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Focus: Climate Change – February 2008

Greenhouse reporting regulations policy paper released

In brief: The National Greenhouse and Energy Reporting Act 2007 (Cth) provides the legislative framework for the operation of the National Greenhouse and Energy Reporting System (NGERS), which will be a key element of the proposed Australian emissions trading scheme. The Federal Government has released a policy paper that sets out the content of the regulations to be made under that Act. Partner Grant Anderson (view CV) analyses the key points arising out of the policy paper.

• Background
• The National Greenhouse and Energy Reporting System
• Content of regulations
• Matters of interest

Background

The National Greenhouse and Energy Reporting Act 2007 (Cth) (the Act) creates a single national reporting scheme for greenhouse gas emissions and energy consumption and production. Under this scheme, the Australian controlling entity of a group¹ must apply for registration by 31 August of the financial year following the financial year in which the facilities under the group's operational control meet one of the 'corporate group' thresholds specified below:

In addition, the controlling entity must apply for registration if any member of its group has operational control over a facility that meets one of the 'facility level' thresholds – namely, if the facility emits 25kt CO² -e or more of greenhouse gases in a year or produces or consumes 100TJ or more of energy in a year. The Australian controlling entity of a group may also apply to be registered under the Act if a member of the group is undertaking, or is proposing to undertake, a 'greenhouse gas project', ie an activity that is designed to remove or reduce the emission of greenhouse gases.

The consequences of registration include that:

• the registered entity must provide an annual report to the Greenhouse and Energy Data Officer (the GEDO) on its group's greenhouse gas emissions, energy production and energy consumption or the reduction, removal or offset of greenhouse gas emissions achieved by its greenhouse gas projects (as the case may be); and
• some of the information derived from those annual reports must be published by the GEDO on its website.

More detail about the Act is contained in AAR Focus: Climate Change – August 2007.

The Act provides for much of the detail of the reporting requirements to be set out in regulations. As part of the process of preparing these regulations, the Federal Government released a regulations discussion paper in October 2007 that sought input on some of the matters that are to be covered by regulation. These matters were canvassed in AAR Focus: Climate Change – October 2007.

The Federal Government has now released the National Greenhouse and Energy Reporting System Regulations Policy Paper (the policy paper), which outlines the Government's proposals for the content of the regulations. Submissions on these proposals are due by 27 February 2008. The policy paper is supplemented by draft technical guidelines, released on 11 January 2008, which contain detailed requirements (including calculation methods and processes) relating to the data that will be required to be provided under the Act, and which will replace the National Greenhouse Accounts Factors. Submissions on the technical guidelines are due by 13 February 2008.

The final regulations will be released this year.

The National Greenhouse and Energy Reporting System

The reporting scheme established by the Act and the regulations is intended to:

• reduce red tape by replacing the overlapping reporting requirements under the plethora of existing federal and state reporting schemes;
• collect information for use in connection with the proposed Australian emissions trading scheme (AETS), including information that may be used to allocate any free permits, to determine the allocation of early action abatements and offset credits, and to set the caps that are to apply under the AETS; and
• collect information that is necessary to enable Australia to meets its international reporting obligations (eg under the United Nations Framework Convention on Climate Change).

Although the scheme only compels the reporting of emissions and energy information where the relevant thresholds are exceeded, and then only for financial years from the 2008-09 financial year, companies should consider whether they would benefit from providing such information even if they are not required to do so (including information on earlier financial years). This is because that information might help establish an historical track record that supports their argument for being allocated a particular quantity of free permits and/or early action abatements or offset credits. Voluntary reporting is likely to be particularly relevant for participants in trade-exposed emissions-intensive industries where their activities fall below the mandatory reporting thresholds but their energy consumption is relevant to determining their allocation of free permits.

