EMISSIONS REDUCTION ASSURANCE COMMITTEE

Land and Sea Transport MethodReview Report

23 January 2020

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Contents1 Executive summary..............................................................................................................22 Background..........................................................................................................................2

2.1 Committee to undertake reviews..................................................................................22.2 Scope of the review......................................................................................................3

2.3 The Land and Sea Transport method...........................................................................32.4 Eligible activities under the Transport method..............................................................3

2.5 Abatement calculations.................................................................................................42.6 Summary of registered projects and abatement under the method.............................4

2.7 Consultation..................................................................................................................52.8 Interaction with Industrial Electricity and Fuel Efficiency method.................................5

2.9 Findings........................................................................................................................63 Conformity with the Offsets Integrity Standards...................................................................8

3.1 Abatement is unlikely to occur in the ordinary course of events...................................83.2 Estimations are measurable and capable of being verified........................................10

3.3 Abatement must be eligible carbon abatement from the project................................103.4 The method is supported by clear and convincing evidence......................................11

3.5 Project emissions and leakages.................................................................................113.6 Estimates, projections or assumptions in the determination are conservative...........13

4 Method calculations and modelling....................................................................................144.1 Advantages of emissions modelling...........................................................................14

4.2 Measurement of emissions for gaseous fuels............................................................144.3 Baseline for shipping..................................................................................................15

5 Treatment of Alternative fuel substitution activities............................................................165.1 Biofuels.......................................................................................................................16

5.2 Scope 1, 2 and 3 Emissions.......................................................................................165.3 Lifecycle analysis standards and protocols................................................................18

5.4 Findings......................................................................................................................195.5 Electrification..............................................................................................................20

5.6 Hydrogen....................................................................................................................216 Mode Shift..........................................................................................................................21

7 Usability..............................................................................................................................227.1 Transaction costs........................................................................................................22

7.2 Understanding the difference between two project types...........................................227.3 Modelling and calculations..........................................................................................23

7.4 Low awareness of the method....................................................................................247.5 Method guidance material..........................................................................................24

8 Policy suggestions outside the scope of the method.........................................................26

1 Executive summaryThe Committee has undertaken a review of the Carbon Credits (Carbon Farming Initiative – Land and Sea Transport) Methodology Determination 2015.

The Committee considered feedback obtained in response to a consultation paper, and through consultation with a range of stakeholders from 26 March to 14 June 2019. Seven submissions were received, of which two were confidential.

The total contracted amount of abatement under the method is 1,062,500 tonnes, of which only 2.1 per cent has been delivered as of 24 October 2019. The method covers all surface transport modes, including road, rail and domestic shipping.

The Committee notes the transport industry has strong commercial incentives to reduce fuel costs, and there are a range of existing approaches to increase energy efficiency and reduce emissions.

The Committee found:

The Land and Sea Transport method (the Transport method) will continue to meet the offsets integrity standards once the recommended adjustments are made (see Table 1 below for examples of how the method addresses the standards).

Project specific requirements could provide an alternative way to ensure that emissions reductions continue to go beyond business-as-usual, without applying a decline rate.

The method should not set emissions abatement to zero if there are measured increases in emissions.

The method should allow an emissions modelling approach similar to the Industrial Electricity and Fuel Efficiency (IEFE) method to be used for transport activities. Modelling provides more accurate abatement estimates by adjusting baseline emissions for changes in conditions.

The method should be amended to exclude mobile equipment that does not perform transport tasks, which should instead be covered under the IEFE method.

The method variation process should examine the potential to better accommodate fuel switching by allowing the seller of these fuels to claim credits rather than the final user.

The Clean Energy Regulator should consider ways to simplify reporting and record keeping under the method and improve guidance materials for proponents.

2 Background2.1 Committee to undertake reviewsThe functions of the Emissions Reduction Assurance Committee include periodic reviews of methods and undertaking public consultation in relation to such reviews (see section 255 of the Carbon Credits (Carbon Farming Initiative) Act 2011 (the Act). According to the Emission Reduction Fund White Paper, methods are to be reviewed at least once every four years.

2.2 Scope of the reviewEmissions Reduction Fund (ERF) methods must comply with the offsets integrity standards defined in section 133 of the Act and summarised in Table 1. The principal focus of the Committee’s review of the Transport method is to assess whether the method continues to meet the offsets integrity standards.

Table 1. The offsets integrity standards

Nature of test Statutory reference Test

Additionality s. 133(1)(a) Projects covered by the determination should result in abatement that is unlikely to occur in the ordinary course of events (i.e. unlikely to occur in the absence of the incentive provided by the scheme).

Measurement and verification

s. 133(1)(b) Removals, reductions and emissions covered by the determination are measurable and capable of being verified.

Eligible carbon abatement

s. 133(1)(c) Abatement accredited under the determination is ‘eligible carbon abatement’ (abatement that is due to the project activities and can be used to meet Australia’s international mitigation obligations).

Evidence s. 133(1)(d) The method is supported by clear and convincing evidence.

Project emissions and leakage

s. 133(1)(e) The method provides for deductions of material emissions that occur as a direct result of the conduct of projects.

Conservativism s. 133(1)(g) All estimates, projections or assumptions in the determination are conservative.

Legislative rules s. 133(1)(h) The determination satisfies any applicable legislative rules.

The Committee was also interested in understanding the reasons for the low uptake of the method and whether uptake of the method could be increased by making the method more usable. The Committee also considered whether there had been any changes in fuel prices, technology and measurement capabilities since the method was developed that could affect offsets integrity.

2.3 The Land and Sea Transport methodThe Transport method was made on 13 February 2015 following consultation with a technical working group and the Clean Energy Regulator, a public consultation process and commissioning of an independent technical assessment.

2.4 Eligible activities under the Transport methodThe Transport method covers a number of land and sea transport industries and sub-sectors, covering both freight and public transport industries.

The Transport method allows fleet operators to earn credits for emissions reductions achieved by reducing the emissions intensity of their operations. The method credits emissions reduction activities from energy consumption by a range of vehicle types, including mobile equipment that performs non-transport tasks.

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Examples of eligible activities for a land and sea transport project include:

replacing existing vehicles modifying existing vehicles changing energy sources (fuel switching) or the mix of energy sources changing operational practices.

2.5 Abatement calculationsEmissions reductions are calculated by comparing the emissions intensity of a group of vehicles or individual vehicles before and after implementing activities to reduce emissions. Vehicles covered by the method include land vehicles such as rail stock, on and off-road trucks, shipping vessels and mobile equipment such as bulldozers or excavators.

The method requires three years of historical fuel use and service data (such as passengers or weight carried and distance travelled) for the group of vehicles or individual vehicles included in the project.

Two different types of projects can be registered under the method. These are:

a group of vehicles project (GV), as described in Division 2 of the method determination)

an aggregated individual vehicles project (AIV), as described in Division 3 of the method determination.

GV projects can be made up of sub-groups. Each sub-group is made up of all vehicles in a vehicle category within a business unit or transport operation. This type of project is suitable for proponents who do not have detailed data at a level of individual vehicles, such as public hire fleets and logistics companies. GV projects:

exclude mobile equipment due to their diverse types and uses apply a decline rate to baseline emissions, based on vehicle type can specify the duty cycle by vehicle category or business unit prescribe service units in Schedule 1 of the method.

AIV projects are suitable for proponents with detailed data at an individual vehicle level, such as rail and shipping operations. Other main differences are listed below, with further details set out at Attachment A.

AIV projects exclude light vehicles

The method only applies to fleets for which the proponent is able to measure transport service levels using one of the service units (or indicators) listed under the method. Examples of service units include litres of fuel per passenger kilometre or per tonne-kilometre.

2.6 Summary of registered projects and abatement under the methodIn over four years of operation, the method has not been widely taken up by the transport sector and only around two per cent of the Emissions Reduction Fund’s contracted abatement has been credited under the method to date.

