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Focus: Climate Change – October 2007

Greenhouse reporting regulations discussion paper released

In brief: The National Greenhouse and Energy Reporting Act 2007 came into operation on 28 September 2007. This Act provides the legislative framework for the National Greenhouse and Energy Reporting System, which will be a key element of any Australian emissions trading scheme. A discussion paper on the proposed regulations that will fill out the details of the reporting system was released last week. Partner Grant Anderson (view CV) and Senior Associate Meg Lee review the proposals canvassed in the discussion paper.

How does it affect you?

  • All Australian companies, joint ventures and partnerships that exceed the greenhouse gas emissions or energy production or consumption thresholds set out in the Act will need to understand the proposed boundaries for their reporting obligations under the National Greenhouse and Energy Reporting System. However, input from stakeholders is being sought on the key design issues of the system to ensure that it is workable and addresses the needs of both business and the public. Submissions are due by 16 November 2007.
  • The information recorded in the reporting system will inform important decisions in relation to the proposed Australian emissions trading scheme, such as the identification of disproportionately disadvantaged businesses and trade-exposed emissions-intensive industries and the amount of 'free' permits that are to be allocated to them under the emissions trading scheme. It will also form the basis for the issue of early action abatement credits and offset credits.
  • While reporting is not mandatory for years before the 2008-09 financial year, companies should consider voluntarily reporting for the 2007-08 financial year, as this will be relevant to the assessment of their entitlements to early action incentives and emissions trading scheme permits. It will also assist in establishing an historical record and enable companies to test and refine the systems they will need for mandatory reporting. For similar reasons, even companies that fall below any reporting thresholds should consider whether it is worthwhile for them to voluntarily report not only for the 2007-08 financial year, but also for subsequent financial years.

What are the key design issues addressed by the discussion paper?

The National Greenhouse and Energy Reporting System Regulations Discussion Paper (October 2007) (the discussion paper) outlines some of the approaches that will be adopted in relation to the interpretation of key parts of the Act (see AAR Focus: Climate Change – August 2007) that were deliberately left to be detailed in the regulations, including:

  • the kinds of hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) to be included in the reporting obligations;
  • the carbon dioxide equivalence factors (or global warming potentials) that are to be applied;
  • the definition of 'emissions'; and
  • the definition of 'industry sector'.

The discussion paper also sets out possible approaches to:

  • the definition of 'facility';
  • the definition of 'operational control';
  • registration and deregistration;
  • the reporting thresholds;
  • the collection and public disclosure of reported information; and
  • compliance assurance.

Stakeholder comment is invited on all these matters.

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What design issues are excluded from the discussion paper?

The discussion paper does not address critical design issues relating to the definitions of, and reporting methodologies for, energy production and consumption. These matters will instead be addressed in separate discussion papers.

Further, the discussion paper is short on detail about the proposed offset regime under section 21 of the Act. Instead, it defers to the September 2007 discussion paper on abatement incentives (see AAR Focus: Climate Change – September 2007) and states that stakeholder feedback on this earlier discussion paper may be considered in the development of regulations relating to offsets and their reporting.

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What design issues have already been determined?

The discussion paper makes it clear that the kinds of hydrofluorocarbons and perfluorocarbons that will be included in the reporting obligations under the Act will be aligned with Australia's international inventory reporting obligations. Accordingly the reporting obligations will extend to all the new HFCs and PFCs that were included in the IPCC Third Assessment Report. The discussion paper also lists the carbon dioxide equivalence factors (or global warming potentials) that will be applied in respect of the greenhouse gases covered by the reporting obligations. Again these factors are drawn from the relevant IPCC Assessment Reports.

As foreshadowed in our Focus: Climate Change – August 2007, the definition of 'emissions' will include both scope 1 emissions (direct releases of greenhouse gases from sources within the boundary of a facility as a result of that facility's activities) and scope 2 emissions (indirect releases of greenhouse gases from the consumption of electricity, heat or steam consumed by a facility but physically produced by another facility). Scope 3 emissions, ie emissions generated in the wider economy as a consequence of a facility's activities but which are physically produced by another facility, will not be required to be reported (although companies might choose to do so voluntarily).