In any case, companies will need to ensure that their systems for measuring, monitoring, verifying and reporting their greenhouse gas emissions and energy production and consumption are established in time, and are able to produce information of the kind and to the required standard of accuracy, that is necessary to enable them to meet their reporting obligations under NGERS. This would sensibly include time for testing these systems and any necessary interface with the OSCAR² system, which is intended to collect all the information provided to the GEDO under NGERS.

On the government side, the rather ambitious 2010 start date for the AETS (which was recently confirmed by Senator Penny Wong in her first major policy speech on the AETS) means that it is important for NGERS to be bedded down well in advance of that time.

Having said this, the Federal Government has left open the possibility that the information reporting requirements may need to be further modified to accommodate the AETS as the details of that scheme are developed and refined during 2008. In addition, further emissions and energy information may be required to be provided under NGERS where it is needed by a state or territory. However, the need to provide further information for this purpose will be the subject of a separate consultation process and will require authorising regulations.

Content of regulations

The regulations policy paper confirms, and elaborates on, a number of the positions that were canvassed in the earlier regulations discussion paper.

Covered gases

The regulations will specify the hydrofluorocarbons and perfluorocarbons that must be reported on³, and the global warming potentials that must be applied to the greenhouse gases covered by the reporting obligations.⁴ These gases and conversion factors are drawn from the relevant IPCC Assessment Reports and are consistent with Australia's international inventory reporting obligations.

Definition of 'facility'

Central to the reporting obligations is the concept of a 'facility'. A facility is defined in the Act as an activity, or series of activities, that form part of a single undertaking or enterprise. Under the proposed regulations, an activity or series of activities will be considered to form part of a single undertaking or enterprise where:

• those activities include one principal activity (ie an activity whose 'value added' exceeds that of any other activity carried out at the facility), the output of which is suitable for delivery outside the facility; and
• those activities are situated in, or attributable to, a single physical location.

Activities associated with the principal activity (ie secondary activities and ancillary activities) will also be included as part of a single facility. For these purposes, activities will be defined using the Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006, classified at either the 2 or 3 digit level. (Note that, in respect of Australia's exclusive economic zone, it is only oil and gas exploration or extraction activities, including carbon capture and storage and liquid natural gas floating platforms, that are required to be reported on under NGERS).

Inevitably there are some exceptions to this general approach, the principal ones being:

• Vertically integrated activities (ie activities where the relevant products or services form part of a single production process and only the output of the final stage is sold) will be able to be treated as a single facility, even where they occur across separate physical locations, providing those locations are all within the one state. However, a reporting entity will be required to separately report data where the facility's activities span two or more ANZSIC divisions.
• Transport activities will constitute a single facility (despite the absence of one physical location) to the extent they can be attributed to a single physical location at the national level. However, sub facility level reporting will be required at a state level where those transport activities cross state boundaries. Moreover, fuel used on international flights and voyages will be required to be separately reported on.
• Gas, sewage and other pipelines (including affiliated compressor stations) will be considered to be single facilities except that, where they cross state boundaries, they are to be reported as sub facilities in each state in which they are located.
• Electricity transmission and distribution losses are to be reported as scope 2 emissions (see below). However, losses in respect of interstate lines must again be separately reported on for each state because such lines are considered to be sub facilities in each state in which they are located.
• Own account construction (ie start ups or expansions that are undertaken by the facility operator rather than by a contractor) will be treated as attributable to the industry sector that is relevant to the facility's principal activity. The exception is that mining sector developments and expansions will be classified by reference to the facility's principal activity irrespective of whether they are undertaken by the facility operator or a contractor on the operator's behalf.

Because there is a degree of uncertainty inherent in some of these approaches, the Act empowers the GEDO (either on application or on its own initiative) to declare those activities that constitute a facility in any particular circumstances.⁵ However, the policy paper notes that one of the factors to which the GEDO will have regard in exercising this power is whether the adoption of a particular method of defining the facility is intended to minimise the associated reporting obligations or to avoid the relevant activity meeting the facility level thresholds under the Act.

