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HG Alert: Carbon sinks under the Carbon Pollution Reduction Scheme - 16 Sep 2009

The sequestration of carbon through planting and preserving trees will play a large role in efforts to reduce Australia’s greenhouse gas emissions. The Carbon Pollution Reduction Scheme Bill 2009, or CPRS Bill, provides for the issuing of free Australian emissions units for eligible reforestation projects. The CPRS Bill also establishes circumstances in which emissions units must be relinquished, and the rules for maintaining forests if units have not been relinquished.

The explanatory memorandum to the CPRS Bill explains the rationale behind the reforestation provisions:

“Forests sequester carbon dioxide as they grow. Issuing free units, in addition to the Scheme cap, for net increases in greenhouse gas removals creates an incentive for reforestation. It will also allow the Scheme cap to be achieved at a lower cost than would otherwise be possible.”

Importantly, the reforestation activity must result in net sequestration for free permits to be issued. For example, an entitlement to free units would be unlikely where the landholder has cleared more vegetation than has been planted. However, if net sequestration does occur, then landholders may be able to ‘opt in’ their reforestation activities to the future CPRS.

HopgoodGanim published an earlier article on 28 July 2009, which briefly traversed the issue of plantations and the opportunities available to coal seam gas (CSG) producers to use the large volumes of CSG water produced for the purposes of reforestation. This article summarises the requirements under the CPRS Bill to be entitled to free Australian emissions units for eligible reforestation projects.

Overview

A person or entity will be entitled to free Australian emissions units if it:

  • is a recognised ‘reforestation entity’;
  • is undertaking an eligible ‘reforestation project’;
  • holds a ‘carbon sequestration right’; and
  • is not subject to the requirements to relinquish a number of Australia emissions units.

If the above requirements are satisfied, and the person or entity is eligible to participate in the Scheme, unit limits will be issued by the Australian Climate Change Regulatory Authority and reporting and monitoring obligations will be triggered.

Reforestation entity

A person may apply to the Authority for recognition as a reforestation entity. Under section 201 of the CPRS Bill, the Authority must be satisfied that the person is a “fit and proper person”, having regard to whether the person has been convicted of certain offences, whether an order has been made against the person under section 76 of the Trade Practices Act 1974 or whether the person has breached the CPRS or associated provisions. Further, the applicant must not be insolvent under administration (if an individual) or an externally-administered body corporate.

The Authority will generally make a decision on eligibility within 90 days of the application being made.

Reforestation project

A person may apply to the Authority for the declaration of a project as an ‘eligible reforestation project’. Under the initial version of the CPRS Bill, a reforestation project may only be carried out on Torrens system or Crown land. The CPRS Bill expressly deemed ‘general law land’, or land other than Torrens system land or Crown land, to be ineligible to hold a reforestation project.

A reforestation project is defined as:

  • a project that establishes, manages and maintains one or more forest stands; or
  • a project that manages and maintains one or more existing forest stands.

A ‘forest stand’ is an existing or new forest of trees that:

  • is established by direct human-induced methods;
  • has a potential height of at least two metres and a potential crown cover of at least 20 percent of the area occupied by the stand of trees;
  • occupies an area of land 0.2 hectares or more;
  • is on land that, as at 31 December 1989, was clear of trees with a potential height of at least two metres and a potential crown cover of at least 20 percent; and
  • meets any requirements specified in the legislation.

If part of the project area remains clear of a forest stand for a continuous period of at least five years (that began when the declaration was in force), then the Authority must vary the declaration in writing by excluding that part of the area from the relevant project area.

As a reforestation project will be subject to an ongoing maintenance obligation, the applicant will be required under some circumstances to obtain the consent of other relevant interest holders in the land. For example, the applicant is required to obtain the written consent of the person holding the fee simple interest in the land if the applicant does not hold such an interest, and from any mortgagees that are registered in accordance with the law of a State or territory. Further, if the applicant does not hold a ‘forestry right’ in relation to the project, consent will be required from the person who does hold the forestry right. This is discussed in more detail below.

Carbon sequestration right

A carbon sequestration right is a right to take the benefit of carbon sequestration by trees or forests. The applicant must have the exclusive legal right to benefit from the carbon in order for the reforestation project to be included in the Scheme. Such rights are attached to the land on which the forest stands, and therefore may act as an encumbrance on title.

