New South Wales Greenhouse Gas Reduction Scheme
www.greenhousegas.nsw.gov.au
Overview
Additionality and Quantification Procedures
Overview
Type of System/Program and Context
The New South Wales Greenhouse Gas Reduction Scheme (NSW GGAS, formerly the New South Wales Greenhouse Gas Abatement Scheme) is a mandatory emissions trading scheme for the state’s electricity sector. It was established initially as a voluntary scheme which commenced in 1997, via amendments to the Electricity Supply Act 1995. The scheme became mandatory on January 1, 2003. On January 1, 2005, the Australian Capital Territory (ACT), a separate jurisdiction physically located inside New South Wales, also introduced legislation to become part of the NSW GGAS.
The NSW GGAS establishes an annual state-wide per capita GHG emission target, a “benchmark”, for the electricity sector, based on the reductions necessary to achieve the global target set in the Kyoto Protocol of reducing overall GHG emissions to 5% below the baseline year (1990) emissions (NSW GGAS, n.d.). The scheme’s initial benchmark target of 8.65 metric tCO2e per capita in 2003 was reduced steadily each year to 7.27 tCO2e per capita in 2007.
An obligation to achieve the reductions is placed on regulated entities (called “benchmark participants”), which are predominantly electricity retailers but also include some generators who sell electricity direct to customers as well as some large energy-using customers who opt voluntarily to manage their own emissions targets (the latter are referred to as “elective benchmark participants”). For each benchmark participant, targets are based on the entity’s share of electricity sales (or use, in the case of large users) multiplied by the overall regional electricity emissions benchmark, i.e. the per capita emissions benchmark described above multiplied by the region’s population for that year (IPART, 2007).
The regulated entities can meet their emission reduction targets either by directly reducing the average emissions intensity of the electricity they sell (or use) or by purchasing accredited offsets and surrendering these to the scheme’s compliance regulator. Two forms of offset can be used. The first, and most widely used, are tradable abatement certificates called NSW GHG Abatement Certificates (NGACs), while Renewable Energy Credits (RECs) created under a separate national scheme aimed at stimulating renewable energy projects (the Mandatory Renewable Energy Target, MRET) can also be used.
To encourage compliance, a penalty is imposed if participants fail to meet their targets. The current rate is USD10.7 (AUD 12) per tCO2e (note that the tax-effective rate is considerably higher). The choice of penalty level was set initially to allay concerns by some parties that compliance costs for regulated entities could blow out, and effectively caps compliance cost for participants.
Standard Authority and Administrative Bodies
The Independent Pricing and Regulatory Tribunal of New South Wales (IPART) serves as both the scheme administrator and the compliance regulator, although the two functions are managed separately. (In the ACT GGAS, IPART has been appointed as the scheme administrator, but the compliance regulation function is performed by the ACT’s Independent Competition and Regulatory Commission (ICRC).) As the scheme administrator, IPART’s role includes the management of applications for project accreditation and the approval of Abatement Certificate Providers (ACP). ACPs are the offset project developers. As a compliance regulator, it also has the authority to enforce the obligations of the scheme’s participants. All audits under the GGAS are required to be performed by specialized auditors appointed to the Audit and Technical Services Panel.
Regional Scope
NSW GGAS and ACT GGAS regulate the emissions of the electricity sector within the jurisdictions of New South Wales and the ACT, respectively. The obligations are imposed by and large on retailers, and the costs for reducing emissions are ultimately borne by residents in these jurisdictions.
NSW and the ACT are part of a regional electricity grid, the National Electricity Market (NEM), which connects the States along Australia’s eastern seaboard (Queensland, New South Wales, Victoria, the ACT, South Australia and Tasmania). Projects which achieve abatement at the point of electricity generation in any part of the NEM are eligible to create NGACs, however projects that create NGACs via measures to reduce electricity demand, sequester carbon and/or reduce industrial process emissions must be physically located in NSW or the ACT.
Recognition of Other Standards/ Linkage with Other Trading Systems
The experiences gained in establishing and administering the NSW GGAS have been used in the development of the proposed Australian Carbon Pollution Reduction Scheme. If implemented, this scheme will expand the emissions trading framework beyond NSW and the ACT to include all other Australia States and Territories. Legislation to implement the scheme was introduced to the Australian Parliament in May of 2009 (see Australian Carbon Pollution Reduction Scheme).
To avoid having two schemes operating simultaneously, in 2005 the NSW Government passed legislation extending the GGAS scheme to 2020 or until a national trading scheme is introduced. That is, NSW GGAS will cease to operate upon the commencement of an Australian national emissions trading scheme (NSW DWE, 2008).
