CPRS White Paper: Waste industry

Introduction

The 15 December 2008 White Paper outlines the Australian Federal Government’s:

• medium-term 2020 target for Australian greenhouse gas emissions reductions, and
• intended final design of the Carbon Pollution Reduction Scheme (CPRS).

This document summarises the position taken in the White Paper for the waste industry.

Key commercial issues

Key commercial issues in the White Paper for the waste industry include:

1. greater certainty regarding the likely price impacts of the CPRS, by knowing the medium-term target, the price cap and that there will be no quantitative limit on the Kyoto credits that can be used. This allows for greater investment certainty and for mitigating measures to be explored and implemented
2. greater certainty regarding the CPRS coverage of the waste industry, including that:
   1. the CPRS will cover landfill facilities that emit 25kt CO₂e per annum or more
   2. the CPRS will cover landfill facilities that emit 10kt CO₂e per annum or more when they are operating within a set proximity (which is yet to be determined) to other operating landfill facilities. The threshold for these landfills will return to 25kt CO₂e per annum 10 years after a site closes
   3. the CPRS will not cover landfill sites that closed prior to 30 June 2008
   4. legacy emissions (emissions from waste disposed of prior to the commencement of the CPRS) will be excluded from the CPRS until 2018
   5. the CPRS will not cover CO₂e emissions from combustion of methane from waste landfill facilities for energy—a significant commercial driver for landfill gas energy
   6. the CPRS will cover waste water facilities that emit 25kt CO₂e per annum or more, including post-discharge emissions
   7. the CPRS will cover incineration facilities that emit 25kt CO₂e per annum or more, and
   8. there will not be any ‘offsets’ recognised by the CPRS.
   
   This greater certainty allows waste operators to more confidently prepare for the implementation and impact of the CPRS, including the consideration of establishing appropriate commercial arrangements.
   
3. the future of the voluntary credit market remains uncertain
4. Climate Change Action Fund (CCAF) funding may be available to the waste industry for energy efficiency projects and low emissions technologies, processes and products
5. there is funding available for Carbon Capture and Storage (CCS) activities, and
6. the Commonwealth’s Renewable Energy Target (RET) scheme will continue and be expanded. It will therefore continue to incentivize the capture and combustion of landfill gas to generate energy.

It will be critically important to ensure the CPRS legislation is correctly drafted to achieve the industry’s goals. The draft legislation is scheduled for public release in late February 2009, with government consultation in March and April 2009, so there will be a very limited time for stakeholders to digest the ramifications of the legislation and lobby for changes.

Please note that this document is a general summary for information, and specific advice on the effect of the CPRS on your business is recommended before taking action. Financial advice should be sought in respect of the financial implications of the CPRS.

Carbon pricing

Targets

The Federal Government previously stated its long-term target for a 60 per cent reduction against 2000 emission levels by 2050.

The White Paper sets out a medium-term target for a 5–15 per cent reduction against 2000 emission levels by 2020.

Price cap

There will be a price cap in the first five years of the CPRS at $40/tCO₂e, rising by five per cent per annum after inflation.

International permits

Kyoto Protocol flexibility mechanism credits, including Certified Emission Reductions under the Clean Development Mechanism (CDM), will be permitted to be used under the CPRS without quantitative limit.

The market for these credits is developed and large compared to Australia’s total emissions and will operate as a further ceiling on the carbon price in Australia. If the price for purchasing Australian permits (either direct from the Australian Government, from forestry producers or on the secondary market) rose above the price of the Kyoto credits then businesses could purchase the Kyoto credits instead. These Kyoto credits now cost approximately $26.75(€13)/tCO₂e on the secondary market, or about $16.44(€8) to $20.55(€10)/tCO₂e direct from accredited projects. However, the Kyoto credit price can be expected to rise as demand increases and opportunities to source credits directly becomes more difficult, which is already occurring.¹

Carbon price

The Commonwealth Department of Treasury’s modelling, released on 30 October 2008, predicted the carbon price under both five per cent and 15 per cent reduction targets (the extremities of the White Paper medium-term target), in models called CPRS-5 and CPRS-15. This modelling was based on Australia’s action taking place within a simple multi-stage global policy framework, where Australia and other developed countries take comparable action from 2010, and developing countries gradually adopt emission reduction obligations from 2015 to 2025. The following table presents the Treasury’s predicted carbon price under this modelling:

At present, the indications are that, at the commencement of the CPRS on 1 July 2010, the carbon price will more closely align with the CPRS-5 modelling than CPRS-15, although this may change.

