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The Authority is required by legislation to review the Carbon Farming Initiative (CFI) every three years; this is its first review. The review has benefited from consultations with stakeholders from a range of sectors and the Authority thanks those who contributed.

When introduced in 2011, the CFI was designed to complement the carbon pricing mechanism. Accordingly, it focused on sectors not covered by the carbon price, namely: agriculture, waste (in part), and land use, land use change and forestry. CFI projects earned credits that could be sold to entities with liabilities under the carbon pricing mechanism.

The carbon price has since been repealed, and the CFI has been expanded to form the Emissions Reduction Fund (ERF) and now covers all sectors of the economy. The ERF is the central plank of the government’s Direct Action Plan to reduce Australia’s greenhouse gas emissions. It has been introduced through amendments to the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth), which brings it within the scope of this review. For simplicity’s sake, this report refers to the CFI as the scheme as originally configured, and the ERF as the scheme as approved by the parliament in November 2014.

Under the ERF, the government will purchase emissions reductions through auctions (and possibly other means). Fixed-price contracts, typically for seven years, will be offered to those who are successful at auction. Other changes to streamline the scheme are also being introduced, and a safeguard mechanism (that will discourage large emitters from increasing their emissions above historical levels) is to commence in July 2016.

While these changes are substantial, the ERF retains an essential characteristic of the CFI in that it credits projects for reducing emissions below a defined baseline, and the baseline reflects what would have been expected to occur in the absence of the scheme.

The changes to the CFI are important for this review in two ways. First, as the scheme is being expanded to become the central element of Australia’s policy to reduce emissions and meet its targets, the lessons to be gleaned from its operation to date will be of interest in assessing the likely performance of the ERF. Second, as this review follows closely on the policy development process for the ERF, care has been taken not to duplicate that process, but to focus instead on the extent to which the design of the ERF addresses problems identified with the CFI, as well as other challenges that may arise.

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