In order to maintain a strong incentive for demand-side activities (which will not be part of the national scheme), in April 2009 the NSW GGAS released a plan proposing a new Energy Savings Scheme (ESS). The ESS aims to build on the Demand Side Abatement rule of the NSW GGAS, by setting an energy savings target for energy retailers. Retailers meet their target by obtaining and surrendering energy saving certificates (ESCs) which represent delivered energy efficiencies (NSW, 2009). Legislation to implement the ESS is expected to be introduced by the NSW Government in 2009.
The Mandatory Renewable Energy Target (MRET), established by the Renewable Energy (Electricity) Act 2000, commenced on 1 April 2001. The MRET requires the generation 9,000 GW of renewable energy production per year by 2010. Regulated entities under the NSW GGAS can meet their compliance mechanism by purchasing RECs generated under the MRET.
Market Size and Scope
Tradable Unit and Pricing Information
NSW GHG Abatement Certificates (NGACs) are the tradable units in the NSW andACT GGAS and represent the abatement of one metric ton of CO2e emissions (tCO2e).
The maximum price for NGACs on the open market is effectively constrained by the cost of non-compliance (i.e. the penalty set by the scheme administrator) set at AUD 12 per tCO2e (NSW GGAS, 2007). In 2008, NGACs traded for about 5 USD (Hamilton, 2009).
Demand for NGACs is expected to rise throughout 2009 as a result of the lowering of the state’s GHG benchmarkand an expected increase in the average emissions intensity of electricity production. However, the transition to a national emissions trading scheme, and in particular uncertainty around the treatment of NGACs and future of compliance obligations, is likely to remain a source of uncertainty in the NGAC market until transitional arrangements are fully clarified.
Participants/Buyers
The NSW GGAS and the ACT GGAS have both mandatory and voluntary participants. Mandatory participants are predominantly electricity retailers, but also include a small number of electricity generators that supply directly to retail customers, and market customers with a market load supplied directly from the National Electricity Market (NEM). Voluntary participants can include large electricity customers and State Development projects designated by the Minister of Planning to manage their own GHG targets. To be eligible as “elective benchmark participants”, large energy users must have annual electricity loads greater than 100 GWh, with at least one site that consumes 50 GWh annually. As of June 2008, there were 13 voluntary benchmark participants. No State Development projects participate in the scheme.
Current Project Portfolio
A total of 224 offset projects have been accredited under the NSW GGAS, as of May 31, 2009 (NSW GGAS, 2009). The scheme administrator reports that since the scheme began in 2003, the offset credits generated to May 31, 2009 have amounted to over 90 MmtCO2e (NSW GGAS, 2009). (Information on the current project portfolio changes rapidly. For the latest Scheme Newsletter and project portfolio information go here). Table 5.1 provides information on offset credits generated by project type.
Table 5.1. Offset credits created in the NSW GGAS as of February 28, 2009 , by project type:
Offset Project Type |
Cumulative offset credits (NGACs) created since 2003 |
Generation |
55.6 million |
Demand-Side Abatement |
29.2 million |
Large-User Abatement |
3.4 million (including RECs) |
Carbon Sequestration |
2 million |
Source: NSW GGAS, 2009
Offset Project Eligibility
Project Types
The GGAS allows for the creation of offset credits by Abatement Certificate Providers (ACPs) for activities in one or more of the four offset project types outlined in the Greenhouse Gas Abatement Rules (IPART, 2007):
Electricity Generation: Covers low-emission generation of electricity including cogeneration and renewable energy production, or improvements in the emissions intensity of existing generation activities. (See Greenhouse Gas Benchmark Rule (Generation) No. 2 of 2003 for details.)
Demand Side Abatement: Covers activities that result in reduced consumption of electricity in residential, commercial or industrial settings. (See Greenhouse Gas Benchmark Rule (Demand Side Abatement) No.3 of 2003 for details.)
Large User Abatement: Covers activities carried out by elective participants to reduce on-site emissions not directly related to electricity consumption. (See Greenhouse Gas Benchmark Rule (Large User Abatement Certificates) No. 4 of 2003 for details.) Project examples include increasing the efficiency of on-site fuel use; switching to lower emissions intensity fuels; the abatement of on-site GHG emissions from industrial processes; and the abatement of on-site fugitive GHG emissions.