Aggregation

Facilities that emit less than 25kt CO² -e pa of greenhouse gases, or produce or consume less than 100TJ pa of energy, will not be required to be separately reported on but can be aggregated, albeit only to a state level and only within the appropriate ANZSIC division. Moreover, it will not even be necessary to include in this aggregated reported information any information on a facility that, in any year:

• accounts for less than 2 per cent of the corporate group's inventory;
• emits less than 3kt CO² -e of greenhouse gases;
• produces less than 12TJ of energy; and
• consumes less than 12TJ of energy,

where the aggregated total for all facilities excluded on this basis could not be estimated to make up more than 5 per cent of the corporate group's total emissions, energy production or energy consumption. However, the reporting entity will be required to report annually on the number of facilities that are excluded on this basis.

Energy and emissions

The policy paper specifies the types of fuel and energy commodities that are to constitute 'energy' for the purposes of the reporting obligations under the Act. These include crude oil and petroleum products, natural gas, coal and coal products, industrial wastes, waste oils, biomass, electricity, and solar, wind and hydro energy. In addition:

• the production of energy will be defined to include not just the manufacture of secondary fuel products, but also the extraction of primary fuels from fossil reserves and biofuel sources, and the capture of renewable energy from water, wind, sunlight etc; and
• the consumption of energy will be defined to include the use of energy (as defined above) for both energy and non energy purposes (eg as feedstocks or carbon reductants), as well as losses in extraction, production and transmission.

These definitions are relevant to the scope of registered entities' reporting obligations. Both energy production and energy consumption will be required to be reported by fuel type.

Insofar as greenhouse gas emissions are concerned, it will be mandatory to report both scope 1 and scope 2 emissions. Scope 1 emissions are greenhouse gases that are emitted from sources within the boundary of a facility and as a result of the facility's activities. Scope 2 emissions are greenhouse gases that are emitted from the production of electricity, heat or steam that a facility consumes where such electricity, heat or steam is physically produced by another facility. Emissions are to be reported by both fuel type and greenhouse gas type. However, because methodologies for measuring non energy related greenhouse gas emissions from agriculture, land use and forestry are not sufficiently developed, emissions of this type will not be required to be reported at this time.

Auditing

The Act permits the GEDO to require a reporting entity to appoint an external auditor to audit its compliance with the Act where the GEDO has reasonable grounds to suspect that the entity has contravened the Act.⁶ It also permits the GEDO to appoint an external auditor to audit a reporting entity's compliance with the Act.⁷ The policy paper sets out the qualifications that such external auditors are to possess. Moreover, separate legally binding guidelines will be developed in relation to the conduct of such audits and the preparation of the resultant audit reports. These guidelines will be consulted on in the first half of 2008.

Matters of interest

This section identifies particular matters arising out of the policy paper that reporting entities should bear in mind.

Joint ventures and partnerships

As stated above, a reporting group includes joint ventures and partnerships of which an entity in the reporting group is a member. However, the Act permits one member of a joint venture or partnership to be nominated as the responsible entity so that only that member (or its Australian controlling entity) will need to report on any facility under the operational control of the joint venture or partnership. It makes sense for the members of a joint venture or partnership to nominate a responsible entity for this purpose. If they do not, all the joint venture participants or partners will need to report under the Act and, if conflicting data is provided on the one facility, an audit will almost invariably be required to be conducted. Moreover, the inconsistent data may result in penalties being imposed on these participants and partners under the Act and/or the regulatory framework for the AETS.

Scope 1 and scope 2 emissions

Both scope 1 and scope 2 emissions are required to be reported, even though only scope 1 emissions are relevant to the AETS. Some stakeholders have expressed concerns that:

• this could lead to 'double counting' – a facility that produces energy will create scope 1 emissions that are also reported as scope 2 emissions by a facility that consumes that energy;
• this requires end users to calculate scope 2 emissions when they do not have sufficient information to do so (and the necessary energy conversion factors could in any event be applied by the GEDO, rather than the end user); and
• it will complicate the analysis of a company's likely obligations under the AETS.