Eight projects have been registered under the method between 2015 and 2019, with three projects having been revoked. Of the five current projects:

there are two contracts which have been entered into with the Clean Energy Regulator (Table 2)

- a fleet operator, contracted in November 2015, for 362,500 Australian Carbon Crediting Units (ACCU)s

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- an aggregated project, contracted in November 2015, for 700,000 ACCUs

only one contract has been issued carbon credits under the method, equating to only 2.1 per cent of the total amount of ACCUs contracted under the Method as at 24 October 2019

only one project is an ‘aggregated individual vehicles project’, while the remaining four are ‘group of vehicles’ projects.

Table 2: Land and Sea Transport method overview statistics as at 24 October 2019.

Land and Sea Transport method statisticsRegistered projects 5

Contracted projects 2

Revoked projects 3

Contracted abatement (tonnes CO2-e; the total abatement to be delivered over the life of all contracted projects, including from future reporting periods)

1,062,500

Australian Carbon Credit Units issued (tonnes CO2-e) 21,957

2.7 Consultation

The Committee released a method review discussion paper for public consultation from 26 March to 14 June 2019, after holding an extended consultation process due to a Federal election. During this period the Committee sought feedback from transport industry operators, including major and regional transport companies and industry associations. The Department obtained further insights from the Clean Energy Regulator on the Committee’s behalf.

Seven submissions were received from the public consultation, including two confidential submissions. In conducting the review the Committee also examined concerns stakeholders had relayed to the Department prior to the review.

On behalf of the Committee the Department commissioned a consultancy study to evaluate the offsets integrity and usability of the method.1 The findings in this report consider the feedback from stakeholders, the consultancy report and analysis undertaken by the Committee.

In undertaking its functions, the Committee seeks to balance offsets integrity with the need to encourage abatement activities. The Committee is mindful that an overly strict interpretation of the standards in the attempt to ensure offsets integrity will obstruct project uptake and exclude the cheapest forms of abatement. Insufficient compliance will result in the issuance of credits of questionable integrity. While a balance must be struck, where there is uncertainty, the Committee errs on the side of a conservative approach to integrity risk. This is consistent with the offsets integrity standards, which require all estimates, projections and assumptions in methods to be conservative.2

2.8 Interaction with Industrial Electricity and Fuel Efficiency method

The Carbon Credits (Carbon Farming Initiative—Industrial Electricity and Fuel Efficiency) Methodology Determination 2015 (the IEFE method) allows owners or operators of large-scale energy intensive equipment to earn carbon credits by reducing their energy consumption.

1 GHD (2019) DOEE ERF Land and Sea Transport Method Review, March 20192 Section 133(1)(g) of the Carbon Credits (Carbon Farming Initiative) Act 2011.

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The IEFE method covers projects that improve the energy efficiency of commercial or industrial equipment by upgrading equipment such as industrial boilers and pumping systems and converting equipment to operate on lower emissions fuel (e.g., switching from diesel to gas).

The Committee reviewed the IEFE method in 2017, and provided advice to the then Minister for the Environment and Energy on 28 February 2018. The Department is currently developing a draft variation to implement the findings of the Committee’s review, for consideration by the Minister for Energy and Emissions Reduction.3

The IEFE method takes a modelled approach to calculating abatement, where the Land and Sea Transport method takes a measured approach.

There is some overlap between activities covered by the Land and Sea Transport method and activities covered by the IEFE method. For example, on-site only vehicles or mobile equipment such as excavators, haulage trucks, or bulldozers are currently covered by the Land and Sea Transport method. However, this type of equipment may form part of a site which has an IEFE project.

The IEFE method currently excludes activities involving any vehicle that could be covered by a project under the Transport method. This exclusion was originally introduced to prevent ‘forum shopping’, or allowing proponents to choose between methods on the basis of which one provides them with the greatest number of credits. This was a material risk because baseline decline rates under the Transport method were higher than under IEFE. This exclusion applies to road, rail and maritime vehicles and to mobile equipment such as excavators that do not undertake transport tasks.

The Committee’s review of the Land and Sea Transport method considers the overlap between the two methods, the different approach to calculations, and which method best suits particular activities.

2.9 Findings

The key review findings are set out in Table 3.

Table 3. Key review findings

Finding 1 Amendments to the method will be required in order to ensure that it continues to meet the offsets integrity standards.

Finding 2 Project-specific requirements could provide an alternative way to ensure that emissions reductions go beyond business-as-usual:

requirements should be more stringent for large capital investments (more than 20,000 tonnes CO2-e per year or $20 million CapEx), which should require sign-off by a Chief Financial Officer or equivalent

vehicle replacement should be subject to specific requirements that provide more assurance that the replacement goes beyond the ordinary course of business. This might take the form of a requirement that the new vehicle includes an uncommonly used drivetrain or other low emission enabling device. The list of uncommon vehicle devices may need to be updated over time.

project-specific requirements would provide a better way to ensure that emissions reductions go beyond business-as-usual than the current decline rate. (Section 3.1).

Finding 3 To ensure emissions abatement is conservative and to avoid increases elsewhere on site, the Transport method should be amended to give flexibility to projects with mobile equipment.

3 See Committee letter of advice to the Minister for the Environment and Energy dated 28 February 2018.

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Mobile transport equipment should be given a choice to use either the Transport method or the IEFE method. Other mobile equipment should only use the IEFE method in order to account for its impact on other energy consuming activities onsite.

Timing of changes to the two methods will need to be coordinated.

Finding 4 To ensure the method calculations are conservative, the method should not set emissions abatement to zero if there are measured increases in emissions.

Finding 5 To allow project proponents to demonstrate abatement under changing circumstances, transport fleets generally should be permitted to use a modelling approach to quantify abatement, along the lines of the Industrial Electricity and Fuel Efficiency method.

Finding 6 To make the method more usable for shipping and projects involving gaseous fuels, the method should be varied to:

either remove the requirement to improve on the Energy Efficiency Design Index or to exclude vehicles that meet the EEDI from the method; and

enable measurement of gas by mass rather than volume.

Finding 7 The method should be varied to account for the difference in the life cycle greenhouse gas emissions of biofuels and other alternative fuels compared to fossil fuels.

The method should be varied to refer to an external document that defines lifecycle assessment requirements. Requirements would be based on those specified at the date of registration.

Finding 8 Consideration could be given to the development of a method for fuel switching or alternative fuels. This could be designed to credit the final users of alternative fuels or even the manufacturers or distributors of the fuels. While crediting manufacturers or distributors would reduce transaction costs, it would give rise to material integrity issues that would need to be carefully considered in the method design process.

Finding 9 To improve the usability of the Transport method:

the baseline data requirements to one year duration; and proponents should be allowed to use an alternative service unit not listed in

the method that meets defined criteria.Finding 10 The Clean Energy Regulator should consider ways to simplify reporting and record

keeping under the method and improve guidance materials, subject to resourcing.

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3 Conformity with the Offsets Integrity StandardsThe review evaluated compliance of the Transport method with the offsets integrity standards in the Carbon Credits (Carbon Farming Initiative) Act 2011 (the Act) based on information available to the Committee.

Finding 1 Amendments to the method will be required in order to ensure that it continues to meet the offsets integrity standards.

3.1 Abatement is unlikely to occur in the ordinary course of eventsFuel costs are one of the major operating costs for transport fleets and are therefore one of the main drivers of reductions in fuel consumption. Vehicle engines and transmissions with better performance and fuel efficiency have become increasingly available since the Transport Method came into force in 2015. For example, the range of electric and hybrid drive vehicles available has expanded. Therefore fleet renewal would be one of the main ways to reduce fuel use and costs, though the capital costs involved can be significant.

It is estimated that the value of ACCUs is around 2 per cent of the fuel savings4. GHD (2019) noted that the much larger value of fuel cost savings means that fuel efficiency projects are much more likely to be driven by fuel cost savings than the value of future ACCUs. The report concluded that the industry should provide evidence that abatement would be unlikely to occur in ordinary course of events, given the relatively low value of ACCUs.

Furthermore, GHD (2019) concluded that vehicle replacement would occur in the ordinary course of business and should be excluded from the method, particularly for large vehicles.

The Committee consulted with the industry to seek information about which, if any, emissions abatement from the method would be unlikely to occur in the ordinary course of events. Submissions discussed barriers to energy efficiency and fuel switching in the transport sector that the method may address.