Carbon Sequestration: To be eligible, sequestration projects must:
- qualify as either an afforestation or reforestation project as defined by the United Nations Framework Convention on Climate Change (UNFCCC);
- take place in NSW;
- own or control the Carbon Sequestration Rights for the land;
- demonstrate that the carbon sequestration achieved will be maintained for at least 100 years;
- provide documentation that appropriate procedures are in place to manage risks of carbon loss, such as fire, disease or climate variability; and
- maintain adequate records of carbon storage.
(See Greenhouse Gas Benchmark Rule (Carbon Sequestration) No. 5 of 2003 for details.)
Project Locations
For the certification of offset projects, activities must meet the location criteria outlined in the Greenhouse Gas Abatement Rules. Generation offset projects can be located in any part of the NEM. Demand-side abatement, large-user abatement and carbon sequestration offset projects are only eligible if implemented within NSW.
Project Size
There are no project size restrictions for demand-side management, large-user on-site reduction or electricity generation projects. Carbon sequestration projects are required to meet the size requirements established by the definition of a forest in Australia and to be consistent with Kyoto Protocol guidelines: Forests must be at least 0.2 ha, have 20% crown cover, and have a 2m height capacity of the tree species.
Start Date
Electricity generation project implemented after January 1, 2003 are eligible to create NGACs. However, a number of projects that pre-date the start of the scheme are also eligible. The NSW Government’s rationale for this was that it provided ‘credit for early action’, however this has been one of the main sources of contention around the NSW GGAS (see Specific Issues, below).
Demand-side projects must have been implemented after January 1, 2002 in NSW or after January 1, 2004 in the ACT. Carbon sequestration projects are required to take place on land that was predominantly non-forest prior to January 1, 1990. In addition, the increases in carbon stocks are only recognized after January 1, 2003 and the projects must provide continued carbon storage for at least 100 years.
Crediting Period
No explicit crediting period was established under the NSW GGAS as it was always intended to be a transitional mechanism.
Co-benefit Objectives and Requirements
There are no co-benefit requirements for offset project eligibility.
Additionality and Quantification Procedures
Additionality Requirements
The NSW GGAS addresses additionality by using a performance standard approach – through the development of a positive technology project list and by establishing baseline scenarios for each project and technology type.
Quantification Protocols
The NSW GGAS uses a top-down approach for baseline quantification. The Greenhouse Gas Benchmark Rules provide rules for calculating baseline emission rates for each type of eligible offset project.
For electricity generation abatement activities, the baseline is calculated using a variety of methods that depend on whether the generator is new or existing, fossil fuel based, and/ or covered by a prior NSW voluntary benchmark system. In general, the baseline is set either relative to the regional benchmark intensity indicated above or to the facility’s prior emission rate.
To accommodate the variability among projects, four different methods are used to calculate the baselines for demand-side abatement activities.
For large-user abatement activities, the baseline is expressed in tCO2e per unit of industrial output.
For carbon sequestration activities, the credits generated are calculated based on the change in carbon stocks over a defined time period. NSW GGAS outlines specific criteria and procedures to ensure the permanence of offset credits generated from carbon sequestration projects. Forest managers are require to conduct an uncertainty analysis and demonstrate that a 70% probability exists that the actual net increase in the carbon stocks is greater than the number of offset credits created. They are also required to conduct periodic monitoring of the forest to verify carbon storage. If carbon stocks fall below the number of offset credits granted, then forest managers are required to inform the scheme administrator (IPART) and to discontinue registration of additional offset credits. IPART can also decide that the project developer (the ACP) needs to purchase offset credits from the open market to account for the shortfall in carbon stocks.
Project Approval Process
Validation and Registration
The regulations governing the NSW GGAS do not prescribe a specific validation approach. The scheme administrator (IPART) has established a risk-based approach to determining whether the eligibility of or the abatement from an offset project must be audited by a third party. The higher the risk is determined to be, the more likely it is that IPART will require a third-party audit. IPART also decides the frequency and scope of such an audit. The risk assessment is based on the participant’s compliance history, the complexity of the offset project, the number of projects that share a common process and additional relevant factors. In some cases, where the risk is considered to be very low, the scheme administrator may not require an audit prior to accreditation of the project.
Monitoring, Verification and Certification
Projects are required to report their status and the emissions abated every year. The offset credits generated are required to be verified to demonstrate ongoing compliance with the NSW GGAS, and the frequency of the verification is determined by the scheme’s administrator. The reporting requirements for monitoring the compliance of offset credits are outlined in the Guide to Record Keeping for Abatement Certificate Providers.
Qualifying reductions from electricity generation, demand-side abatement and large-user offset projects are calculated on an annual basis and credited as offset credits for the duration of the project.