Coverage and application

The waste industry

The White Paper notes that ‘waste’ is one of the seven categories of human-induced greenhouse gas emissions that parties to the Kyoto Protocol account for. For these purposes, the term ‘waste’ is considered to relate to:

primarily methane and nitrous oxide from solid waste sent to landfill, from the treatment of domestic, commercial and industrial waste water, and from solvent and clinical waste incineration. (White Paper page 6-3).

The White Paper is relevant to the waste industry as follows.

Landfill

Participation thresholds

In general, the CPRS will cover landfill facilities that emit 25kt CO₂e per annum or more. This threshold is equivalent to other industries.

A lower participation threshold of 10kt CO₂e per annum will apply to landfill facilities that are operating within a set proximity to other operating landfill facilities. The distance between landfill sites that trigger a reduction in the threshold will be calibrated and adjusted as necessary to avoid displacement. We expect this will most likely be done through the CPRS regulations. The suggestion appears that the initial proximity distance will be set at approximately an 82km ‘return trip’, said to be the distance up to which displacement of waste is commercial. The lowered participation threshold will return to 25kt CO₂e per annum 10 years after a site closes.

This reduced threshold arrangement places a unique burden on the waste industry. Owners of existing landfill sites will need to be alive as to whether they will be subject to a reduced threshold. This will, necessarily, entail CPRS costs which will then need to be commercially managed. It will also drive decisions regarding the location of future waste facilities.

Closed sites

Emissions from landfill sites that closed prior to 30 June 2008 will not be covered by the CPRS.

Subject to participation thresholds, all other landfill facilities will be covered from the date the CPRS commences (currently scheduled for 1 July 2010).

In the Federal Government’s discussion paper entitled ‘Coverage of Landfill Emissions’ it was noted that other mechanisms may be considered for sites that are scheduled to close soon after the CPRS commences. This may include the CCAF providing transitional assistance, including capital investment in energy efficiency and low emissions technologies and processes. By implication, this assistance should also be available for sites that close between 30 June 2008 and the CPRS commencing (planned for 1 July 2010). The CCAF is discussed further in the ‘Climate Change Action Fund (CCAF)’ section below.

Methane emissions from closed sites can still be captured to generate energy, with additional incentive available under the RET scheme.

Legacy emissions

The White Paper provides that no liability will arise under the CPRS until 2018 for emissions from waste disposed of prior to the commencement of the CPRS on 1 July 2010. From 2018, landfill operators will be liable for any emissions arising from waste disposed of prior to 1 July 2010 (using emissions estimations).

However, all landfill emissions (including emissions from waste disposed of prior to 1 July 2010) will need to be reported under the National Greenhouse and Energy Reporting System (NGERS) (provided the relevant thresholds are exceeded) and will be counted towards the CPRS participation thresholds (that is, 25kT CO₂e per annum or the reduced 10kT CO₂e per annum landfill threshold).

The White Paper has been amended by corrigendum to clarify that any methane capture will be allocated 'proportionately' between legacy and new emissions, rather than using the ambiguous term ‘equally’. For example, if 10 percent of a landfill’s emissions are from ‘new’ waste then 10 per cent of captured methane can be deducted from the site’s overall permit obligations.

Although legacy emissions are excluded until 2018 for waste disposed of prior to the CPRS commencing, after this date waste facility operators will be liable for any legacy emissions that arise and could incur significant financial obligations for those legacy emissions. Consequently, waste operators will benefit from steps to reduce those emissions, by for example investing in landfill gas energy technology (see para 2(b)(5) above). Waste operators will need to ensure that post-2018 legacy emissions costs are taken into account in future cost structures. Planning issues are addressed further in the section ‘Managing CPRS obligations’ below.

Combustion of landfill gas for energy

CPRS obligations will not apply to CO₂e emissions from combustion of methane from waste landfill facilities for energy.

This matter is not further explained in the White Paper. It appears that if landfill methane is captured and combusted for energy, then the resulting CO₂ emissions will not be subject to the CPRS. However, if landfill methane is flared and not used for energy, then the emissions would be subject to the CPRS (but with lower CO₂e value—and therefore a lower carbon price—than methane).

This represents a significant commercial driver for landfill gas energy. Not only will landfill gas energy produce saleable energy and generate Renewable Energy Certificates (RECs) under the RET scheme (see the ‘Renewable Energy Target (RET) scheme’ section below), but will also significantly reduce landfill emissions liabilities under the CPRS.

Logically, the position would also be the same for other waste to energy projects, however this is not further considered in the White Paper. This potential point of ambiguity is another example of the importance of ensuring that the CPRS legislation is properly drafted.