The Committee notes that rapid technological change (such as hybrid and electric vehicles) and developments in fleet logistics like autonomous vehicle technology are creating significant uncertainties around new vehicle investments. The expectation of price reductions for hybrid and electric vehicles, for example, may create perverse incentives. Fleet operators may be reluctant to invest in lower emissions alternatively powered vehicles that come at a premium, because it leaves the business with less capital to invest in these emerging technologies as they become available at a lower price. Similarly, fleet operators may have concerns that some more efficient vehicles (e.g. small rigid trucks for urban delivery) may be made obsolete by new technology and may rapidly depreciate. The value of emissions credits may help transport operators to partially address such deflation risks.

Decline Rate

The method covers a wide range of energy efficiency and fuel switching activities. This broad eligibility of the method affects the range of available options to ensure additionality, as requirements need to be applicable to a wide range of circumstances.

Under the method, the primary requirement to ensure additionality is the decline rate, which reduces baseline energy consumption by a stipulated percentage each year – based on statistical data.

4For every 100kL of diesel consumption reduced, approximately $140,000 is saved in fuel costs, but only 272 tCO2-e in emission reduction. This is equivalent to $3,400 in ACCU value at $12.50 per ACCU.

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The decline rate was introduced as an additionality measure for group of vehicles projects, to take into account the improved performance of the potential new vehicles or other project activities in the business as usual case. The method applies the decline rate from the date of registration even if the project is implemented later. For project activities with low percentage savings, the decline rate can lead to very low and even negative emissions abatement using the method calculations.

The Committee found some practical issues with continued use of the decline rate to ensure additionality in the method into the future. Industry submissions claimed that the decline rate used in the method is disproportionately high for some industries with long-lived vehicles, for which the rate of efficiency improvement would be expected to be lower. Submissions also pointed out that the decline rate was derived from a data set that is not transparent or available to the public at reasonable cost.

For rail freight, submissions indicated the decline rate appeared to be higher than the likely efficiencies that might be gained from fleet renewal or low cost energy efficiency improvements. Decline rates for the various vehicle categories do not seem to reflect fleet turnover rates, or adjust for differences between types of projects, or changes in the drivers of energy efficiency (such as prices).

Since the method was developed, newer methods have adopted a range of other approaches to ensure abatement is additional to business-as-usual. The Committee considered how alternative approaches might be both better suited to ensuring additionality into the future and more practical, given the range of projects covered by the method. This is discussed in detail in subsections 3.4 and 3.6.

Other standards set out in the legislative rules

The Act requires that projects and activities covered under methods must not be required to be carried out by, or under, a law of the Commonwealth or a state or territory. For the Transport method, the only exception is state based mandates for energy efficiency for government operated transport fleets in a number of state and territories. GHD suggested that if participants in these state programs were excluded, this may reduce the number of potential fleet owners to those predominantly in the private sector.

Vehicle replacement

The Committee concluded that vehicle replacement should be subject to specific requirements that provide more assurance that the replacement goes beyond the ordinary course of business. The Committee notes the value of the emissions credits available under the method would be a minor proportion of the investment costs of a new vehicle and would be unlikely to affect investment decisions for conventional vehicles. The Committee considers additionality requirements should be augmented to ensure any vehicle replacement goes beyond business as usual. This might take the form of a requirement that the new vehicle includes an uncommonly used drivetrain or other low emission enabling device. The list of uncommon vehicle devices may need to be updated over time.

Additionality

The Committee considered additionality measures under more recent energy efficiency method reviews to identify alternative, project-specific approaches to additionality.

The Committee considers the baseline decline rate should be replaced with project-specific requirements. Ideally, this would include a Chief Financial Officer (CFO) declaration requirement, similar to the Facilities and IEFE methods, for projects involving capital expenditure above a defined threshold (for example, over $20 million in capital expenditure or 20,000 tonnes of abatement per annum on average over the crediting period). The method could include criteria for the CFO or equivalent to consider when making the

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declaration. CFO declaration requirements should be consistent with treatment of projects involving transport vehicles under the Industrial Electricity and Fuel Efficiency method.

Considering the compliance and transaction costs, it may not always be practical for smaller projects to obtain additionality declaration by the CFO. Requiring CFO sign off may act as an artificial barrier because of the difficulty in obtaining access to the CFO for small projects. An alternative approach for smaller projects that avoids the internal complications associated with CFO sign offs is to require them to satisfy further additionality requirements. The committee considers any proposed variation of the method to address this issue should consider the following requirements:

A Chief Financial Officer or equivalent has signed a declaration of additionality, stating that the large project (over $20 million in capital expenditure or 20,000 tonnes per annum on average carbon abatement over the crediting period) would not have occurred in the ordinary course of business; and

any replacement vehicle under the method must replace a vehicle which is still in operation, in serviceable condition, and fully registered (where applicable); and

The replacement vehicle must be of new technology such as a hybrid or electric vehicle, or is designed to use a lower emissions fuel or power source than the standard vehicle; and

The vehicle replacement is recommended in a fleet energy audit undertaken to the Australian Standard (AS/NZS3598:2014.3 Energy Audits – Transport and related activities), or is otherwise recommended by a third party energy efficiency study to identify opportunities.

The Committee notes that trends in electrification discussed in section 5.2 may mean that lower emissions vehicles become cost competitive in the next five to ten years, and the Committee may need to consider the impact of this on business as usual activities in future reviews.

Finding 2 Project-specific requirements could provide an alternative way to ensure that emissions reductions go beyond business-as-usual:

requirements should be more stringent for large capital investments (more than 20,000 tonnes CO2-e per year or $20 million CapEx), which should require sign-off by a Chief Financial Officer or equivalent.

vehicle replacement should be subject to specific requirements that provide more assurance that the replacement goes beyond the ordinary course of business. This might take the form of a requirement that the new vehicle includes an uncommonly used drivetrain or other low emission enabling device. The list of uncommon vehicle devices may need to be updated over time.

project-specific requirements would provide a better way to ensure that emissions reductions go beyond business-as-usual than the current decline rate.

3.2 Estimations are measurable and capable of being verifiedThe method specifies appropriate equations to calculate project emissions and emissions reductions based on measured data and appropriate external parameters, such as the NGER system and the Green Vehicle Guide. Measurement, monitoring and emissions calculation requirements under the method ensure abatement is measurable and can be verified. The use of emissions intensity partially adjusts for changes in the level of transport activity. Suggested amendments to improve the method calculations are outlined in section 7.

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3.3 Abatement must be eligible carbon abatement from the projectThe Act defines eligible carbon abatement as abatement that results from carrying out the project, and is able to be used under Australia’s climate change targets under the Kyoto Protocol and its successors.

The method provides carbon abatement that is able to be used under Australia’s climate change targets because:

changes in emission levels resulting from projects under the method would be reflected in the national inventory

the inventory is the basis for determining Australia’s compliance with its international emissions reduction commitments (in conjunction with Australia’s holdings of eligible carbon units).

The method includes a range of requirements to ensure that abatement is due to the project rather than to other factors, including:

the method provides for crediting emissions reduction based on changes to emissions intensity rather than changes to absolute emissions (ensures credits are not provided for cases where emission fall due to the level of service falling due to market conditions).

two general project types provide flexible options for different transport businesses:- group of vehicle projects – for project proponents who do not have data

disaggregated to the level of individual vehicles such as public or hire fleets and logistics companies.

- aggregated individual vehicles projects – for proponents with disaggregated, vehicle specific data, such as rail and shipping operations.

measurement requirements ensure abatement accurately reflects the amount of fuel combusted.

The ERF includes a newness requirement to exclude project activities that were already in train prior to registration.

3.4 The method is supported by clear and convincing evidence The Committee considers the current calculation approach to be supported, on the whole, by clear and convincing evidence, because it uses measurements of fuel consumption and service levels to calculate baseline and project emissions, and verifiable external sources such as the NGER system.

