Net zero

Is the future for offsets in Australia now settled and secured?

With the findings of the review of Australia’s carbon credit system by our former chief scientist, Ian Chubb, the cloud hanging over the use of ACCUs for emissions reduction pathways appears to be lifted – in large part. Concerns were raised back in March 2022 when a number of papers criticised the methods and calculation tools used by the government for determining abatement for certain land sector methods[1]. The Chubb Review rejected the criticisms, although it identified improvements that should be made to the scheme’s governance, transparency, and co-benefit realisation. The government in turn accepted the review’s conclusions and all 16 recommendations put forward. So what does this mean for Australian business? In this article we discuss the findings and outline our advice.

“The panel concludes that the scheme was fundamentally well-designed when introduced. Nevertheless, after 11 years of operation, (it) can be improved[2]”

Australia’s carbon credit system is central to reaching the federal government goal of 43% emissions reduction by 2030 and net zero by 2050. In turn, high quality credits must represent real cuts in emissions and their methods of calculation and verification need to be robust and transparent. As summarised below, the Chubb Review has recommended significant changes to how Australia’s scheme is managed:

• Establishment of the Carbon Abatement Integrity Committee (CAIC) which will replace the current Emissions Reduction Assurance Committee (ERAC) for enhanced independence and capacity to ensure the integrity of ERF methods. The new committee will have First Nations membership to incorporate their knowledge of rural and remote regions.
• Removing conflict of interest. Whilst the Clean Energy Regulator (CER) explicitly conducts project monitoring, verification and reporting, its role as the primary buyer of ACCUs on behalf of the government will be separated out to another government body (yet to be confirmed).
• Enhanced public disclosure of project data and information sharing, to improve public access and confidence on project performance and outcomes through a proposed national platform.
• Improving the ERF method development process by pivoting to a more industry led approach to ensure innovation and ease of uptake. The proposed changes also allow for proponents to achieve scale by developing a portfolio of methods. An EOI process will be set up for proponents to express their interest in new methods as well as modifications to existing methods. CAIC will be responsible for method endorsement.
• Refining the existing Offsets Integrity Standards. Whilst the current Standards (Information Paper on the Offsets Integrity Standards) are deemed appropriate, the government has been urged to ensure alignment with what is being developed internationally in terms of best practice (see Core Carbon Principles). Also, the ‘newness’ criteria could be amended to emphasise ‘new’ abatement.
• Improve but not disallow the Human Induced Regeneration (HIR) method, which was heavily criticised ahead of Chubb’s Review, including enforcing the intent of the method (i.e. managed forest regeneration, so the project areas would become native forest and permanently store carbon dioxide) and publishing project data and assessment results to appease critics.
• Avoided deforestation method to be phased out given additionality concerns, such as awarding credits for land that was never going to be cleared.
• Landfill gas methods to stay, however, future extension of their crediting period will require re-baselining of emissions to avoid the over issuance of credits.
• Potential for the “conservative” cancellation of ACCUs to improve ERF’s integrity. A “percentage” of ACCUs could be cancelled by the government to avoid any concerns about over crediting. The balance needs to be right to avoid upward pressure on ACCU prices by removing too much supply (note that sufficient details have not been provided on this recommendation).
• Provision of project co-benefits to be encouraged but not mandated. The CER is to work with stakeholders to identify the best way for co-benefits to be quantified and verified prior to being published.
• Removal of the former government’s requirement for Climate Active participants to purchase a minimum 20% ACCUs. The measure is intended to ensure that Climate Active remains flexible and affordable.

What does it all mean for buyers?

Energetics advises the following:

• Risk management is still paramount for an offset strategy and offset selection and procurement. For example, avoided deforestation projects currently in the pipeline could be deemed a ‘junk’ credit.
• International developments such as the establishment of Core Carbon Principles, could see the credibility of some ACCUs questioned in the context of best practice.
• Leveraging the ability to propose new ERF methods, including putting forward a portfolio approach, could provide cost effective options for offset generation.   
• Identifying projects with co-benefits will continue to gain traction, however, the co-benefits will need to be quantified and verified. ACCUs with such co-benefits are expected to continue to command a considerable price premium.
• Whilst there is increasing policy certainty, some level of uncertainty remains with respect to future ACCU prices, which could be impacted by a number of factors on both the supply and demand sides, including:
• Supply side: impacts of changes to the ERF method development process, constrained supply of landfill and avoided deforestation projects, and the potential removal of ACCUs by the government
• Demand side: ongoing demand by net zero organisations, the announced changes to the Safeguard Mechanism, the evolution of Safeguard Crediting Mechanism and ultimately the position of Safeguard facilities as they seek to mitigate liability and any preference by Climate Active organisations to continue to purchase ACCUs (to ensure credibility)
• Management of ACCU price risk through a robust offset procurement and market engagement strategy will continue to be important as organisations seek to manage their future liability (such as Safeguard facilities) and net zero commitments.

Buyers also need to remember that there are growing market expectations for genuine emissions abatement to be prioritised over the purchase of offsets; and for offsets to be reserved for hard to abate ‘residual’ emissions. Furthermore, organisations are being encouraged to pivot towards ‘removal offsets’ as opposed to ‘emissions avoidance-based offsets’, based on the IPCC’s recent findings that removal offsets are critical for achieving net zero by 2050[3].

Energetics will keep you informed with further advice as more detail about the proposed changes to carbon credit scheme emerge.