Wastewater

The CPRS will cover wastewater facilities that emit 25kt CO₂e per annum or more. The threshold and liability will be based on the total direct emissions, including post-discharge emissions.

The CPRS will cover on-site wastewater treatment (subject to the 25kt CO₂e pa threshold) from:

• dairy production
• pulp and paper production
• meat and poultry processing
• organic chemicals production
• sugar production
• beer production
• wine production
• fruit processing, and
• vegetable processing.

Therefore the wastewater emissions from agricultural sectors may be covered by the CPRS, even if agricultural emissions are not.

The White Paper notes that the CCAF will be accessible to assist with implementing new low emission technologies, for example wastewater methane capture. The CCAF is discussed further in the ‘Climate Change Action Fund (CCAF)’ paragraph below.

Waste incineration

The CPRS will cover incineration facilities that emit 25kt CO₂e per annum or more.

Managing CPRS obligations

The government has stated in the White Paper that it will not be prescriptive about how waste operators should manage their finances or time their permit purchases.

Several submissions made in response to the Green Paper addressed the unique waste industry commercial issues associated with the disconnect between the management of the liability for future emissions costs, with a revenue stream that is only received when waste is disposed of.

The lack of specific government requirements means that, in each year, waste operators will be responsible for the direct emissions in that year. In the absence of government prescription, waste operators will themselves need to manage their incoming revenue to ensure they are able to surrender sufficient permits for each year in which there will be an emissions liability for waste that has been received in the past.

Relevant matters include:

• revenue sources such as gate fees, energy sales, REC sales and compost sales
• CPRS liability, including:
  • hedging future CPRS costs, and
  • utilising sources of available permits or substitutes, such as cheaper abatement options including forestry and Kyoto permits, and
• other costs, such as energy supplies.

Emissions monitoring

The White Paper also addresses NGERS issues. The White Paper confirms the current position under the NGERS, being that Methods 1–3 must be used to indirectly estimate emissions.

The White Paper states that Methods 1–3 have the capacity to differentiate between legacy and non-legacy emissions, and therefore are necessary for the legacy emissions exemption until 2018.

The government will continue to work with the industry to develop direct measurement (Method 4) for landfill emissions.

The submissions in response to the Green Paper showed that there was little industry consensus as to the preferred measurement method, which highlights the difficulties of measuring landfill emissions.

As CPRS costs will arise and be levied in respect of the emissions as measured, the industry will be well served to work to refine and improve waste emissions monitoring with the government as required, including to develop direct measurement methodologies where possible.

Carbon Capture and Storage (CCS)

Carbon Capture and Storage (CCS) is a developing technology that may have application to reduce waste emissions, potentially in conjunction with flaring or using waste gas for energy.

Emissions that are injected and stored in CCS facilities will not be counted towards the originating entity’s total emissions. However, CPRS obligations for fugitive emissions from CCS and associated transport activities will be imposed on the relevant CCS facility.

In practice, this means that a waste operator would not be liable under the CPRS in respect of waste emissions that are sequestered, but a liability will arise for the operator of the CCS facility (and permits would need to be acquired and surrendered by that operator) in respect of any fugitive emissions. Whether those costs would be passed back to the waste operator would depend on the commercial arrangement in place.

It is apparent that CCS will become more commercially viable as the price of carbon under the CPRS increases.

No waste industry offsets under the CPRS

‘Offsets’ are a recognition for emission reductions by an operator which could be purchased and then surrendered by other emitters in respect of their emissions, in substitution for permits available under the CPRS.

The White Paper confirmed that there will not be any offsets recognised by the CPRS.

However, there will be special treatment of forestry and CCS, but they will not receive offsets. Forestry operators will be able to opt into the CPRS and be issued permits in return for their sequestration. CCS is considered further in the above ‘Carbon capture and storage (CCS)’ paragraph, but would essentially mean that emissions that are sequestered are not included in an emitter’s total emissions.

The White Paper states that, in 2013, the Federal Government will consider the scope for domestic offsets from emission sources that are not covered by the CPRS. This may include smaller waste facilities that do not exceed the CPRS thresholds. Offsets in respect of smaller waste facilities would act as a complimentary measure to increase abatement, but would add administrative burden, especially if offsets were not permitted from other sources, and therefore may be unlikely.

The Federal Government’s discussion paper entitled ‘Coverage of Landfill Emissions’ briefly referred to the possibility of offsets in respect of closed sites (which the White Paper has now provided will not be covered by the CPRS, as set out in the above ‘Closed sites’ paragraph), but noted that considering the merits of allowing offsets was not ‘a near term priority’.