There are two areas where the method calculations are not, however, supported by strong evidence:

the method treats any negative abatement (emissions increases in a reporting period) as zero, which may not be the conservative approach. See section 3.6.

the decline rate is based on data that may not be transparent nor verifiable, and there is uncertainty as to the source of differences in the decline rates for different vehicle types. See Section 3.1.

Due to low takeup of the method the zeroing of negative abatement is unlikely to have resulted in projects being over-credited, once the discounting effect of the decline rate is taken into account. Nevertheless, the Committee considers omitting negative abatement is unlikely to be conservative and may not be well supported by the evidence.

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3.5 Project emissions and leakagesThe method does not typically create indirect emissions that could cause emissions leakage, as the energy consumption emissions are limited to the vehicles involved in the project.5 There is however the possibility of a project involving mobile equipment increasing overall site emissions. This can occur because the interactions with the other site activities are not taken into account under the Transport method. For example, a project might improve the emissions intensity of excavators at a mine site by changing blasting techniques in a way that increases the fragmentation of the ores. This could be allowable under the method as a change to the operation of the vehicle, and could have several impacts on site energy consumption emissions:

directly decreasing the emissions from the excavators, as less energy would be required to collect the more fragmented material

increasing the emissions intensity of mine haulage trucks, as more fragmented rock has a higher ‘swell factor’ – leading to lower capacity utilization of the trucks

decreasing the emissions intensity of crushing and grinding processes.

These effects are not taken into account under the Transport method, because the project boundary is limited to the mobile equipment and other vehicles. To ensure such site interactions are taken into account under the ERF, the Committee considers that mobile equipment should be covered under the Industrial Electricity and Fuel Efficiency method rather than the Transport method in some cases. Only mobile transport equipment projects that do not increase emissions for other equipment at the site should be able to use the Transport method. Section 4.1 discusses the advantages of emissions modelling that can account for changes in a range of factors.

Figure 1: Proposed method coverage for mobile equipment

Many types of mobile equipment, such as excavators or draglines, do not primarily perform transport tasks. The Committee considers the method should provide mobile transport equipment a choice of using either the Transport method or the IEFE method. Activities involving mobile equipment that does not primarily perform a transport task should only be allowed to use the IEFE method, which can account for the on-site interactions with other energy consuming activities. Emissions modelling also provides a more accurate representation of actual energy consumption patterns, which is an advantage for projects with low percentage abatement.

5 Only a small proportion of emissions embodied in new vehicle manufacture fall under the Australian emissions inventory. Emissions from the manufacture and the international transportation of vehicles do not fall under Australia’s inventory.

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To ensure continuity of ERF coverage and offsets integrity, the timing of changes to the two methods will need to be coordinated.

Finding 3 To ensure emissions abatement is conservative and to avoid increases elsewhere on site, the Transport method should be amended to give flexibility to projects with mobile equipment.

Mobile transport equipment should be given a choice to use either the Transport method or the IEFE method. Other mobile equipment should only use the IEFE method in order to account for its impact on other energy consuming activities onsite.

Timing of changes to the two methods will need to be coordinated.

3.6 Estimates, projections or assumptions in the determination are conservative

The method calculations have several conservative features that are likely to yield a conservative result:

baseline emissions are set as the lowest emissions intensity over a three year period for some vehicle types, the decline rate further limits crediting, and starts reducing

the baseline emissions level from the point of registration.

In combination, these two requirements make it unlikely that a project with a low percentage emissions reduction will obtain a material amount of credits.

Conversely, the method sets any negative abatement to zero, on the assumption that any increase in emissions is caused by external factors. This approach could theoretically enable projects to obtain credits for some proportion of the crediting period due to changes in external variables, even if the project increases emissions.

GHD (2019) considered the estimates, assumptions and projections used in the method are conservative overall. The only exception is the zeroing of negative abatement.

One of the submissions argued that zeroing of the negative abatement should be retained. The submission argued some sub-groups in a group of vehicles project may show no improvement in emissions intensity due to having no project activities implemented or due to implemented projects not having a significant emissions reduction. The Committee understands that such situation could arise, but notes that the Act requires methods to have conservative estimates and assumptions.

The Committee recommends varying the abatement calculations for transport fleets by allowing proponents to adopt a modelled approach to abatement calculations, similar to the IEFE method. This would more accurately calculate the abatement and take project specific factors into consideration. The simplest way to do this could be to allow transport fleets to use the IEFE method, or to reference the IEFE modelling approach in the land and sea Transport method (section 4.1 discusses the benefits of modelling).

New projects under the method could still choose to use the simpler emissions intensity approach in the current method, noting that negative abatement would be accounted for.

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Finding 4 To ensure the method calculations are conservative, the method should not set emissions abatement to zero if there are measured increases in emissions.

Finding 5 To allow project proponents to demonstrate abatement under changing circumstances, transport fleets generally should be permitted to use a modelling approach to quantify abatement, along the lines of the Industrial Electricity and Fuel Efficiency method.

4 Method calculations and modellingDuring the IEFE review consultation process, stakeholders suggested that heavy mining vehicles should be eligible for IEFE because the Transport method is generally not practical for applications involving heavy mining vehicles, such as mine haulage trucks. Mining businesses do not typically have three years of mining fleet data of sufficient accuracy to meet the requirements of the Transport method.

Transport project activities are often confronted by a paradox – firstly, they are excluded from the Transport method due to lack of data. Secondly, they cannot use the IEFE method because the vehicles are potentially eligible for the Transport method, yet cannot use it in practice. Although IEFE method baseline measurement period requirements appear less prescriptive than the Transport method, IEFE baseline models must meet stringent modelling and statistical requirements. These requirements ensure the baseline emissions are robust even when based on a shorter period of time.

4.1 Advantages of emissions modellingEmissions modelling considers the effect of multiple variables, and accounts for both the fixed and variable components of energy consumption. Regression modelling as used under the IEFE method is more robust than the simple energy intensity ratios used under the Transport method. Simple intensity ratios are inaccurate whenever multiple variables affect energy consumption, or when fixed energy consumption is material. For these reasons, international energy management, measurement and verification standards and protocols (such as ISO50001 and ISO50006) recommend using regression analysis or other forms of mathematical modelling rather than simple energy intensity ratios.

For example, the IEFE modelling approach can account for interactions between interconnected systems, such as excavators, haulage trucks and the crushing and grinding circuits. By contrast, the Transport method only covers those vehicles and mobile equipment selected by the proponent, without considering changes in production variables that impact on emissions. This can lead to emissions increases elsewhere at the site being ignored.

As mobile equipment covered under the method does not perform a transport task and interact with other onsite processes, the Committee considers these equipment types should

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be excluded under the Transport method (Section 3.5). Mobile equipment can be covered under the IEFE method which allows more robust modelling of energy consumption and which can account for impact on the energy consumption of other processes (Finding 3).

Similarly, the Committee recommends other transport activities be able to use modelling, as in the IEFE method, to enable more accurate modelling of emissions, noting that most project activities will have relatively small percentage savings.

4.2 Measurement of emissions for gaseous fuelsThe method requires monitoring of gases such as liquefied natural gas (LNG) fuel consumption in kilolitres, cubic metres or gigajoules – not tonnes of gas. Yet it is standard practice for LNG to be traded by mass, because the mass of the gas accurately represents the number of gas molecules, and therefore the amount of energy in a gas flow or tank. The reason is that for a given mass of a gas, the volume and pressure of the gas vary significantly with temperature, according to the ideal gas law. Mass is a more accurate and reliable measure of the quantity of a gas, and is often less costly to measure.

For example, whereas the main LNG export terminals and LNG export vessels maintain a temperature of -161°C, transport applications maintain LNG at higher temperatures and pressures6. At these temperatures the density of the LNG (i.e. kg/m3) is much lower, so the emissions intensity of the gas per cubic metre is also lower than the default scope emissions factor for natural gas.

Requiring proponents to report LNG consumption by volume forces proponents to convert mass to volume in cubic metres, and then adjust for temperature and pressure to determine the volume of gas at the temperature and pressure required by the NGER system. This process is convoluted and can result in errors. It is also impractical in a transport context, as the temperature and pressure is likely to vary between gas shipments.

