.

Permanence period Annual permanence deduction (%)†: price scenario

Low Clean Energy Future High

25 years 53 86 8750 years 22 47 4775 years 8 24 25100 years 3 13 13†Assumes 7% real discount rate.



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consequence of the project. Like the 100-year rule, for Kyoto offset projects (and assuming the cap remains on national emissions), the purpose of these requirements should be to shield the Australian Government from potential lost revenue stemming from measurement and leakage risks.

In implementing these requirements, a balance must be struck between the desire to protect the financial interests of the Government and need to promote off-set projects. Excessive conservatism in methodologies reduces the financial returns from projects, thereby undermining their capacity to compete with alterna-tive land uses. While the scheme is in its early stages and teething problems are to be expected, there is evi-dence that conservatism and overly restrictive meth-odology requirements may be impeding the uptake of projects. Examples include the following.

Underestimating sequestration in forest modelsPreece et al. found that the model used to estimate carbon stock changes in reforestation projects (i.e., the National Carbon Accounting System and Full-CAM, which sit behind the CFI Reforestation Mod-eling Tool) potentially underestimates aboveground biomass in certain vegetation types [70]. This reduces the LULUCF credits recorded in Australia’s GHG accounts and, in turn, the ACCUs that proponents receive for reforestation projects.

Size & nature of the risk of reversal bufferArguably, the 5% risk of reversal buffer is unneces-sarily high and, if applied uniformly, will not reflect the risk profile of individual projects. The effect is that low-risk projects subsidize those with higher risk. Greater guidance is required to demonstrate if and how the risk of reversal buffer might be adjusted to account for the characteristics of projects and propo-nents, the extent to which cyclical variations have been

accounted for in methodologies and the conservatism in the applicable methods. A more effective approach could involve merging the buffer with a permanence period–permanence deduction mechanism, under which a single deduction would be made on the basis of the characteristics of the project and proponent.

Exclusion of carbon poolsUnder the permanent environmental plantings meth-odology, the soil organic carbon pool is excluded, although it is counted towards Australia’s mitigation targets for the purposes of reforestation and regrowth on deforested land units [71]. This is likely to benefit proponents in the initial years of a project as reforesta-tion/afforestation typically results in soil carbon losses in the years immediately following planting or seeding. In the longer term, the exclusion of the soil carbon pool will usually lead to losses to the proponent, with corresponding gains to the Australian Government, as soil carbon levels recover, then exceed, the levels under the previous agricultural land use [71–77].

Leakage & project-related emission deductionsThe intent of the requirement that a deduction be made for GHGs ‘emitted from any source’ is to ensure that the abatement accredited for a project via the issu-ance of ACCUs is net of any increases in emissions caused by the project. For instance, the permanent environmental plantings methodology requires that, in determining a project’s net abatement number, the carbon stock change in the live biomass and debris pools must be calculated, after which a deduction is made for fuel use emissions (CO

2, CH

4 and N

2O) from

vehicles and machinery used in site preparation, plant-ing, management and other project-related activities (including transportation between business locations and to the site), and for CH

4 and N

2O emissions from

prescribed burning and wildfires. Within a purely

Table 5. Net climate impact of hypothetical sequestration project and fossil fuel emission.

Year (tCO2)

2013 2042 2062 2112 2113 (reversal)

Net climate impact of sequestration offset project

What the atmosphere sees without the offset project

1.0 0.5 0.44 0.36 0.36

What the atmosphere sees with the offset project

0.0 0.0 0.0 0.0 1.0

Net climate impact of offset project -1.0 -0.5 -0.44 -0.36 0.64

Net climate impact of fossil fuel emission

What the atmosphere sees with the emission 1.0 0.5 0.44 0.36 0.36

Net climate impact of offsetting fossil fuel emission with sequestration offset project

