As part of its broader carbon reductions aims, the Government of Australia has sought to reduce greenhouse gas emissions in a number of sectors. Agriculture, being responsible for 18% of emissions in Australia, was identified as an area in which measures were needed to improve performance. The CFI was intended to plug a hole in the existing carbon pricing mechanism, which had not covered agriculture, waste management, land use or forestry. Additionally, the initiative sought to contribute to land management and future economic development of farms.
The voluntary CFI scheme aimed to incentivise farmers to introduce new carbon farming initiatives for reducing greenhouse gas emissions. Two kinds of measures for reducing greenhouse gas emissions (abatement activities) were supported: ‘sequestration projects’ for storing carbon in soil or in plants, and ‘emissions reduction of avoidance projects’, for reducing greenhouse gas emissions.
The scheme also offered different types of carbon credits. The first, earned under the CFI, were called Australian Carbon Credit Units (ACCUs). The second, Kyoto ACCUs, were awarded only to abatement activities that could count towards Australia's national target under the Kyoto Protocol (reforestation, avoided deforestation, reducing emissions from livestock reducing emissions from waste deposited in landfills).
The initiative applied the principle of ‘additionality’, meaning that credits could not be awarded for business-as-usual activities, but rather, activities had to deliver extra reductions. To identify this, a benchmarking exercise has been performed to define a list of eligible activities, showing activities that were not already common practice, but that could deliver additional abatement. On the other side of the coin, another list was created showing activities that would not be eligible under the scheme, as they were considered to have adverse impacts on food security, water, employment, biodiversity or the environment.
Credits could be sold to eligible entities under the carbon pricing mechanism, and in 2012, links were made with the EU’s Emissions Trading Scheme (EUETS) to allow cross-market sales. In 2014, the Australian Government amended the CFI, turning it into the Emissions Reduction Fund (ERF), expanding coverage to encourage emissions reductions across the economy. Under the ERF, the government purchases credits through auctions, and $2.55 billion has been allocated for this purpose. By the time it ended, the CFI had reduced emissions by around 10 million tonnes.
A major issue with initiatives such as the CFI is demonstrating additionality. Robust administrative measures have ensured successful investments, though the administrative intensity of the initiative resulted in relatively high transaction costs. These costs constrained participation in the scheme, which was also affected by gaps in coverage and uncertainty about future prices of credits, as a result of the carbon pricing mechanism. The new ERF overcomes this barrier by giving projects a fixed price for the duration, and taking on more enhanced additionality tests only for projects that create large numbers of credits.
Carbon units and markets are a relatively well developed instrument, however, the implementation of such instruments requires high administrative capacity. Target sectors must have the capacity to implement emissions reductions measures, which may rely on higher than average innovation capacity and access to technology. The practice is estimated GML 8.