Voluntary credit market

Many alternative waste treatment (AWT) facilities have gained accreditation under voluntary climate change schemes (including the Commonwealth’s Greenhouse Friendly scheme) and generate credits under those schemes which they sell. The voluntary credit market will continue following commencement of the CPRS. However, offset credits traded in the voluntary market will not be recognised under the CPRS. They will be voluntary measures taken in addition to the CPRS. The value of these voluntary market offsets would be to meet corporate responsibility goals for public relations or branding reasons and to facilitate the sale of products (including by emitters not covered by the CPRS, such as individuals), rather than assisting emitters covered by the CPRS to reduce their CPRS obligations. Consequently, voluntary offsets can be expected to be less desirable to emitters and therefore less valuable on the market than CPRS permits.

The White Paper identifies that the Federal Government has committed to develop a national standard for voluntary carbon offsets to provide national consistency and give consumers confidence in the voluntary carbon offset market. The standard is intended to provide guidance on what constitutes a genuine, additional voluntary offset credit, as well as setting requirements for the verification and retirement of such credits. A discussion paper regarding the national offset standard was released in December 2008. That discussion paper focuses on the shape of the voluntary credit market following the introduction of the CPRS rather than on how the current generation of voluntary credits will be treated. It indicates that the voluntary market will continue to operate following the commencement of the CPRS, and could include:

• the voluntary surrender of CPRS permits, either by parties not subject to the CPRS or by parties subject to the CPRS in addition to their CPRS obligations
• the voluntary surrender of Kyoto units (such as CDM units) and possibly other recognized international credits, and
• domestic offsets from sources uncovered by the CPRS.

The discussion paper’s focus on domestic offsets from sources uncovered by the CPRS indicates that entities that currently generate offset credits from sources which will be covered by the CPRS (such as AWT operators) will not be able to continue to do so once the CPRS commences.

The discussion paper identifies that the following uncovered waste sector activities could be potential sources of voluntary offsets (as they will not be covered by the CPRS):

• landfill sites that closed prior to 30 June 2008, and
• landfill site past waste streams (legacy emissions) until 2018.

However, the discussion paper identifies that ‘regulatory additionality’ will continue to be a key requirement for the accreditation of domestic offsets, that is, that the emissions reduction must not be required by regulation. Any proposals for recognition of domestic offsets from waste sources would need to demonstrate that the activity is not required by state or local government regulation. Therefore, the discussion paper identifies that the scope for genuinely additional offsets from the waste sector may be limited, as many states and territories have regulated or provided policy guidance that flaring of methane is required.

We note that the discussion paper does not name waste facilities that are below the suggested CPRS emission thresholds (that is, 25kT CO₂e per annum or 10kT CO₂e per annum) as potential generators of domestic offsets. We would expect that they could also be a source of domestic offsets, provided that it can be established that there is no regulation requiring the emissions reductions.

The discussion paper seeks input on the issues it raises rather than stating set policy positions. Therefore, the precise effect of the CPRS on the waste operators who currently participate in the voluntary credit market and their existing arrangements to supply voluntary credits remains uncertain. As the position becomes clearer, Freehills can assist waste operators with existing arrangements to determine the continuing enforceability of those arrangements and available legal options. We can assist now with submissions in response to the discussion paper and with advice on whether any particular activities are likely to be considered as ‘additional’ or not on the basis on existing regulation.

Likely CPRS effects on the waste industry

The White Paper states that the CPRS will encourage resource recovery because the alternative—sending waste to landfill—will become more expensive once permits are required for emissions from waste landfill facilities. This bald statement is made, despite acknowledging that resource recovery uses energy and that energy emissions are also covered by the CPRS at their source, and therefore energy costs will increase.

However, whether and when the CPRS will encourage resource recovery, or other forms of AWT that reduce greenhouse emissions, or other options like bioreactors, will depend on a number of matters, such as:

• sunk capital costs and existing commercial arrangements, including financing arrangements
• the prevailing carbon price under the CPRS
• the energy intensity of AWT
• the type of energy used for AWT (and therefore its cost under the CPRS, namely renewable against CO₂ emitting)
• the prevailing price of electricity, both in respect of energy used but also energy produced and sold from gas capture
• the prevailing REC price under the RET, and
• community and government attitudes to waste treatment.

Emissions-Intensive Trade-Exposed (EITE) compensation

The Green Paper and White Paper have both provided for compensation to be provided for activities that are deemed to be ‘emissions-intensive’ and ‘trade-exposed’. This EITE compensation is unlikely to be available to the vast bulk of the waste industry, however it may be available for discrete activities which are both ‘emissions-intensive’ and ‘trade-exposed’.