Net impact 0.0 0.0 0.0 0.0 1.0



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voluntary offset policy structure, these deductions are appropriate and necessary to ensure the integrity of credits. When applied within the compliance and car-bon pricing structure embodied in the CEF package, they can result in perverse outcomes. In some cases (e.g., emissions from non-transport use of liquid fuels and Scope 2 emissions from electricity use) [109,110], the deduction will result in a double application of the car-bon price – once via the fuel tax system or CE Act and then again via the lost ACCUs. This is inefficient and inequitable. In others (e.g., off-road use of transport fuels for agriculture and forestry) [104], the deduction imposes an effective carbon price on emissions that would not otherwise be subject to one. Landholders who carry on with past land use practices are exempt from a carbon price for emissions from these sources, but those who undertake an offset project are subject to a price for the same emissions through lost credits. This would fit with the structure of the CEF package if the direct emissions deduction was calculated using a baseline representing the emissions from these sources under business-as-usual (or reference case) conditions. However, none of the relevant methodologies calculates the deduction on this basis; the emissions are simply subtracted from the LULUCF, waste or agriculture-related avoided emissions or enhanced removals. To satisfy the equimarginal principle and ensure consis-tency with the structure of the CEF package, deduc-tions should not be made for project-related emissions that are already subject to a carbon price and, where deductions are made for emissions that are exempt from a direct or equivalent carbon price, they should be calculated against the counterfactual reference case.

The conservative approach that has been adopted toward the measurement of abatement and issuance of credits is reducing the financial benefits associ-ated with CFI projects. If the CFI is to realize its full potential, these and other similar requirements should be revised to shift the balance more in the favor of proponents.

Integrity risk, perverse impact restrictions & native forest protection projectsUnder the CFI Act, the Climate Minister has broad powers to make regulations and declarations concern-ing integrity and perverse impact risks that can sig-nificantly alter the way many aspects of the scheme operate. These include powers to include and remove activities from the positive and negative lists, and to waive the second limb of the additionality test. The way these powers are exercised will profoundly influence the outcomes of the CFI.

Although still in its infancy, the relevance of the Minister’s powers has been demonstrated in the way

they have been exercised in relation to native forest protection projects, which are defined for the purposes of legislation as projects to remove CO

2 from the atmo-

sphere by sequestering carbon in trees in native forests and avoiding emissions attributable to the clearing or clear-felling of native forests (CFI Act, section 5). Despite the CFI Act explicitly providing for these proj-ects, at the time of writing, the CFI positive list did not include avoided or delayed native forest harvesting (i.e., improved forest management) or avoided native forest conversion (i.e., deforestation of remnant forest) projects. No public explanation has been provided for the omission of these projects from the positive list but it appears to be a product of resourcing issues within the Department of Climate Change and Energy Effi-ciency (there have been cutbacks designed to bring the federal budget back in to surplus by 2012–2013) and technical issues associated with the development of relevant project rules and methodologies. While these projects remain excluded, the CFI is incapable of real-izing one of the largest and possibly cheapest sources of abatement [78].

Even if native forest protection projects were included on the positive list, there are two further obstacles that could impede the uptake of these proj-ects. The first is that the CFI Act limits native forest protection projects to a single crediting period with a default length of 20 years, which differs from other project types where crediting periods can be renewed and have a default length of 7 years. These rules appear to have been based on the abatement characteristics of avoided forest conversion projects, where the avoided emissions are initially large but then follow an expo-nential decay function that approaches zero after approximately 20 years. Although well suited to the avoided forest conversion projects, it is inconsistent with the abatement profile of avoided and delayed native forest harvesting projects, and avoided native forest reclearing projects (i.e., clearing of regrowth for-ests). These project types could be significantly dis-advantaged by the single crediting period restriction, particularly if it is limited to 20 years.