Registries and Fees
The NSW GGAS Registry was commissioned by IPART, and is operated and maintained by LogicaCMG, an IT and business services company. Offset credits are registered on the online registry for a fee of USD 0.13 (AUD 0.15) per certificate. Change in ownership is recorded in the registry, but the registry does not serve as a platform for offset credit trading. The buying and selling of offset credits is done on the open market.
Selected Issues
Several examples of best practice in the NSW GGAS offset program scheme design were identified in a 2007 report by Abatement Solutions – Asia Pacific (AP-AC, 2007). They include the following:
• The NSW GGAS has a strong legal basis, which allows the scheme’s administrator (IPART) to use enforcement mechanisms to create a strong culture of compliance among the program participants.
• The NSW GGAS reduces the administrative burden for smaller projects by using a risk-based approach to determining auditing frequency and flexibility of unit creation , as well as using a tiered approach for compliance and performance monitoring requirements.
• The NSW GGAS has enhanced the consistency and ease of project assessment and project applications by developing a set of document templates for project assessment and application guidelines for each project type.
Concerns about the effectiveness, efficiency and equity of the NSW GGAS were raised in a report prepared by the Center for Energy and Environmental Markets in 2007 (CEEM, 2007):
• The lack of any required assessment of additionality in the validation process of offset credits is a primary criticism. The report cites several examples of the generation of offset credits from pre-existing power generation facilities, one of which predates even the Voluntary scheme and creates a large portion of total NGACs. This claim is corroborated by the Australian Government’s estimate that the additional abatement driven by the NSW GGAS in 2010 will be only 5 MtCO2e and not the 20 MtCO2e claimed by IPART.
• Given concerns about additionality, CEEM’s overall concern is that NSW GGAS may actually delay more significant action to reduce GHGs at the state and national levels by creating a perception that emissions are already being reduced.
• A conflict of interest exists by having both the scheme administrator and compliance regulator responsibilities managed by IPART.
• There is concern about the transparency of the reporting process due to the lack of publicly available data and information on the methodology or the equation used, on how the baselines were calculated and on how compliance is achieved.
• The diversity of project types and providers is low. Most of the offset credits from 2003–2005 came from only a few project types.
With the commencement of an Australian national emissions trading scheme, the currently operating NSW GGAS will cease to operate. Several issues for consideration raised in The Garnaut Climate Change Review Final Report address the transition from the regional to the national emissions trading scheme, may also be relevant for other nations where regional programs have been established prior to a federal system.
The issues raised include (Garnaut, 2008a):
- Treatment of accredited abatement providers, project income could be reduced if projects eligible under GGAS are not eligible or to a lesser degree under the national scheme.
- Forestry carbon sequestration projects may be inconsistent with the intention to include the forestry sector under the cap of a national scheme.
- Mechanisms are needed to prevent hoarding of GGAS certificates in expectation of a higher price under the national emission trading scheme.
References
Abatement Solutions-Asia Pacific (AP-AC) (2007). World’s Best Practice in Project-based Mechanisms for Abatement of Greenhouse Gases. Version 1.0. December 2007.
Center for Energy and Environmental Markets (CEEM) (2007). The NSW Greenhouse Gas Reduction Scheme: An Analysis of the NGAC Registry for the 2003, 2004 and 2005 Compliance Periods. August 2007.
Crossley, D. (2005). The white certificate scheme in New South Wales, Australia [presentation]. Task 14 Workshop on White Certificates, Paris, France: 14 April 2005.
Greenhouse Gas Abatement Scheme (2004). Fact Sheet: When Can Large Users Create LUACs.
Greenhouse Gas Abatement Scheme (2004). Fact Sheet: When Can Forest Managers Create NGACs.
Greenhouse Gas Abatement Scheme (2006). Fact Sheet: When Can Generators Create NGACs.
Greenhouse Gas Abatement Scheme (2007). Fact Sheet: Creating NGACs from Demand Side Abatement.
IPART (2007). Introduction to the Greenhouse Gas Reduction Scheme (GGAS).
NSW (2009). Preparing for the Energy Savings Scheme. May 2009.
NSW GGAS (n.d.a). Audit Panel: Overview.
NSW DWE (New South Wales Department of Water and Energy) 2008, Transitional Arrangements for the NSW Greenhouse Gas Reduction Scheme, consultation paper, NSW Government.
NSW GGAS (2007). Fact Sheet: Offences and Penalties. August 2007.
NSW GGAS. GGAS Newsletter (2009). Issue 12 : June 2009 .
Tradition Financial Services (TFS) (2007). Global Environmental Markets. June 2007.