The solution to this would be to modify the method to allow reporting of LNG consumption in tonnes of gas. Due to the measurement advantages, the Australian Taxation Office uses the mass of LNG for excise purposes, as does the International Maritime Organisation for its Energy Efficiency Design Index.

To simplify the method and make it more robust, the Committee considers the Department should set out mass-based emissions factors for common gaseous fuels under the method. This could be done either in the method itself or on the Department’s website. The value of the emissions factors would not change as a result of converting to a mass measurement as the conversion is based on well documented scientific concepts.7

4.3 Baseline for shippingUnder the Transport method, if the vehicle is a ship that must comply with Annex VI of the International Convention for the Prevention of Pollution from Ships, then the baseline emissions intensity is set as whichever is the smaller of the required Energy Efficiency Design Index (EEDI) and the historical emissions intensity for the vehicle. This means the EEDI is equivalent to a regulatory baseline.

Stakeholder submissions have pointed out that in practice it is almost impossible for an existing ship in operation to achieve a lower emissions intensity than a design standard. Submissions also pointed out that the EEDI stipulates vessel speeds and emissions factors. As the hydraulic resistance of a ship’s hull in the water increases greatly with speed, it is not feasible for a ship travelling faster than the stipulated velocity to consume less energy than the EEDI.8

6 LNG used in transport is managed differently to export LNG into atmospheric tanks. The LNG used in transport is stored at higher pressures/temperatures (5-6bar) therefore lower densities than export LNG.7 Specifically, the ideal gas law.

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As the requirement to improve on the EEDI emissions intensity cannot be met in practice, the Committee considers this requirement should be removed from the method. Removing this requirement should enable shipping projects to demonstrate abatement under the method.

Options to address this issue are to either remove the requirement to improve on the EEDI emissions intensity or to exclude vehicles that meet the EEDI from the method. As there may be a range of shipping scenarios, the appropriate approach could be confirmed with industry before a variation is made. This could be done through targeted consultation as part of a method variation.

Finding 6 To make the method more usable for shipping and projects involving gaseous fuels, the method should be varied to:

either remove the requirement to improve on the Energy Efficiency Design Index or to exclude vehicles that meet the EEDI from the method

enable measurement of gas by mass rather than volume.

5 Treatment of Alternative fuel substitution activitiesChanging energy sources for vehicles is one of the ways to reduce energy intensity and hence reduce the emissions intensity of a project. Alternative fuel substitution such as use of biofuel (chiefly biodiesel) or electrification of vehicles and eventually the use of hydrogen in heavy vehicles are activities that proponents could consider undertaking under the method in future.

The Committee found the method could be updated in line with these future uses. However, fuel switching to biofuels, electricity or hydrogen is unlikely to become viable under the method for the foreseeable future.

5.1 BiofuelsDepending on the production pathway, substituting traditional petroleum-derived fuels with a non-petroleum based biofuel can lead to a reduction in emissions. Use of biofuels is growing internationally; however, the uptake domestically has been slow. Submissions suggested that industry has some concerns about the voiding of original equipment manufacturer (OEM) warranties for some vehicles and some concerns over fuel standards. Submissions also claimed that biodiesel availability has declined in the domestic market in the period since the method was established in 2015.

In reviewing the Aviation method9, the Committee found that in order to ensure abatement estimates are conservative, the method should be varied to better account for lifecycle emissions from alternative fuels. Similarly, the Transport method should be varied to account for the difference in the life cycle greenhouse gas emissions of biofuels compared to fossil fuels. By omitting these lifecycle impacts and only including direct non-CO2 combustion emissions, the National Greenhouse Account Factors overestimate abatement for biofuels.

5.2 Scope 1, 2 and 3 EmissionsLifecycle emissions refer to the emissions associated with the full life-cycle of a fuel, product or activity; for example, from the production, transport and combustion of transport fuels. They cover scope 1, 2 and 3 emissions. As highlighted in submissions, ideally, the Transport

8 The fundamental relationship is that both hydrodynamic and aerodynamic drag vary with the square of the velocity when the water is flowing in a straight line. See, for example, Potter and Wiggert (2001), The Dynamics of Fluids, 3rd edition, Brooks/Cole, United Kingdom. In practical shipping applications wave interactions make the relationship more complex and often increase this resistance.9 http://www.environment.gov.au/climate-change/government/emissions-reduction-fund/methods/review-aviation.

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method should account for scope 1, 2 and 3 emissions for both the baseline fuel and lower carbon replacement fuels involved in a project.10

Scope 1 emissions refer to emissions released as a direct result of a project activity. In transport projects, scope 1 emissions are estimated using direct (or point-source) emission factors, which give the mass of carbon dioxide equivalent (CO2-e) emitted per unit of activity at the point of emission release.

Scope 2 emissions refer to emissions released as a direct result of the generation of purchased or imported electricity, heating, cooling or steam that is consumed by the project or entity. In the simplest case, scope 2 emissions are physically produced by the burning of fuels (coal, natural gas, etc.) at relevant power stations. Indirect emission factors are used to calculate scope 2 emissions from the generation of the electricity purchased and consumed by an organisation as the mass of CO2-e per unit of electricity consumed.

Scope 3 emissions refer to indirect greenhouse gas emissions other than scope 2 emissions that are generated in the wider economy as a consequence of project activity. Relevant scope 3 emissions include those associated with the extraction, production and transport of alternative fuels.

To examine the appropriate way to account for alternative fuel projects, take the example of a project replacing petroleum diesel with sustainably produced biodiesel. Assume the total emissions intensity of conventional diesel is composed of 95 per cent of Scope 1 emissions (70.5 kg CO2-e per GJ) and 5 per cent of Scope 3 emissions (3.6 kg CO2-e per GJ). Also assume Scope 1 emissions intensity for sustainably produced biodiesel is around 0.27 kg CO2-e per GJ. Although the National Greenhouse Accounts Factors document does not estimate the Scope 3 factors for biofuels such as biodiesels and ethanol, research suggests that various types of biodiesel will reduce carbon emissions by approximately 50 per cent.11 For biofuels, the lifecycle emissions are almost all Scope 3 emissions. Based on these assumptions, Figure 3 shows the components of emissions types for the hypothetical project.

Figure 2: Greenhouse gas emissions from a project replacing a petroleum diesel with sustainably produced biodiesel

Petroleum Diesel (%) Biodiesel (%)

95%

1%

5%

49%

Greenhouse Gas Emissions from Transport Fuel

Scope 1 Scope 3

10 National Greenhouse Account Factors August 2019, Department of the Environment and Energy11 University of Idaho, US Department of Agriculture and US Environment Protection Agency (2010) states that lifecycle CO2 emissions of biodiesel is 76.4%. CSIRO (2007) states the reduction in carbon emissions from biodiesels from various sources are: Canola – 49%, Tallow – 76%, Used cooking oil – 87%, Palm oil – 80%. Lifecycles & Qld Department of Environment and Heritage (2016) Table 11 has percentage emissions reduction for replacing petrol and diesel with equivalent amount of biofuel.

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The ERF Transport method needs to ensure conservativeness of abatement calculations for the purposes of meeting the offsets integrity standards. To meet the requirements of the Act, the method also needs to ensure abatement credited under ERF is from the Australian emissions inventory and can be measured and verified.

Scope 1 emissions are measured directly from combustion of fuels in Australia and are covered under the Australian inventory. By contrast, as the bulk of conventional diesel is imported, most of scope 3 emissions from the use of conventional diesel would not constitute domestic emissions. Due to this, the Committee considers the only practical way to ensure all abatement from alternative fuels under the method is domestic and conservative is:

to only count scope 1 and 2 emissions in the baseline case, ensuring any reduction is of domestic emissions

to account for scope 1, 2 and 3 emissions for biofuels so that the abatement is conservative.

This approach should allow the method to be used for substitution of conventional fuels with either domestically or foreign-sourced biofuels. While the Committee notes the lifecycle emissions for imported biofuels are not part of the Australian inventory, accounting for lifecycle emissions only for domestic fuels would have perverse outcomes. These include incentivising imported biofuels with higher lifecycle emissions or involving adverse environmental outcomes. Imported biofuels would require robust and verifiable third party certification in order to be used under the method.