Rather than including details in the regulations, the AGO Factors and Methods Workbook is currently being updated to make it suitable for use in calculating greenhouse gas emissions, reductions, removals and offsets, for the purposes of reporting them under the National Greenhouse and Energy Reporting System (NGERS). Detailed consultation on these calculation methods will be held separately and it is intended that the relevant methodologies will also consider the requirements of a future Australian emissions trading scheme (AETS). Affected industry participants should therefore monitor these developments and seek to be actively involved in them.

Companies operating in the agriculture, forestry and fishing sectors are not excluded from the reporting obligations under NGERS, even though they will not be covered initially by the AETS. This means that, while such companies will not be required to report their non energy-related greenhouse gas emissions, they will be required to report their scope 1 and 2 energy-related greenhouse gas emissions, and energy production and consumption, where the relevant thresholds are met.

The discussion paper states that the Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006, which classifies activities by reference to the output they produce, will be used to define industry sectors for the purposes of the Act. The concept of industry sectors is important because it affects how facilities are defined (see below) and when data from smaller facilities (proposed to be those that emit less than 25kT pa of CO2-e greenhouse gas emissions or that produce or consume less than 100TJ pa of energy) may be aggregated for reporting purposes. In other words, the definition of the relevant industry sector will shape the nature of the reporting systems adopted by companies that operate in that sector for the purposes of the Act.

The discussion paper notes the importance of achieving the right balance between the need to have clearly defined reporting boundaries for facilities while also having broadly defined sectors to ensure that facility thresholds capture major greenhouse gas and energy activities. It therefore proposes that the industry sector structure for reporting under the Act should utilise the ANZSIC classification codes at the 'Group (3 digit)' level so as to separate out activities that might fall within different scopes. By way of illustration, 'electricity supply' is a 'Subdivision (2 digit)' classification that includes the separate 'Group (3 digit)' level classifications of electricity generation, transmission, distribution and retailing. It is appropriate that reporting in this context be at the 'Group (3 digit)' level. However, some exceptions are recommended in relation to sectors such as construction, insurance and superannuation funds, and agriculture, forestry and fishing, where the similarity in activities or the extremely diversified outputs render it more appropriate to use the 'Subdivision (2 digit)' level classification.

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What design issues are open for input?

While space does not permit us to summarise in this article all of the design issues that are open for consultation, we note below some of the key issues on which stakeholder input is sought to assist clients in deciding whether or not to prepare a submission.

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Definition of facility

The Act defines a 'facility' as an activity, or series of activities (including ancillary activities), that involve the production of greenhouse gas emissions or the production or consumption of energy, that form a single undertaking or enterprise, and that meet the requirements of the regulations.

It is in this context that the discussion paper proposes that the regulations should further define a 'facility' by reference to activities that are situated in, or attributable to, a single physical location and that consist of one principal productive activity. For these purposes, the principal productive activity of a facility is proposed to be defined as the activity for which the value added exceeds that of any other activity carried out at the facility.

In order to address the problems this might raise for vertically integrated enterprises, the discussion paper proposes that:

  • where vertical integration is across two or more ANZSIC divisions, at least one facility must be distinguished for each division; and
  • where vertical integration is within one ANZSIC division, the facility will be classified by reference to the ANZSIC division where the most value is added. If the value added is equal as between activities, or cannot be separately identified, then the activity that represents the last stage in production will determine the classification.

The discussion paper also notes the difficulties created where activities occur at a variety of locations, as is typically the case with transport activities, gas and sewerage pipelines and electricity transmission/distribution networks. It proposes three different options for aggregation for the transport sector, namely classification according to:

  • the location at which fuel is supplied;
  • the depot to which the transport vehicle belongs; or
  • the business units of the transport company.

Data relating to international and domestic air and sea transport will also be required to be reported separately.

The proposal for gas and sewerage pipelines is to consider the pipeline, together with compressor stations, as a single facility except where the pipeline crosses state boundaries, in which case a pro rata approach is proposed so that the pipeline is divided into one facility per state.