The difficulty is that section 24(1) of the Act does not seem to allow the GEDO to separately publish scope 1 and scope 2 emissions data, which is what would be required (at a minimum) to address at least some of these issues. However, the policy paper indicates that the Act will be amended to allow such separate publication.

Operational control

An entity has 'operational control' over a facility for reporting purposes where that entity has the authority to introduce and implement operating, health and safety, or environmental policies for that facility.⁸ However, the entity that has such operational control might not always be clear, eg as where the facility owner contracts out the operation or maintenance of the facility to a third party (this frequently occurs in contract mining). In such a case, the Act provides that the entity to be considered to have operational control over the facility will be the entity that has the 'greatest' authority to introduce and implement such policies.⁹ In determining this question, the policy paper states that:

• regard will need to be had to the terms of the services contract to determine whether it is the facility owner or the facility operator that has this authority; and
• there is a distinction between the 'introduction' of such policies, which may be the province of either the facility owner or the facility operator (depending on the terms of their contract), and the 'implementation' of those policies, which is more likely to be the province of the facility operator. The policy paper suggests that this will generally be sufficient to accord the facility operator the 'greatest' authority in this regard.

In the case of commercial properties, control over energy billing will be considered to be a proxy for operational control, ie the party that effectively pays for the actual consumption of energy at the premises (whether directly or indirectly) will be considered to have operational control. Depending on the circumstances, this could be either the landlord or the tenant.

Because of the uncertainties that may arise in relation to determining which entity has operational control over a facility, the Act empowers the GEDO (either on application or on its own initiative) to declare that a particular entity has operational control of a facility.¹⁰ However, to obtain such a declaration it will be necessary to provide the GEDO with any relevant contract between the parties.

Publication of information

It has been decided that the GEDO will publish greenhouse gas emissions, energy consumption and energy production totals for both the reporting group and each individual member of that group. This means that a registered entity that wishes to keep its individual company level information confidential will need to be able to persuade the GEDO that the publication of such disaggregated information might reveal a matter (such as a trade secret) about a specific facility, technology or corporate initiative that has a commercial value that would reasonably be expected to be diminished if the information is disclosed.¹¹ Alternatively, the entity will need to seek to persuade the GEDO that only a range of values (rather than the precise values) should be published.¹² The specific protocols and processes for applying for exemptions of these kinds will be the subject of work undertaken with a separate public disclosure focus group.

The decision not to publish facility-level data has been criticised on the grounds that investors will be deprived of a source of information about how different business units within the same company would be affected by the carbon price. However, although such information will not be published by the GEDO, it must still be provided to the GEDO and is therefore able to be used in determining the allocation of free permits. Experience from the European Union emissions trading scheme suggests that the use of facility-level information for this purpose is essential to minimise the risk of the over-allocation of free permits.

The policy paper states that reporting entities will also be entitled to provide contextual data to the GEDO for publication on the GEDO's website, together with the greenhouse gas emissions, energy production and energy consumption data that is required to be published. This will give reporting entities the opportunity to explain matters relevant to the published data (eg their proposed emissions or energy consumption in the future). However, the GEDO will be able to publish disclaimers in relation to such contextual data, stating, for example, that the data might not be consistent across group members and has not been subject to external audit or quality assurance.

In addition, non compliance with the Act will be publicly disclosed on the National Greenhouse and Energy Register, but only where a corporation has been found guilty of that non compliance by a court.

Reporting requirements where thresholds not met

Where a registered entity's group subsequently ceases to meet any of the mandatory reporting thresholds, the reporting entity will simply be required to state in its annual report to the GEDO that no thresholds have been met for the reporting year. However, where any of the corporate group thresholds are met, the reporting entity will be required to report on the group's greenhouse gas emissions, energy production and energy consumption. Conversely, where only a facility level threshold is met, the reporting entity will just be required to report on that facility.