5.3 Lifecycle analysis standards and protocolsThere are a number of approaches that could be used to account for the lifecycle emissions associated with alternative fuels (potentially including hydrogen, depending on the production pathway).

Use of existing lifecycle protocols such as ISO 13065 (sustainability criteria for bioenergy), ISO 14067 (carbon footprint of a product) or the ARENA lifecycle assessment method for bioenergy.

Use of sustainability certification standards such as RSB Standards certification and ISCC Sustainability certification of transport fuel.

Simpler defined abatement calculations which are conservative and ensure that abatement is covered by the Australian greenhouse gas inventory.

Lifecycle Protocols and Sustainability Certification

ISO 13065:2015 Sustainability Criteria for Bioenergy specifies principles, criteria and indicators for the bioenergy supply chain to facilitate assessment of environmental, social and economic aspects of sustainability. ISO 14067:2018 Greenhouse Gases – Carbon Footprint of Products – Requirements defines the principles, requirements and guidelines for the quantification of the carbon footprint of products. This standard aims to quantify greenhouse gas emissions associated with the lifecycle stages of a product, beginning with resource extraction and raw material sourcing and extending through the production, use and end-of-life stages of the product. Quantified emissions could potentially be used in the calculation of abatement in the Transport method.

The Australian Renewable Energy Agency (ARENA) has developed a method and guidance document to help applicants seeking funding for bioenergy and biofuel projects to undertake life cycle assessments (LCAs).12 The method is based on international standards, including the above mentioned ISO 13065 and 14067. While it does not quantify LCA values for

12 ARENA (2016) Method and guidance for undertaking life cycle assessment (LCA) of bioenergy products and projects October 2016.

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bioenergy or products, the method sets down the requirements for an ARENA funding applications. Figure 2 details the system boundaries under the method.

Figure 3: Diagram of ‘cradle to gate’ and ‘cradle to grave’ system boundaries from ARENA Lifecycle Assessment Method

Established sustainability certification protocols verify biomaterials, biofuels and biomass for their socially responsible production, environmental sustainability, credible sourcing, and mitigation of business, environmental and social risks. They ensure production of biomaterials enhance food security and support the local community. Certification allows traceable and deforestation-free supply chains, covering all feedstocks and markets. Certifications are recognised under particular regulatory standards, such as US EPA Renewable Fuel Standard Program, EU Renewable Energy Directive, International Civil Aviation Organization (ICAO)’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and California Air Resource Board’s Low Carbon Fuel Standards. The regulatory standards often set default intensity values for fuel production pathways, which can be used in abatement calculations.

5.4 FindingsThe Committee considers the Transport method should account for the carbon lifecycle impact of biofuels, while recognising there are a number of ways to do this. The Committee also acknowledges that the treatment of alternative fuels needs to be consistent across all relevant methods.

Rather than varying the method directly, the Committee considers requirements for alternative fuels could be better addressed through a reference an external document, e.g. on the Department or the Regulator’s website. The external document could potentially make use of current international standards and protocols for lifecycle analysis of biofuels, such as ISO 13065 (sustainability criteria for bioenergy) and ISO 14067 (carbon footprint of a product). The ARENA lifecycle assessment guidelines for bioenergy could also be used to develop a suitable approach.

The Committee notes that some international standards and protocols quantify lifecycle emissions while others do not. Referencing an external document allows the method to accommodate either quantitative or process-based standards and protocols, or both. It would also allow the lifecycle analysis requirements for biofuels to be consistent under all relevant methods.

The Committee notes that submissions viewed the availability and cost of biofuels and potential engine degradation concerns from OEMs as the key barriers to using biofuels13. This suggests the level of take-up of biodiesel in the near future may be limited unless other changes occur in the market for these fuels.

13 Fuel quality concerns likely relate to the use of the fatty acid methyl ester version of biodiesel which converts oils through transesterification and does not meet fuel standards at high blends. On the other hand, all biodiesel manufactured through hydrotreating or thermal conversion meets or exceeds diesel fuel standards.

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The Committee is also concerned about the potential replacement or displacement of the biofuel feedstock which could be used for other essential uses such as food production and agriculture. This issue will need to be investigated and potentially considered in the lifecycle analysis for biodiesel.

While acknowledging that transaction costs make it unlikely that the method would be used for projects involving light vehicles, the Committee is also concerned about the regulatory additionality implications of the method being used for biofuels that are mandated under State laws. The method may need to be adjusted to exclude any mandated biofuel content in the fuels, or to set a minimum threshold for biofuel content or emissions reduction.

Another potential option that could be considered is creating a new method for fuel switching or alternative fuels. This could be designed to credit the final users of alternative fuels or even the manufacturers or distributors of the fuels. The benefit of crediting the manufacturers or distributors of fuels is it would reduce transaction costs. The main difficulty associated with this approach is additionality; there would be a significant risk of crediting non-additional production. There could also be issues with the estimation of abatement (e.g. because of differences in the efficiencies of vehicles), the eligibility of abatement if the fuels were exported and double-crediting if the method allowed for the crediting of both users and manufacturers or distributors.

Finding 7 The method should be varied to account for the difference in the life cycle greenhouse gas emissions of biofuels and other alternative fuels compared to fossil fuels.

The method should be varied to refer to an external document that define lifecycle assessment requirements. Requirements would be based on those specified at the date of registration.

Finding 8 Consideration could be given to the development of a method for fuel switching or alternative fuels. This could be designed to credit the final users of alternative fuels or even the manufacturers or distributors of the fuels. While crediting manufacturers or distributors would reduce transaction costs, it would give rise to material integrity issues that would need to be carefully considered in the method design process.

5.5 ElectrificationElectrification of rail and road passenger and freight vehicles is increasing as a way to reduce urban air pollution and reduce greenhouse gas emissions. Electric vehicles for passengers and commercial delivery are also emerging in the market. Bloomberg New Energy Finance forecasts that electric trucks ‘will dominate’ urban and sub-urban deliveries by 2040.14 Projections for light electric road vehicles are similar with upfront cost parity projected to be reached in the mid-to late 2020s15 in some markets. The cost parity point in Australia will likely be delayed by several years after other major markets given our internal combustion engine vehicle costs are not increasing.

Given the projected fast decline in cost for electric road vehicles, it may be that there will only be a period of a few years where the purchase of electric vehicles is affordable enough to be attractive under the ERF, but not sufficiently price competitive to be purchased in the ordinary course of events. This risk can be managed under the Committee’s normal review and monitoring activities, and potentially by including project-specific additionality requirements, including for vehicle replacement (see section 3.1).

14 Bloomberg New Energy Finance, Electric Vehicle Outlook 2019.15 Lutsey, N., and Nicholas, M. 2019. Update on Electric Vehicle Costs in the United States through 2030, Working Paper 2019-06, International Council on Clean Transportation, April, https://www.theicct.org/sites/default/files/publications/EV_cost_2020_2030_20190401.pdf

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In the rail industry, the potential to use electric locomotives instead of diesel is limited by the availability of enabling electric traction infrastructure. One of the submissions suggested the Committee consider expanding the Transport method to potentially include the provision of electric infrastructure for rail, and multi-modal transport hub construction.

While the Committee acknowledges that infrastructure is an important enabler of improvements in transport energy efficiency and productivity, the provision of infrastructure does not seem to have a sufficiently clear link to abatement to meet the offsets integrity standards.

To account for electrification of transport fleet, the Transport method applies electricity grid factors in the same way as other comparable methods. The Committee considers that any changes made to electricity emissions factors for similar methods should be reflected in the Transport method in due course.

5.6 HydrogenHydrogen may be a potential future alternative fuel for long-haul road freight vehicles. An industry submission highlighted that there is potential for hydrogen fuel cell long-haul road freight vehicles to outperform battery electric trucks due to the greater energy density, refuelling speed and reduced weight allowing greater vehicle range and larger payloads. However, take up within industry will remain small until hydrogen vehicle manufacturing costs are reduced, refuelling/recharging infrastructure is in place and whole of lifecycle running costs reach a suitable level.

