Net zero

The role and quality of carbon offsets remain under the spotlight

In light of market concerns about the environmental integrity of offsets, organisations are increasingly being asked to explain their use in the achievement of their decarbonisation goals, and to demonstrate that the offsets applied are credible to avoid accusations of greenwashing. This article discusses the market scrutiny we are seeing over the use and quality of offsets. This scrutiny is only expected to escalate, highlighting the importance of carbon ‘due diligence’ for organisations that require offsets in their climate transition.

The rigour of Australia’s Climate Active program is being challenged with respect to the prevalent use of offsets, including less credible international offsets

The Climate Active program, under which organisations can achieve carbon neutral certification, has been accused of greenwashing[1]. As well as concerns about the over use of offsets to achieve carbon neutrality (as opposed to emissions abatement), the eligibility of less credible offsets under the program, such as Certified Emissions Reductions (CER), has been identified as a key concern given their diminishing additionality.

In response, Climate Active, which has a set of requirements with respect to offset eligibility, including a minimum vintage year of 2012[2], has reiterated that its remit does not extend to assuring offset projects. Nor does it extend to the methods and selection of offsets - the methodology for which sits firmly with program participants.

Climate Active organisations will continue to have optionality with respect to offset types in the short term. However, with the government still considering recommendations from the Australian Climate Change Authority's review of international offsets[3], including for CERs to be phased out by 2025 and for the introduction of a rolling five-year vintage rule, a robust offset strategy is required to future proof these organisations from any reputational risks.

The role and use of offsets are also being scrutinised under regulatory regimes

The amendments to the Safeguard Mechanism, which are expected to drive considerable demand for ACCUs, include an “offset justification” obligation, whereby facilities relying on offsets to meet more than 30% of their emissions reductions are required to justify their reason for doing so to the Clean Energy Regulator. Further, there will be a freeze on issuing Human Induced Regeneration (HIR) project ACCUs (which have faced credibility concerns[4]) until they are subject to an independent audit.

Similarly, under the Western Australia EPA’s updated greenhouse gas (GHG) guideline[5] (the Guideline), in developing their GHG management plans for reaching net zero by 2050, project proponents need to clarify the role of offsets in achieving their abatement targets. The Guideline also requires proponents to consider the integrity of their offsets as well their practicality and availability. An expert opinion is required with respect to the GHG management plan’s offset component.

The implementation of the Core Carbon Principles could enhance buyer confidence

In March 2023, the Integrity Council for the Voluntary Carbon Market (ICVCM), after extensive market consultation, released its Core Carbon Principles (CCPs)[6], which include key elements to assess offset integrity such as additionality, permanence and independent third party verification. Together with its Assessment Framework, which proposes a process for assessing CCP-eligibility (at a program level such as Verra or Gold Standard) and determining how eligible carbon credits will be tagged, the CCPs' aim to define a global standard around voluntary carbon market credit quality.

Carbon offsets will receive the CCP label subject to both the carbon crediting program that issued them, and whether the project methodologies (e.g. Human Induced Regeneration) assessed by the Integrity Council meet the criteria for high climate, environmental and social integrity as set out in the CCPs and Assessment Framework. The ICVCM is expected to announce CCP-Eligible programs and CCP-Approved methods later this year.

International experience with the CCPs is also likely to shape the evolution of Australia’s Emissions Reduction Fund (ERF), in particular its Offset Integrity Standards (OIS), which was a recommendation from the recent independent review of Australia’s carbon markets[7].

Australian organisations should proceed with caution as they navigate the use of offsets

With heightened demand from Safeguard facilities and potential supply constraints with the phasing out of the avoided deforestation method and a degree of risk associated with HIR projects, corporate buyers relying solely on ACCUs face higher offsetting costs. At the same time, market scrutiny over the use and type of offsets is only expected to escalate.

In summary, Australian carbon offset buyers need to consider an optimum strategy that balances credibility, risk and costs.

Into the future, the CCP labelling rules will provide Australian buyers of voluntary international offsets with a higher degree of confidence regarding offset integrity. However, to avoid credibility risks, undertaking a due diligence exercise with respect to any banked offsets, which pre-date the CCPs, is recommended.

The evolution of CCPs could also have implications for buyers of ACCUs as, over time, some ERF methods may be deemed non-compatible with the CCPs, bringing into question their quality.

Energetics can help

Energetics has extensive experience in helping our clients navigate the complexities of engaging in carbon markets, mitigating material risks and capitalising on opportunities aligned with their broader sustainability values and objectives. We can support you with:

• Market intelligence and policy advice, including building foundational market knowledge, assessing existing carbon market mechanisms and advising on offset creation methods.

• ACCU price forecasts, including bespoke scenarios, using our propriety model.

• Offset strategy development, including an assessment of purchasing options, offset evaluation criteria development and market engagement.

• Offset due diligence, including rigorous review and assessment of ‘back books’ and upcoming purchases to ensure these offset are aligned with emerging market expectations around quality and credibility and to avoid any reputational risks.

• Carbon investment and risk management, including the assessment of low carbon transition opportunities in terms of carbon value, and developing shadow carbon prices.