The second potential barrier stems from the Kyoto Protocol’s second commitment LULUCF rules. To address concerns about the potential for ‘hot air’ (credits that do not represent additional abatement), forest management credits and credits associated with forest management project activities undertaken through the Joint Implementation mechanism are subject to a combined cap of 3.5% of total base year emissions excluding LULUCF [11,79]. For Australia, the 3.5% cap is likely to equate to a limit of approxi-mately 15.3 Mt CO

2-e year -1 over the commitment

period. As detailed in Macintosh [78], Australia’s forest



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management reference level for multiple use public native forests and Tasmania’s private native forests was calculated using the mean harvest rate from the period 2002–2009, and roundwood removals from 2008. Since that time, the native forestry sector has undergone a major contraction. The harvest area in native forests (broadleaved and cypress, exclud-ing Queensland) in 2010–2011 was 39% below the 2002–2009 mean [80–84]. Total native broadleaved roundwood removals in 2011 were 32% below the 2002–2009 mean and 29% below the 2008 levels (Figure 3) [85]. The causes of the decline since 2008 are largely unrelated to post-2009 policy changes. The industry has been struck by a confluence of events, including shifting market preferences (away from native forests), increased competition from domestic and international saw and pulp log producers, appre-ciation of the Australian dollar and depressed wood prices [78]. If these conditions persist, and harvest rates remain at 2011 levels, Australia will receive approxi-mately 10–12 MtCO

2-e year -1 of forest management

credits, leaving 3.3–5.3 MtCO2-e year -1 of space under

the 3.5% cap [78,86]. That is, Australia will almost fill its 3.5% cap from credits that are not due to post-2009 policy changes. When full, the cap will strip away the incentive for further policy-induced abatement in the sector and, in doing so, potentially increase the costs associated with achieving Australia’s mitigation targets. Within the CFI, the practical impact will be to prevent forest management projects from generat-ing Kyoto ACCUs. Any credits from these projects will be non-Kyoto ACCUs that can only be sold into voluntary markets. This situation vividly illustrates the downsides of using blunt caps in international agreements to guard against additionality concerns.

ConclusionThe CFI is one of the most robust carbon offset schemes of its kind in the world. If it is successful, it could lower the cost of achieving Australia’s mitigation targets and generate a number of important environ-mental co-benefits, including habitat restoration and improved soil conservation. While it has significant potential, a number of barriers threaten the scheme’s

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

02002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

20,000

40,000

60,000

80,000

100,000

120,000

Har

vest

are

a (h

a)

Rem

ova

ls (

m3 )

Year

Harvest area (ha)

Mean removals, 2002–2009 (m3) Mean harvest area, 2002–2009 (ha)

Removals (m3)

Figure 3. Harvest area in native Australian forests (broadleaved and cypress, excluding Queensland) in ha and native Australian broadleaved roundwood removals in m3, 2002–2011. Data taken from [80–85].



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success. These include uncertainties in carbon markets and the international climate negotiations, transac-tion costs stemming from regulatory requirements, and overly restrictive integrity and perverse impact risk management mechanisms.

At the time of writing, only 27 eligible offsets proj-ects had been registered, involving 14 registered off-set entities [111]. All but four of the registered projects involved the capture and combustion of CH

4 from

either landfill or piggeries; two of the remaining proj-ects involved reforestation (environmental plantings), one was a legacy waste to fuel project and the other was an early dry season savanna burning project. The scheme’s slow start is a ref lection of the identified

barriers; until these are resolved, the CFI will struggle to realize its full potential.

Future perspectiveClimate policy in Australia has always been volatile and the introduction of the CEF package has not resolved this. Current polling has the Liberal National Party Opposition as the odds-on favorite to win the 2013 federal election [112]. If this happens, the Liberal National Party has undertaken to abolish the carbon pricing scheme and replace it with a collection of ben-eficiary pays programs, under which the Australian Government would directly purchase abatement from polluters and offset providers [87,113]. The uncertainty