The proposal for electricity transmission and distribution networks is to report greenhouse gas emissions that are associated with the consumption of electricity in the transportation process in line with the GHG Protocol, namely as scope 2 emissions, with the emissions being pro rated if the network crosses state borders.

Stakeholders are specifically invited to comment on these proposals.

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Operational control and the commercial property sector

The Act requires that data is reported on facilities that are under the 'operational control' of the relevant company, joint venture or partnership. For these purposes, the Act defines an entity as having 'operational control' over a facility if the entity has authority to introduce and implement operating, health and safety, or environmental policies for the facility and the requirements of the regulations are met. The discussion paper flags the need for the regulations to clarify the concept of 'operational control' in the case of tenanted commercial properties. The options proposed involve designating one of the following parties as the party with operational control over the property (ie the 'facility'):

  • the entity or entities that directly pay the electricity bills at the tenanted building; or
  • the property manager for the tenanted building, being the entity that controls the central services (regardless of the electricity billing arrangements).

Again, input from stakeholders is sought on the best option, as well as on other sectors where the definition of 'operational control' might need to be refined in the regulations.

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Corporations that meet one or more thresholds

In circumstances where a company, joint venture or partnership controls a facility that meets the facility-level threshold for reporting of 25kT pa of CO2-e greenhouse gas emissions or 100TJ pa of energy production or consumption, but the corporate group does not meet the corporate group thresholds, three options are proposed for determining the nature of the reporting obligation that arises:

  • the entire corporate group could be required to report its greenhouse gas emissions and energy production and consumption data;
  • the entity that has operational control over the relevant facility could be required to report such data in relation to all the facilities under its operational control (as opposed to facilities under the operational control of other members of the group); or
  • the entity that has operational control over the relevant facility could be required to report the requisite data in relation to that facility only.

The discussion paper notes that the first option may impose too great a reporting burden whereas the other options would result in the provision of a more restricted amount of information. It is against this background that stakeholders are invited to identify which of the three options they consider to be most appropriate.

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Disclosure of information

The Act permits the Greenhouse and Energy Data Officer to publish information on greenhouse gas emissions and energy production and consumption at the individual company level as well as at the group level, with provision being made for a company to seek to protect any commercially sensitive information by applying to the Officer for, say, a data range (rather than specific amounts) to be published.

The discussion paper now seeks input on whether there is any reason why scope 1 and scope 2 emissions information (disaggregated to the individual company level) should not also be published separately. Some of the reasons identified for doing so are:

  • separate scope reporting is required under the Greenhouse Gas Protocol and ISO 14064 and therefore would assist in ensuring that Australia is able to meet its international reporting obligations;
  • permit allocations under a future AETS might conceivably vary according to the scope of the emissions; and
  • the separate reporting of scope 1 and 2 emissions enables a better assessment to be made of the greenhouse risks and opportunities that corporations face ¡V this is particularly relevant to investors when they are trying to assess whether the corporation is likely to be able to comply with its AETS permit obligations and the cost of doing so.

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Collection of information

It is anticipated that regulations will be made under the Act to require the provision to NGERS of information that is required by the states for their own greenhouse-related schemes. While NGERS is intended to replace the existing range of State based requirements for greenhouse related information, there may well be some information that is nonetheless required by a particular State and that is more appropriately captured under NGERS. Regulations for this purpose will be developed following further consultation.

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What's next?

Submissions are to be lodged by 16 November 2007 with the Greenhouse and Energy Reporting Taskforce by email to reporting@greenhouse.gov.au and submitters are invited to express interest in being involved in further consultations during the development of the regulations. It is worthwhile expressing such interest because the regulations will no doubt evolve to accommodate specific design elements of the AETS as they are settled.

These consultations will be conducted before the end of 2007 in the form of individual meetings, email exchange and/or broader forums on issues as they arise. In addition to these stakeholder consultations, public consultations will be held during the week commencing 29 October 2007 in Canberra, Melbourne, Perth, Sydney, Adelaide and Brisbane.

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