Australia’s carbon credit mechanisms need reform and there are several factors making it a pressing concern, writes Ivy Yin, energy transition and carbon specialist at S&P Global Commodity Insights.
Carbon market architecture requires a compliance carbon pricing system that covers a nation’s most emission-intensive industries, as well as a marketplace offering high-quality carbon credits to voluntary buyers.
Australia has created both systems.
“We think we have a very complete carbon market architecture; more complete than any other country in the world in terms of the mechanisms in place,” said executive general manager of Australia’s Clean Energy Regulator, Mark Williamson, in a 2021 interview with S&P Global Commodity Insights.
Australia’s Safeguard Mechanism imposes compliance obligations on 215 industrial facilities across the metals, mining, oil and gas extraction, manufacturing, and waste sectors, representing 28 per cent of the nation’s emissions.
Domestically certified Australian Carbon Credit Units (ACCUs), open to both compliance and voluntary buyers, cover a variety of decarbonisation projects such as soil carbon sequestration, afforestation and reforestation, as well as carbon capture and storage.
These projects also claim to provide additional income for local farmers and preserve indigenous habitats.
Despite advances with both initiatives, developing the complete architecture into a trustworthy, mature and liquid marketplace for carbon remains an uphill journey for Australia.
The need for reform
There are several reasons why Australia’s carbon credit mechanisms need reform.
A key issue with the current compliance market design is the low baseline, under which the total emissions covered by the Safeguard Mechanism are too generous, and even exceed their actual emissions.
“Those baselines [for individual industrial facilities] add up to about 180 million tonnes within a year,” said Kath Rowley, the head of the Climate Change Division at Australia’s Department of Climate Change, Energy, the Environment and Water at the Australasian Emissions Reduction (AER) Summit in Sydney, in October 2022.
“The current total emissions are around 140 million tonnes so there is a lot of headroom in those baselines.”
Carbon Market Institute data shows total emissions from facilities under the Safeguard Mechanism increased by about four per cent between 2017 and 2021 rather than falling.
The ACCU methodology has also been challenged. In early 2022, a controversial study by the Australian National University’s Professor Andrew Macintosh and Professor Don Butler sparked a crisis of trust in Australia’s carbon market.
The research pinpointed issues with Human-induced Regeneration (HIR) projects, which allow landholders to earn ACCUs for the regeneration of native forests. It said the total forest area under these projects had barely increased and the actual emissions abatement was much lower than the carbon credits issued.
The research noted that HIR is the most popular project type in Australia, accounting for 32 per cent of all registered projects and 27 per cent of all issued ACCUs as of November 2021.
Market experts have also expressed concerns over outdated methodologies such as landfill gas projects that have been heavily used by the waste industry. The integrity of the ACCU market was questioned and the lack of credibility impacted farmers and project developers on the supply side, as well as corporate buyers, carbon traders and hedge funds on the demand side.
In July 2022, Minister for Climate Change and Energy Chris Bowen appointed an independent panel to review the ACCU system, which was completed in December.
The panel sought to update existing methodologies in line with new technologies, and considered new scientific data, according to chair Ian Chubb.
“I’m confident this review will lead to our carbon trading system operating at the highest level of integrity and standards well into the future,” said Minister Bowen at the AER Summit.
The global context
The Australian carbon market also needs to evolve in tandem with global decarbonisation efforts, and take into account the nation’s role as a leading global supplier of natural resources.
The Federal Government plans to introduce a specialised type of credits called Safeguard Credits that move the domestic compliance market closer to the formats in Europe and China, aimed specifically at reducing industrial emissions in the long-term by raising the price of carbon.
Implementing a compliance system requires a delicate balance between economic growth and decarbonisation because the most emission-intensive industries are usually the pillars of a nation’s GDP. Australia is no exception.
Tightening the baselines will mean significant increases in carbon prices, and ultimately costs of emissions will be reflected in commodity prices, passed on to domestic consumers and importers of Australian minerals and energy products.
While global carbon prices differ significantly, ACCUs are much cheaper than carbon prices in Europe. ACCUs are currently traded at around $32, while the EU’s ETS price was €75.94/mtCO2e (A$117.16/mtCO2e) in late November 2022.
The pricing of Safeguard Credits in Australia will need to take into account evolving policies such as the EU’s proposed carbon-border adjustment mechanism, which imposes a carbon tariff on imported commodities, mirroring the EU’s carbon prices to level the playing field for domestic companies.
The Australian Industry Group, representing more than 60,000 businesses, is calling for a similar measure.
But it is unclear how China, the largest importer of Australian raw commodities, will respond to cross-border carbon taxes. In late November 2022, China’s national carbon market compliance allowances were priced around Yuan 58.00/mtCO2e (A$12.04/mtCO2e).
True representation
In the whole carbon market framework, activists have argued the rights and interests of farming communities and Indigenous peoples have been under-represented.
For soil carbon projects, low awareness and poor communication has resulted in farmers becoming sceptical of carbon trading, and landowners being lured by unscrupulous middlemen. Such projects usually require significant investment and land space, and farmers need to thoroughly understand the impacts of altering land use.
Another concern comes from Indigenous communities that are unsure whether afforestation and reforestation projects will genuinely benefit them and the homeland.
“Indigenous peoples are concerned the popularity of nature-based solutions to ‘net’ residual emissions will result in a land grab by rich countries and companies to claim benefits associated with forests and force people to migrate,” S&P Global Ratings said in the report, “Mind the Gap: Pledges at COP26 Give Hope But Significant Shortfall Still Exists”.
At the AER Summit, delegates from Pacific Island nations complained about poor representation at international forums, with some saying it was the first time they had been invited by a developed country.
Cissy Gore-Birch, who has worked in the Aboriginal land management and community development sectors in Australia for more than a decade, was overcome with emotion onstage at the event while speaking about the role of Indigenous peoples in the carbon industry.
“What I have seen in the past 10 years getting involved with this is it just seems criminal that there are so many people out there wanting to take the money and give pittance to the people they are representing, especially in the Indigenous sector,” she said. “Let’s not repeat that in this carbon industry.”