The Committee considers that hydrogen could play a role in reducing transport emissions in future if it is produced using renewable energy, or if emissions from hydrogen production are captured and securely stored. The Committee notes the likelihood of hydrogen fuel cell vehicles being purchased under the method is currently negligible due to lack of vehicle availability and other market factors, and likely to remain so for the foreseeable future. The lifecycle emissions from hydrogen vary considerably with the production pathway, so any future coverage of hydrogen under the method would need to consider this pathway.

6 Mode ShiftThe existing method does not credit abatement from mode shifting – for example, moving freight via rail (a less emissions intensive mode) or by ship instead of by road.

In April 2016, the Committee reviewed an exposure draft of the method that included mode shifting as an activity. This review included consideration of a technical assessment which concluded the mode shift activity would result in abatement likely to occur in the ordinary course of events. In view of this advice the Committee decided to advise the then Minister of the Environment not to add mode shifting as an eligible activity under the Transport method, as it would not meet the offsets integrity standards.

One submission from an industry body highlighted mode shift as potential activity under the method. The submission indicated that the addition of mode shift activity would help support an increase in the movement of freight from road to rail. The submission also suggested allowing mode shifting would likely result in a higher level of participation in the Transport method. Mode shifting would also support efforts being made by other jurisdictions to address road congestion in port precincts by moving more freight via rail between ports and intermodal terminals.16

While acknowledging the emissions reductions that mode shifting from road to rail can bring, the Committee notes that the mode shifting decision is unlikely to be materially affected by

16 From Australian Logistics Council (ALC) submission

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crediting under the method and would likely occur in the ordinary course of business. Also, rail freight has been steadily gaining a higher share of the total freight task in the last ten years, suggesting that it would be challenging to identify additional abatement in this activity. As such the Committee does not recommend the method include this activity.

7 Usability7.1 Transaction costsGHD (2019) found transaction and compliance costs for the Transport method are high relative to the benefits, and are one of the key barriers to uptake of the method.

GHD observed the record keeping and data management under the method is not particularly onerous, as it is expected the records would be kept as part of normal fleet management practices. However, obtaining three years of historical data in the same format for the same duty cycle may be both costly and time consuming. Overall, compliance costs for the Transport Method were estimated to be approximately $95,000 to $146,000 over a typical seven year crediting period.

The above estimate does not include:

any specific additional monitoring equipment that may be required to obtain the relevant data

any costs for implementation, as these will vary widely depending on the project activity (e.g.: replacement of large vehicles will be significantly different than for changing operational practices)

any purchase/ updates/ improvements to data management systems any costs to an aggregator and/or agent annual costs for calibration of fuel flow meters, if used in the project.

Based on the lowest ACCU price of $10.23/ACCU, GHD noted the break-even number of ACCUs to offset compliance costs would be approximately 2,000 per annum. To allow for unforeseen circumstances, unless a project is likely to generate ACCUs of more than 3,000 per annum over the seven year crediting period (21,000 total), it probably would not proceed under this Method. If the project is implemented after the start of the reporting period scheme participants would need to generate at an even higher annual rate to be economically viable.

Submissions from the public consultations highlighted that the transaction costs are high and potentially limit involvement in the Transport method. Submissions indicated transaction costs could be reduced by:

simplifying the method providing better method guidance material reducing reporting and auditing requirements, especially for smaller projects allowing proponents to have one application for both ‘group of vehicles’ and

‘aggregated individual vehicles’ projects.

The Committee agrees that there may be scope to vary the method to make it simpler, provided this does not affect impact on offsets integrity.

7.2 Understanding the difference between two project types Under the Land and Sea Transport method, a project can be registered as ‘a group of vehicles project’ or ‘an aggregated individual vehicles projects’. It is important to understand the differences between the two types of projects. Section 2.5 and Attachment A outlines different elements of the two different types of projects.

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7.3 Modelling and calculations

Three years of Baseline data

The Land and Sea Transport method requires three years of historical emissions intensity data, determining the baseline emissions intensity as the lowest intensity over three years. Using a three year period ensures that long business cycles are taken into account, and requiring the least emissions intensive year provides a conservative baseline. Three years is longer than the baseline period of 12 months used in the Aviation method.

Stakeholder submissions indicate that many transport businesses do not have detailed data going back three years, as this data is not required for business reasons. In addition, the requirement to choose the lowest emissions intensity over a three year period, while conservative, does not account for changes in conditions as well as a modelled approach would. Data that is three years old may also not reflect current conditions, and effectively makes operational improvements to newer vehicles ineligible.

One industry submission suggested an alternative approach would be to require three years of baseline data, but to allow a shorter period of one year where a full three years of data was not available.

To improve usability of the method, the Committee considers that proponents should be allowed to use the annual emissions intensity over one year. The proponents should also be allowed to use the IEFE method, which allows a shorter period of data collection because the regression modelling accounts for changes in conditions. The IEFE method also better accounts for changes in conditions, so the calculations are more accurate and more suitable to projects with lower percentage savings.

Expand the list of service units allowed

The technical analysis and the consultation submissions have identified the service units (measures of emissions intensity) allowed in the Transport method may be too restrictive and not always appropriate.

Currently the method allows some flexibility on service units. For example, for trucks and shipping, there is a choice of service units and for rail freight the proponents can choose to base the project on a net or gross tonne-kilometres. However, there may be better service units the proponents can use. The method should also allow alternative service units if they can be justified by the proponents.

In some cases, the fuel used in the operations under the project is different, or changes continuously depending on the type of goods being carried. Some submissions suggested to accurately compare previous fuel usage data to new data is difficult. A potential service unit in this case could be ‘engine hours’, which would improve the ease of calculation and therefore the usability of the method, particularly for transporting mobile equipment projects. Alternatively, a weighted average of indicators might be used.

The Committee considers that in the interests of usability the method should retain the existing list of service units, but also allow proponents to use an alternative service unit that meets defined criteria. This would be similar to the approach used for output indicators in the Industrial Equipment Upgrades method.

Finding 9 To improve the usability of the Transport method:

reduce the baseline data to one year duration allow proponents to use an alternative service unit that meets defined

criteria.

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Simplify reporting requirements

Submissions from industry suggested that the review should recommend simplifying the method by reducing reporting requirements and making it more practical.

GHD (2019) identified that the reporting requirements could be simplified by:

moving section 28 (if the Green Vehicle Guide is used) to section 31(6), as including this information in the offsets report adds little value

removing the requirement to record the reason for vehicle sale/disposal, or movement or replacement as specified in sections 31(1)(c)(ii), 31(3)(b)(iii) and 31(4)(c)

removing section 31(5) requirements relating to the ‘first vehicle’ in a project.

The Committee agrees that record keeping and reporting requirements should be simplified where possible, provided this does not unduly compromise offsets integrity.

7.4 Low awareness of the methodOne of the issues identified by the consultation submissions is the low awareness of the Transport method and its operation in the industry. GHD (2019) suggests that in practice the pool of potential project proponents is quite limited due to the required scale of emissions reductions.

In order for using the method to be viable, a project proponent must have a large fleet consuming considerable amounts of fuel. Even many larger transport businesses may not have enough fuel consumption to make projects economically viable. For example, Sydney Ferries is reported as having an annual fuel consumption of around 10,300kL17. GHD (2019) indicated that an organization would need to use approximately 18,350kL of diesel per year to make a project economically viable, assuming a 10 per cent fuel saving accrued over three years.

Also, very large private transport companies and government transport operators are likely to have internal fuel reduction programs in place, which may not comply with the ‘newness’ requirements of the method.

7.5 Method guidance materialTo increase the usability of the Transport method, both submissions to the review and GHD (2019) suggested the method documentation should provide better guidance materials to assist proponents. This includes:

providing more worked examples adding an equations flowchart or decision making flowchart a calculation tool to give quick indications of the amount of credits achievable.

GHD (2019) noted the Department and the Regulator could consider available resourcing when determining the appropriate investment in guidance materials. GHD(2019) also suggested specific amendments to improve the method, as set out in Table 5.