Broadly speaking, carbon sequestration rights will be recognised under the CPRS Bill where:

  • the reforestation area is on Torrens system land or Crown land;
  • the person holds a legal estate or interest in the project area (e.g. a leasehold interest); and
  • as a result of the legal interest, the person has the exclusive legal right to obtain the benefit, whether present or future, of carbon dioxide sequestration by trees to which the project relates.

The CPRS Bill differentiates between the concept of a carbon sequestration right and a forestry right. A forestry right will generally be recognised where:

  • the reforestation area is on Torrens system land or Crown land;
  • the person holds a legal estate or interest in the project area (e.g. a leasehold interest); and
  • as a result of the legal interest, the person has the exclusive legal right to establish, manage and maintain a forest on the project area or project areas.

Reforestation unit limit

After the Authority has declared an eligible reforestation project, it must then declare that a specified number of units is the ‘reforestation unit limit’ for the project.

The amount of free units to be issued will be worked out with reference to the net tonnes of greenhouse gases that, under the regulations, will be removed by the forest and the reforestation unit limit determined by the Authority for the project.

This limit can be increased or decreased under certain circumstances.

Reporting requirements

Reporting obligations are triggered as soon as an eligible reforestation project is declared by the Authority. The first reporting period is the five year period beginning on the day that the declaration takes effect, and is followed by subsequent five year reporting periods.

The person or entity must provide the Authority with a written report about the project for the period that is given, in the manner and form prescribed under the regulations. They must include information specified under the regulations and give the report to the Authority within 40 days of the end of the reporting period.

Monitoring and maintenance obligations

The Authority is also able to impose forestry maintenance obligations. Such obligations may require a forest stand to be established or maintained so that when the forest stands reach maturity, the number that is taken to be the net total number of tonnes of greenhouse gases removed by the maintained forest will equal or exceed the net total number of Australian emissions units issued in relation to the project.

Maintenance obligations can be triggered where a person has not complied with a notice to relinquish Australian emissions units, in circumstances where declarations relating to an eligible reforestation project have been revoked. For example, where a forest is cleared, or not replanted after a natural disaster, the person may be liable to relinquish the free emissions units. If the units are not surrendered, the maintenance obligation may arise.

Under the initial draft of the CPRS Bill, the person responsible for maintenance is the person who holds the forestry right at the time of non-compliance with the relinquishment notice, which is usually the current landowner. This applied regardless of whether the landowner was the initial recipient of the free emissions units.

Amendments to initial CPRS Bill

A number of amendments were introduced into the CPRS Bill in May 2009, several of which impact upon the forestry provisions. The key amendments are:

  • allowing reforestation projects over multiple (instead of single) land titles. This will allow larger entities to manage forests across different geographical locations. It may also assist in reducing forms of risk, for example from natural disasters such as fire.
  • enabling projects to be declared on land granted under Commonwealth, State or territory land rights legislation (or held for the benefit of Aboriginal peoples or Torres Strait Islanders) and land subject to native title rights.
  • allowing a group of persons to be Scheme participants. This will allow for participation by a greater range of entities, such as farmers who own land in partnership.
  • allowing the holder of the carbon sequestration right to transfer Scheme liabilities, such as reporting requirements or relinquishment obligations, to another entity with the agreement of the Authority. This will allow a broader ranger of legal and commercial arrangements for reforestation projects.
  • converting the forestry maintenance obligation from a positive to a restrictive obligation. In effect, it imposes an obligation on all persons with an interest in the land, not just forestry right holders, not to engage in conduct that will have the effect of removing the carbon stores of a forest. It therefore removes the obligation on the landowner to re-establish or maintain a forest unless they were the person or entity responsible for breaching the conditions of the forest maintenance obligations. It also reduces the risk to the landowner of allowing reforestation projects on their land.

It is important to keep in mind that while the Carbon Pollution Reduction Scheme legislation will set out the tax consequences of dealing with units acquired as a result of reforestation and other carbon sequestration activities, the tax treatment of costs incurred in generating units is not dealt with in the Scheme’s rules.

The tax consequences of these costs will need to be determined under existing tax rules, including the new Subdivision 40-J of the Income Tax Assessment Act 1997, which deals with upfront deductions for certain expenses relating to the establishment of carbon sink forests, such as the costs of acquiring and planting trees.

For more information on carbon sequestration or the Carbon Pollution Reduction Scheme, please contact HopgoodGanim’s Climate Change specialists.