New South Wales Greenhouse Gas Reduction Scheme

Currently active emissions trading scheme for state electricity sector (as of 1/2011)

www.greenhousegas.nsw.gov.au


Overview
Market Size and Scope
Offset Project Eligibility
Additionality Requirements and Project Methodologies
Project Approval Process


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.

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.

The regulated entities can meet their emission reduction targets either by directly reducing the average emissions intensity of the electricity they sell (or use) via the Energy Savings Scheme 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) or (LUACs), 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 2010 penalty was set at USD13.95 (AUD 14) per tCO2e. The penalty will be increased by 1 AUD each year until 2013. 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.

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, but implementation has been delayed. (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. Since the announced delay of the implementation of the CPRS, the NSW Government has advised that the NSW GGAS will continue until 2020 and beyond. With ongoing uncertainty regarding the status of a national carbon pricing scheme in Australia, the NSW Government commenced a review of the NSW GGAS in Nov. 2010.

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Market Size and Scope

Tradable Unit and Pricing Information

NSW GHG Abatement Certificates (NGACs) are the tradable units in the NSW and ACT 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 15 per tCO2e (as of 1/2011).

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. 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.

Current Project Portfolio

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 November 30, 2010, by project type:


Offset Project Type

Cumulative offset credits (NGACs) created since 2003
(each equivalent to one mtCO2e)

Generation

79.7 million

Demand-Side Abatement

30.4 million

Large-User Abatement

5.1 million (including RECs)

Carbon Sequestration

3.22 million

 

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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:

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 National Electricity Market (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.

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.

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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.

Project Methodologies

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.

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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 0.15 (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.

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