17 Table 4 of ARUP “IPART, Cost of Emissions for NSW Ferry Networks” November 2014, based on 2013/14 data

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Table 4: Suggested amendments to improve the method

Issues Method amendment Explanation

Monitoring, measurement, data collection

Include a note in guidance explaining that QS must be measured over the same baseline and reporting periods as QF, QEC and QRen.

Measured period for QS, QF, QEC and QRen needs to be the same and it is not defined in the method

With proposed changes to the historic data requirement, include guidance explaining how the one year ‘immediately before the declaration of the project’ should be determined and provide examples.

For a group of vehicles project, the current method is not clear on what ‘immediately before the declaration of the project’ means – whether it is calendar year or financial year of standard reporting year.

Change the requirements for monitored parameters in section 33 for QS, QF, QEC and QRen of ‘Frequency – continuously’ to ‘Cumulative value for the reporting period’.

There is no technical basis for specifying continuous measurement.

Minimise uncertainty Provide guidance material with a worked example of converting CNG and LNG volumes to standard conditions, using the Ideal Gas Law. Also consider measuring gas used in mass rather than volume.

The method uses Part 3 and 4 of NGER (Measurement) Determination for measurement of liquid fuel by volume. For fuel which is a gas, temperature and pressure materially affect its volume. Measuring by mass will reduce this uncertainty.

Record keeping requirements Provide examples of records to be kept of ‘duty cycles’ for sample vehicle categories.

Definition of ‘duty cycle’ is quite broad and it may be difficult to have adequate records to determine 80 per cent change.

Possible outreach The Clean Energy Regulator could consider the merits of targeted outreach activities, subject to resourcing.

Targeted outreach might increase participation in the method, to the extent that would consider the value of credits under the ERF exceeds transaction costs involved in using the Fund.

Finding 10 The Clean Energy Regulator should consider ways to simplify reporting and record keeping under the method and improve guidance materials for proponents, subject to resourcing.

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8 Policy suggestions outside the scope of the methodThere were a number of policy suggestions (outside the scope of the method) from the public consultation of the industry bodies and companies. Although these suggestions are outside the scope of the method, they are issues that the industry considers important for Government to consider.

Some of these suggestions relate directly to the Department’s work, such as considering interactions between the method and the Safeguard Mechanism, and considering introduction of specific programs to support increased biofuel production and use. The Committee has referred these suggestions to the Department for consideration.

Some submissions suggested the method could support infrastructure investments that reduce emissions, but did not provide suggestions as to how the method calculations might work for such projects.

Infrastructure projects are funded by a mixture of private and public funding. From the private investors’ perspective, the key driver for investment in infrastructure projects is to obtain stable returns for the investors. It is difficult to envisage emissions reduction as a material driver for transport infrastructure investment. Public funding bodies such as Infrastructure Australia consider a number of investment criteria. Greenhouse gas emissions are mentioned in the criteria, but are less of a driver than economic or social impacts.

To be eligible for funding under the ERF methods, projects need to comply with the other government program requirement under section 27 (4A)(c)(i) of the Carbon Credits (Carbon Farming Initiative) Act 2011. Australian governments fund infrastructure through a range of schemes and grants using bodies established for this purpose. As infrastructure projects often receive assistance from another government grants or schemes they would typically not comply with the other government program requirement.

Other challenges to support infrastructure projects under the ERF are below.

Infrastructure owners/providers will not have control over the volume or timing of abatement, which may occur several years after an investment decision is made.

Difficulties in measuring the abatement measurement and ability to verify the abatement.

The low financial value of ACCUs compared to the capital cost of the infrastructure projects, which makes the value of credits unlikely to be a material factor in infrastructure investment decisions.

Question about who should be credited.

For these reasons, the Department and the Committee finds infrastructure projects outside the scope of the ERF. The Committee has asked the Department to relay these infrastructure concerns to the Department of Infrastructure, Transport, Cities and Regional Development for their consideration.

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Attachment A

Difference between two projects typesItems & section

Group of vehicles Project Aggregated individual vehicles Project

Definition

(Section 11 and 14)

Credits emissions reductions from groups of vehicles

Credits emissions intensity reductions achieved by one or more individual vehicles

The group of vehicles can be made up of sub-groups, where each sub-group is made up of all vehicles in a vehicle category within a business unit or transport operation.

Emissions reductions are credited against a historically derived emissions intensity baseline, which for some vehicle categories will decline over time.

Emissions reductions from each sub-group are then aggregated.

The baseline emissions intensity is tailored to the vehicle and activity being undertaken and is generally based on historically-derived data.

Emissions reductions from multiple individual vehicles are then aggregated.

Suitable operations

This type of project is likely to be suitable for proponents who do not have data disaggregated to the level of individual vehicles, such as public or hire fleets and logistics companies.

This sub-method is likely to be suitable for proponents with disaggregated, vehicle-specific data, such as rail and shipping operations.

Proponents are able to move individual vehicles in or out of a sub-group for commercial reasons (for example, as the fleet turns over, to meet seasonal scheduling demands or to replace another vehicle that is out of service for maintenance). However, subsection 11(3) requires that a vehicle cannot be moved to or from a related group of vehicles that is outside the project for the dominant purpose of producing eligible abatement for the project. This is to reduce the risk of leakage and the scope for intentionally shifting high emissions intensity vehicles from the project to another part of the operation, or intentionally shifting low emissions intensity vehicles into the project from another part of the operation.

Excluded vehicles

(subsections 11(6) and 14(2))

Mobile equipment

This is because mobile equipment is an extremely diverse vehicle category, and there is limited data upon which to set an appropriate decline rate for baseline calculations.

Light vehicles

This is because of a higher risk of crediting non-additional abatement from light vehicles compared to other vehicle categories due to rapid fleet turnover and the fast rate of improvement of the new light vehicle fleet. This is less of a risk in a group of vehicles project due to the decline rate applied to historic emissions

Items & section

Group of vehicles Project Aggregated individual vehicles Project

intensity, which takes into account business as usual fleet improvement.

Application inclusions

(Section 12 and 15)

description of the sub-groups in the project;

transport operations or business units concerned;

duty cycles of the vehicles; the project activities involved; the service unit to be used for each

sub-group in the project; and any intended use of the Green

Vehicle Guide to set the emissions intensity including a statement about why fuel consumption cannot be measured.

the duty cycles of the vehicles; the project activities involved; an estimate of the number and

categories of vehicles to be included in the project; and

the service unit to be used for each vehicle in the project.

Duty cycle

(subsection 12(3) and 15(3))

Project activities can be provided by class, for example by vehicle category or business unit. This allows for a shorter application that avoids repetition.

For example, an application could state that all the vehicles in a specific business unit were to undergo the same project activity, rather than having to list each vehicle and the project activity being performed.

Project activities can be provided by class, for example by vehicle category. This allows for a shorter application that avoids repetition.

For example, an application could state that all vehicles of a particular category were of the same duty cycle and undergoing the same project activities, rather than listing each vehicle duty cycle and project activity separately.

Service units

(section 13 and 16 and Schedule 1)

Proponents must use the same service unit in all reporting periods. This is to ensure that abatement is calculated in the same way throughout the project.

Schedule 1 prescribes the service units that may be used for each vehicle category in a group of vehicles project. The service units used for group of vehicles projects are consistent with the service units on which decline rates are based.

Proponents must use the same service unit in all reporting periods. This is to ensure that abatement is calculated in the same way throughout the project.

Also includes the rules for converting passengers to tonnes where a vehicle category may carry both passengers and freight (78kg per passenger) and the prescribed service unit is in tonne kilometres. This approach only applies to aggregated individual vehicle projects.

Schedule 1 prescribes the service units that may be used for each vehicle category in an aggregated individual vehicles project.

Decline rate

(Schedule 2)

Schedule 2 outlines decline rates by vehicle category and service unit that must be used in the calculation of the net abatement amount.

Relevant decline rates are applied to the historic emissions intensity of each vehicle category in the project in order to define a baseline.

Not applicable.

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