Greenhouse gas projects

The annual report of a reporting entity on a greenhouse gas project must separately identify the greenhouse gas reductions, greenhouse gas removals and offsets that result from the greenhouse gas project. For this purpose:

• reductions and removals are to be measured in quantitative terms (tCO² -e) in accordance with a baseline approach and Part 2 of ISO 14064; and
• offsets will be required to involve the retirement of 'carbon credits' that are generated outside the reporting entity's reporting boundary. Given the absence of an Australian standard for carbon credits, the only qualifying carbon credits for this purpose will be those approved by the Federal Government. Currently, only Greenhouse Friendly carbon credits are so approved, but it is likely that other credits will be approved once an Australian standard for offsets is developed (this is expected to occur by the end of 2008).

Where a reporting entity does not have to provide greenhouse gas information because it does not meet the corporate group thresholds, a condition of a greenhouse gas project's registration will be that the reporting entity provides the GEDO with a corporate greenhouse gas emissions inventory so as to enable the greenhouse gas reductions and removals attributable to the project to be verified.

The publication of greenhouse gas project data on the GEDO's website will be at the option of the reporting entity: if the entity elects to have such information published then all of the information reported to the GEDO on that project will be published.

Updating information

Reporting entities will be required to update any changes to their registration information at the same time as they provide their annual report to the GEDO. However, where a facility's principal activity changes from one ANZSIC classification to another, that change is only to be taken into account for reporting purposes if it has subsisted for at least two years.

Enforcement

The policy paper states that, while the enforcement approach will initially be to encourage compliance with the reporting framework through non punitive measures, punitive measures are more likely to be applied during this initial period to reporting entities whose data would be used to determine their permit allocation, or permit acquittal obligations, under the AETS.
If you would like any further information on this area or assistance in drafting submissions in response to the regulations policy paper, please contact any of the people below. 

Footnotes

1. For these purposes, a group includes the controlling entity, the controlling entity's subsidiaries and (in the absence of any nomination to the contrary) the joint ventures and partnerships of which a group entity is a member.
2. Online System for Comprehensive Activity Reporting.
3. The Act itself specifies that the reporting obligations extend to the other four Kyoto gases, ie carbon dioxide, methane, nitrous oxide and sulphur hexafluoride.
4. These global warming potentials are intended to be reviewed prior to the 2012-13 reporting year (ie the first reporting year following the end of the first commitment period under the Kyoto Protocol).
5. s54 of the Act.
6. s73 of the Act.
7. s74 of the Act.
8. s11(1) of the Act.
9. s11(4) of the Act.
10. s55 of the Act.
11. s25 of the Act.
12. s24(3)(b) of the Act.
     

For further information, please contact:

• Grant AndersonPartner, Melbourne
  Ph: +61 3 9613 8928
  Grant.Anderson@aar.com.au
• Chris SchulzPartner, Melbourne
  Ph: +61 3 9613 8772
  Chris.Schulz@aar.com.au
• Matthew SkinnerPartner, Sydney
  Ph: +61 2 9230 4038
  Matthew.Skinner@aar.com.au
• Jim ParkerPartner, Sydney
  Ph: +61 2 9230 4362
  Jim.Parker@aar.com.au
• John GreigPartner, Brisbane
  Ph: +61 7 3334 3358
  John.Greig@aar.com.au
• Ben ZillmannPartner, Brisbane
  Ph: +61 7 3334 3538
  Ben.Zillmann@aar.com.au
• Darren MurphyPartner, Perth
  Ph: +61 8 9488 3768
  Darren.Murphy@aar.com.au
• Campbell DavidsonInternational Partner, Shanghai
  Ph: +86 21 6841 2828
  Campbell.Davidson@aar.com.au

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