Alert

Who does this affect?

Australian energy producers, manufacturers, industrial and mining companies.

What do you need to do?

Review the discussion paper and make submissions. Ultimately companies will need to decide on their emissions estimation methods under the guidelines.

Author
Chris Miller  
Solicitor

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Louis Chiam  
Partner
T +61 3 9643 4086

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Sydney
Dominic Bortoluzzi  

Melbourne
Louis Chiam  

Perth
Tim Warman  

Brisbane
Matthew Austin  

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In a move with possible long-term ramifications for a national emissions trading scheme, greenhouse gas emitters could be forced to choose a carbon measurement methodology next year, according to a recent Government consultation paper.

The paper, released by the new Commonwealth Department of Climate Change, suggests emitters could be locked into the choice going forward.

Background

The Australian Government is developing a national framework for greenhouse emission and energy reporting under the National Greenhouse and Energy Reporting Act 2007 (Act) in order to support the Australian Emissions Trading Scheme (AETS).

The framework will be essential to the development and operation of the AETS, in that it will provide a more systematic and harmonised approach to the monitoring, reporting and verification of businesses’ emission data.

In December 2007 the Department of Climate Change released Technical Guidelines for the Estimation of Greenhouse Emissions and Energy at the facility level: the Energy, Industrial Process and Waste sectors in Australia- Discussion Paper (Discussion Paper). The main purpose of the Discussion Paper is to propose emissions estimation methodologies for Australia’s National Greenhouse and Energy Reporting System (Reporting System).

After the conclusion of the consultation process, the Department will release Guidelines that will assist covered entities prepare inventories of high-quality greenhouse emission estimates and inventories of the production and consumption of energy. The Guidelines will replace the AGO Factors & Methods Workbook.

The Discussion Paper follows the National Greenhouse and Energy Reporting System, Regulations Discussion Paper which was released in October 2007 and dealt with issues relating to definitions, registration, reporting, auditing and disclosure.

Reporting requirements

Energy production and consumption as well as direct and some indirect greenhouse gas emissions will need to be reported under the Reporting System. The Discussion Paper considers the technical aspects of reporting emissions under the Reporting System.

Direct emissions are produced as a direct result of an organisation’s activities, for example, generation of energy, manufacturing processes, transportation and fugitive emissions. Indirect emissions are generated in the wider economy as a consequence of an organisation’s activities, for example, consumption of electricity.

The Discussion Paper adopts the three emission categories defined in the international reporting framework of the World Resources Institute/World Business Council for Sustainable Development:

• Scope 1 - direct emissions.
• Scope 2 - indirect emissions from the consumption of electricity, steam or heat produced by another organisation.
• Scope 3 - all other indirect emissions.

The Reporting System will only require Scope 1 and Scope 2 emissions to be reported. Scope 3 emissions may be reported on a voluntary basis.

Scope 1 emissions

The Discussion Paper proposes two methodologies for estimating emission levels:

• the General Methodology, and
• the Higher Level Methodology.

The General Methodology involves estimating emission levels from the quantity of the emission-producing activity being engaged in and by using a benchmark emissions factor provided by the Department. This methodology is intended to be used in the absence of facility-specific information.

The Higher Level Methodology involves on-site sampling to determine facility-specific emissions factor. Sampling will be conducted in accordance with applicable standards, or, if no such standards are available, best practice.

Most covered entities will be able to choose between the General Methodology and the Higher Level Methodology. While an emitter using the General Methodology may switch to the Higher Level Methodology at any time, an emitter that has chosen the Higher Level Methodology may not revert back to the General Methodology.

Covered entities will need to weigh the potential advantages of relying on the Higher Level Methodology against the resulting increase in measurement costs.

• Emitters using fuels that are non-homogeneous, such as coal (in contrast to, say, petroleum products that are relatively homogeneous) may prefer the Higher Level Methodology. Emissions from non-homogenous fuels are less predictable and thus the variation between the benchmark emission factor and the facility specific emissions factor is likely to be greater, making the Higher Level Methodology potentially more attractive.
• Companies that are already using a Higher Level Methodology to measure emission levels under existing government programmes or in accordance with industry practice may find additional measurement costs will be minimal.
• Large emitters’ measurement costs will be lower relative to their emission levels.

Scope 2 emissions

Greenhouse gas emissions that result from the production of the energy purchased by a covered entity must be reported by the covered entity as Scope 2 emissions.

The Discussion Paper proposes that Scope 2 emission factors be calculated through the ‘physical approach’. This approach involves the allocation of all emissions attributable to a State’s or Territory’s electricity production amongst individual consumers in proportion to their relative levels of consumption. The Discussion Paper favours this approach over either an approach based on contractual relationships between suppliers and consumers or a hybrid approach.

Scope 2 emission factors are calculated based on the electricity sent out on the grid rather than the electricity delivered. This ensures that consumers are not allocated Scope 2 emissions attributable to transmission and distribution losses.

Conclusion

The release of the Discussion Paper is an important step towards the establishment of the Reporting System and ultimately the AETS.

If the proposals are implemented, covered entities would need to undertake a thorough cost-benefit analysis before deciding to rely on the Higher Level Methodology, as the covered entity may not be able revert back to the General Methodology. This may be an issue as businesses may be reluctant to make a long-term commitment to higher measurement costs when the factors relied upon in the cost-benefit analysis are subject to change.

Covered entities would also need to be conscious of the interrelationships between the Reporting System and the proposed compensation/free permit allocation mechanisms under the AETS. While committing to the Higher Level Methodology may decrease reported emissions, it may also reduce the value of compensation to which the covered entity would otherwise be entitled to under the AETS adjustment mechanisms.

Submissions to the discussion paper are to be lodged by 13 February 2008 and must comply with the guidelines set out on the Department of Climate Change website.