The Green Paper had taken a very simple approach to the definition of trade exposure—that all industries would be considered to be trade-exposed, other than those for which there exists a physical barrier to trade. The White Paper has presented a more sophisticated approach to the definition of trade exposure. Trade exposure will be assessed on either:

• a trade share (the ratio of the value of imports and exports to the value of domestic production) greater than 10 per cent in any single year between 2004–05 and 2007–08, or
• a demonstrated lack of capacity to pass through costs due to the potential for adverse international competition.

Consequently, some elements of the waste industry (for example, recycling facilities that ship materials overseas) may be able to argue for EITE assistance.

However, in order to be entitled to compensation, ‘emissions intensity’ also needs to be established. Emissions intensity for an activity is determined by calculating the average emissions per million dollars of revenue or the emissions per million dollars of value added. To receive EITE compensation, the emission intensity will need to be over 1,000t CO₂e/$million revenue or 3,000t CO₂e/$million value-added. The emissions used for this calculation include direct emissions, indirect electricity and steam emissions and indirect emissions from the processing of natural gas where used as a feedstock. It may be that, even if sectors of the waste industry are trade exposed, they would not be considered to be emissions intensive under this test.

A Guidance Paper was released on 18 February 2009 regarding the assessment of activities for the purpose of EITE assistance. Please let us know if you would like further information on this process.

Climate Change Action Fund (CCAF)

The CCAF will be a $2.15 billion fund available over five years (from 1 July 2009) to smooth the transition for businesses, community sector organisations, workers, regions, and communities to an operating environment that includes a price on carbon. A priority of the CCAF will be businesses that are not eligible for other forms of assistance associated with the CPRS. This will therefore include the waste industry, other than if it is eligible for the upper tier of EITE compensation (which appears highly unlikely).

The CCAF will have four streams, of which stream 1 (the provision of information) and stream 2 may be relevant to waste operators. Stream 2 will provide grants and incentives for businesses to invest in energy efficiency projects and low emissions technologies, processes and products. This stream commits $1.4 billion over five years. In particular, there will be a sub-program for ‘Innovation in Climate Change’, being for competitive grant funding to contribute to the cost of innovative low emission technologies, production methods, supply-chain improvements or products, and energy savings projects with long payback periods. The competitive funding round will begin in late 2009. It will complement the government’s existing range of energy technology specific funds.

Renewable Energy Target (RET) scheme

In addition to the CPRS, the Commonwealth’s Renewable Energy Target (RET) scheme will continue as a complementary measure, primarily focused on promoting renewable energy as an alternative energy source. The Federal Government has proposed the expansion of the scheme to 20 per cent renewable energy by 2020, and extending the operation of the scheme from 1 January 2021 to 1 January 2031. Draft exposure legislation and a discussion paper on compensation were released in December 2008 and the government is taking submissions until 13 February 2009.

Under these proposals, the RET will continue to incentivise the capture and combustion of landfill gas to generate energy by providing valuable RECs, for which demand will increase under the proposed expansion of the scheme. The RET will continue alongside the CPRS, before ending in 2030.

Next steps

The indicated timetable for implementing the CPRS and related matters is set out below. The next key events will be:

• submissions in response to the national offset standard discussion paper are due by 27 February 2009, and
• the release of exposure draft legislation, currently indicated for late-February 2009, with the opportunity for public submissions following.

It is not known whether the CPRS regulations will be released at the same time as the governing legislation. The regulations will be important for landfill operators in respect of the distance to be set between landfills for the lower 10kt CO₂e per annum threshold to apply.

The Rudd Government intends to have the CPRS legislation through parliament by June 2009. In the Senate, the government will need the support of either the Opposition Liberal and National Parties (the support of the Liberals alone would be sufficient), or all minor parties (the Greens, and the independents from Victoria and South Australia). The initial reaction of the Greens has been negative to the medium-term target, and the Opposition, consistent with its policy to delay introduction of an emissions trading scheme until global economic conditions improve, announced on 15 December 2008 that it has commissioned an economic analysis of the proposed CPRS. There is potential division between the Liberals and Nationals. A Senate inquiry seems likely. Therefore, there will continue to be scope to lobby in respect of the CPRS design.

Endnotes

1. These CDM costs appeared in the Australian Financial Review on Wednesday 17 December 2008, p5. Discussion regarding EU permit prices falling appeared in the Australian Financial Review on Thursday 29 January 2009, p13.

This article was written by Melanie Cave, Partner, Michael Voros, Solicitor and David Jenaway, Articled Clerk.

More information

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