Executive summary

Overview of the Carbon Farming Initiative � In December 2011, the Australian Government introduced the Carbon Farming Initiative (CFI), a project-based, baseline-and-credit offset

scheme for emissions and removals from the land use, land use change and forestry, agriculture and waste sectors. � The CFI is an integral part of the Clean Energy Future package, which includes the carbon pricing scheme that commenced in July 2012. � The CFI divides projects into two categories based on whether the relevant removals and/or avoided emissions count towards Australia’s

mitigation targets: Kyoto offset projects (which count toward the targets) and non-Kyoto offset projects (which do not). � Kyoto offset projects lead to the generation of Kyoto Australian carbon credit units (Kyoto ACCUs), which can be used to meet liabilities

under the carbon pricing scheme, exchanged for Kyoto units and sold into overseas compliance markets, or sold in voluntary markets. � Non-Kyoto offset projects lead to the generation of non-Kyoto ACCUs, which can only be used in voluntary markets. � The CFI also divides projects into sequestration and emissions avoidance offset projects. Sequestration offset projects are those involving

the sequestration of CO2 in biomass or soils and/or the avoidance of CO2, CH4 and N2O emissions from the destruction or disturbance of biomass or soils. Emissions avoidance offset projects are those involving the avoidance of CH4 and N2O emissions from agricultural activities, legacy waste in landfill facilities or feral animals.

Integrity & perverse impact risks, & capturing co-benefits � In most climate offset programs, if the offset credits do not represent their face value in abatement, the environment bears the cost – the

use of the offset results in higher net emissions and a higher atmospheric concentration of GHGs. The same applies with non-Kyoto ACCUs under the CFI but not necessarily with Kyoto offset projects.

� Due to the fact that Australia’s national emissions are capped under the Kyoto Protocol, if Kyoto ACCUs do not represent their face value in abatement, the impacts will usually be financial rather than environmental. Defects in Kyoto ACCUs expose the Australian Government to financial losses, either through the carbon pricing scheme or via the need to import Kyoto units to meet its international obligations. This provides an inbuilt incentive for the Australian Government to minimize integrity risks.

� The CFI includes a number of innovative design features to deal with integrity risks, including a project-type (rather than project-level) test for additionality. It also has mechanisms to deal with perverse impacts and to promote co-benefits.

Obstacles to the success of the CFI � Although the CFI has many admirable features, it faces several barriers that could impede its success. These relate to carbon price

uncertainty, transaction costs, path dependencies, and integrity- and perverse impact-related restrictions. � There are a number of opportunities for technical improvements to be made to the CFI to address these barriers. In particular, the current

100-year rule that is designed to address the risk of nonpermanence could be replaced by discount-based approach for Kyoto offset projects, whereby proponents would able to select different permanence periods and a permanence deduction would then calculated on the basis of the project characteristics and length of the period.

Conclusion � The CFI is an innovative policy mechanism that has the capacity to significantly reduce the cost of achieving Australia’s mitigation targets.

Despite its potential, to date, only a small number of CFI projects have been initiated (27 eligible offsets projects had been registered at the time of writing, involving 14 registered offset entities).

� The CFI’s slow start is due to the identified barriers. Unless further efforts are made to address these issues, there is a risk the potential of the CFI may not be fully realized.

� Policy innovation comes with risks, including the making of initial design and administration errors. How the Australian Government responds to the issues that have arisen in the first year of the CFI could have a significant influence on the success of the scheme.

� The experiences of the Australian Government in the design, implementation and evolution of the CFI offer valuable lessons for other countries.



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created by this prospect is eroding interest in the CFI and impeding the efficient operation of the carbon pricing scheme.

Notwithstanding the domestic political situation, there are a number of opportunities for technical improvements to be made to the CFI. Several sugges-tions have been made here. These and other technical revisions are unlikely to set off a surge in CFI projects. Uncertainties surrounding the domestic and interna-tional policy framework, unavoidable transaction costs and path dependencies will remain as obstacles. How-ever, adjustments in the design and implementation

of the CFI could help expand its reach and lay the foundations for future success.

Financial & competing interests disclosureThe author has a financial involvement with Forests Alive Pty Ltd, an entity that provides offset services related to the contents of this article. The author has no other relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript apart from those disclosed.

No writing assistance was utilized in the production of this manuscript.

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Documents

The Carbon Farming Initiative: removing the obstacles to its success