Out-Law News 3 min. read

Australian Carbon Credit Units scheme needs further improvement, says review group

The Australian voluntary carbon reduction scheme is fundamentally well-designed but needs further improvement, an independent review group has said.

The Australian Federal Government appointed an independent group in July 2022 to review the “integrity” of the Australian Carbon Credit Unit (ACCU) scheme, which is the country’s credit system for voluntary carbon reduction measures. The group closed its consultation and published a review report (16-page/4.51MB PDF) some six months later, which includes recommendations to improve this system.

ACCUs are issued under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (the CFI Act). They are a financial tool granted to eligible energy efficiency, renewable energy generation and carbon storage projects which reduce greenhouse gas (GHG) emissions. One ACCU equates to the removal of one tonne of carbon dioxide equivalent of GHG.

The independent review group has made 16 recommendations in order to make sure the carbon crediting framework has integrity; to relax existing data sharing restrictions which go further than required for protecting private data information; to enable free, prior and informed consent; and to improve incentives for all emissions reduction options. The concept of free, prior and informed consent refers to obtaining the consent of Indigenous Peoples for any activities that take place on their land.

Australia has great potential to develop a lucrative carbon trading market and having a well-designed ACCU scheme will be fundamental for this

The group recommends that the Emissions Reduction Assurance Committee (ERAC) be re-established as the Carbon Abatement Integrity Committee (the CAIC), with new terms of reference. ERAC is the independent legal board established under the Carbon Credits (Carbon Farming Initiative) Act 2011 to oversee the integrity of the scheme. The new CAIC should have a membership of a full-time chair and at least four part time members and at least one member should be a First Nations Australian with relevant expertise, according to the review group.

The group recommends that the Offsets Integrity Standards (OIS) should be clearly defined and supplemented with ACCU Scheme Principles. OIS, which are based on international standards, ensure that carbon credits issued under the various methods applicable to Australia represent real reductions that can be counted in Australia's international emissions reduction obligations. The group recommends amending provisions in the governing legislation to maximise transparency, data access and sharing; and amending the CFI Act to remove the option to conditionally register ACCU projects on native title lands before getting consent.

The group said that carbon service providers and carbon market advisors including agents should be regulated. The suggestion states that the mandatory requirement for climate-active organisations to use at least 20% of their ACCUs to achieve their emission offsets should not be put into effect. This is because some organisations may choose or be forced to leave climate active organisations due to the high costs caused by this mandatory requirement. The group further notes that there is no practical or cheap alternative for all the links in the chain of ACCUs. Ultimately, these costs will be passed through to consumers, for whom cost of living inflation is their primary concern.

George Varma of Pinsent Masons said "The proposed recommendations to the ACCU scheme will drive greater confidence and participation in the carbon trading market and encourage more international participation. We also expect this to drive further investment in carbon offset projects as greater levels of transparency, clarity and certainty will give confidence to market participants about their return on investment and growth of an emerging industry. Australia has great potential to develop a lucrative carbon trading market and having a well-designed ACCU scheme will be fundamental for this.”   

Based on the report’s conclusions and recommendations on ACCUs, the National Australia Bank (NAB) recently has published a report (9-page/428KB PDF) on the current discount of ACCUs when compared to the global market. The report says the prices of ACCUs are still undervalued and “the growing demand for carbon offsets from Australian corporates is set to drive prices higher by 2025 if not earlier”.

According to the NAB’s report, under the existing government's proposed Safeguard Mechanism Reforms, it is expected the new 2030 baseline proposed by the Federal Government will require about 40Mt of abatement reductions per annum. By comparison, new contracted ACCU supply is estimated at about 80 million units by 2030, which is only equivalent to two years of abatement demand if managed with carbon offsets alone.

“What this means is that carbon farming or carbon sequestration projects under Australia’s Emissions Reduction Fund are likely to have more economic value between now and 2030, and should provide financiers with additional credit support for such projects if the risks are managed appropriately,” said Jeremy King of Pinsent Masons.

King went on to say: “The market for forward starting swaps in respect of ACCU prices needs to be accessed by project sponsors, using the Australian Financial Markets Association's Australian electricity and environmental products addenda as the base for negotiating such swaps. If financiers are taking mortgage security over real estate, they should be comfortable that the terms of any carbon service agreement that attaches to the land are fair and reasonable. Any carbon service provider appointed by the landowner should be approved by the financier as sufficiently technically skilled, reputable, and capable of maximising value for the ACCUs generated by the project.”

“And if the carbon service provider has contracted to take title to any ACCUs generated by the project, such transfer should be for sufficient value so as not to detract from the financier’s security. Finally, financiers should consider a tripartite deed with any carbon service provider to mitigate the impact of landowner insolvency on the continuing viability of the project,” he said. 

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