Carbon credits and safeguards offsets and nature offsets – what you need to know

You’d be right in thinking there’s been plenty of talk about offsets in the last few weeks, but now the Albanese Government has in place the building blocks it believes will ensure Australia reaches its carbon reduction target.

So, what do you need to know?

After coming to power in May 2022, the new government entrenched a 43% carbon emissions target in law.

Before being elected, it promised – and has now completed – several reviews into laws and regulations designed to reduce carbon emissions.

Now, fresh legislation beckons for several key pillars of Australia’s carbon reduction effort: carbon credits, the safeguard mechanism and biodiversity regulation.

What’s the deal with carbon credits?

Australian Carbon Credit Unions – or ACCUs – are central to the nation’s carbon market. In principle, they provide an alternative form of carbon reduction: units which can be purchased by companies to offset their greenhouse gas emissions.

One carbon credit represents one tonne of carbon abatement via an emission reduction initiative or carbon sequestration.

If a company wanted to ‘remove’ one tonne of carbon from its balance sheet, it could either reduce its greenhouse gas output, or purchase a carbon credit from another company which did it for them.

The carbon offsets conundrum

Presently, there are dozens of ways entities can generate carbon credits for purchase, but three quarters of projects currently generating credits are in either avoided deforestation, human-induced regeneration of native forest and landfill gas.

Why did the new federal government review the current ACCU system?

In the lead up to the last federal election, Australian National University researchers led by Professor Andrew Macintosh found that, of these three primary credit generating opportunities, at least 70% were ‘low integrity’. Basically, they were projects that didn’t really offset carbon going into the atmosphere.

Further investigations from environmental not-for-profits the Australia Institute and Australian Conservation Foundation found one in every five carbon credits issued by the government didn’t represent actual greenhouse gas abatement.

They described these as ‘junk credits’ where abatement didn’t occur. An oft-cited example is a land-holder pledging not to fell native forest on their land, that was never intended to be removed in the first place.

Midway through 2022, newly-appointed Climate Change Minister Chris Bowen appointed Australia’s former Chief Scientist Ian Chubb to chair a review into ACCUs.

And what about the safeguard mechanism?

The safeguard mechanism monitors big industrial facilities (including factories, mines and smelters) that emit more than 100,000 tonnes of carbon equivalent each year. These account for more than a quarter of Australia’s greenhouse gas emissions.

The name effectively refers to a set threshold, designed to limit greenhouse gas emissions. This system is intertwined with the carbon credit scheme as, in theory, facility owners should purchase carbon credits to offset their excess emissions when they overshoot set safeguard limits.  

But environmental groups and policy observers noted the mechanism’s safeguards were such high ceilings that it was rare for facilities to actually exceed them.

Labor also pledged – and has now completed – a review into this mechanism.

What about the voluntary biodiversity credits?

Australia’s environment minister Tanya Plibersek has touted the prospect of a ‘Green Wall Street’ through nature-based offsets similar to carbon credits which would draw private investment to restore nature. In August, the government announced a biodiversity certificates scheme that would recognise “landholders who restore or manage local habitat”, granting credits that can be on-sold to others wishing to contribute to nature restoration.

However this is a voluntary scheme – at least at the moment – so unlike the safeguard mechanism, which requires credits to offset excess emissions, a destroyer of vegetation isn’t forced to buy a biodiversity credit. The jury is still out on how such a scheme would work for nature and endangered species protection.

It’s worth acknowledging that buying offsets for habitat restoration in, say, Western Australia, is probably not an appropriate compensation for clearing of an endemic species’ ecosystem on the other side of the country.

What have these reviews recommended, and what is the government going to do?

The Chubb Review into ACCUs made 16 recommendations – all have been accepted by Bowen.

Chiefly, the review has brushed aside suggestions the existing scheme lacks integrity, as criticised by Macintosh and his colleagues last year, finding the scheme includes “all the functions necessary for good governance”, but that separating the ACCU’s assurance, regulation and policy development should be undertaken by separate bodies.

It also calls for a new body that manages the carbon abatement objectives of the scheme, and also for more transparent data sharing.

The Federal Government will introduce safeguard mechanism reforms it says will deliver 205 million tonnes of carbon abatement by 2030, “equivalent to cutting emissions from Australia’s cars by two-thirds” in the same time.

That scheme will include flexible baselines that will rise and fall in line with production – the purpose is to reduce the intensity of those emissions, such that greenhouse gas output from safeguard facilities will decline 4.9 percent annually up to the end of the decade.

The government says companies may also access carbon credits ad infinitum to meet their new baselines and will cap the price on carbon credits at $75 to provide “stability and certainty” for industry.

There are still, however, criticisms

In an opinion piece, Macintosh called out the Chubb Review’s lack of detail and failure to address the key issues outlined in his research.

While future carbon credit projects will be tightened up, Macintosh remains concerned the review fails to outline how the government should treat existing initiatives.

He says that risks over 20 million credits being generated under existing rules, which could run the risk of generating more ‘junk’ abatement.

“I genuinely don’t know, how they [the panel] came to the conclusions, and that’s why I’m saying publicly, I’m bewildered,” Macintosh told Cosmos.

“For the credits on the existing [avoided deforestation] projects – there’s 63 of those projects registered – they are completed unaffected by the revocation of the method. Those projects will receive credits… all the way through to 2029/2030.

“What I’d like to see is those credits blocked from the government safeguard mechanism. Because they are, at the very least, of high risk, and that essentially been conceded by the panel.”

Critics of the existing system are concerned the continuation of existing projects runs the risk of companies that exceed their safeguard baselines buying false abatements: their purchased offsets might not actually exist.

While the ACF – which contributed to the exposure of false abatements last year – would rather see offset systems treated as a small part of the government’s carbon reduction effort, it does acknowledge an effective credit scheme has a role to play in reducing greenhouse gas emissions.

Its climate and energy program manager Gavan McFadzean shares Macintosh’s concerns about how the federal government will treat existing ACCU projects, and is wary safeguard reforms may not be enough for Australia to meet its recently legislated emissions reduction target.

“We reckon [safeguard reform] is the most important climate policy the government will release this term. It needs to deliver on Australia’s 2030 and 2050 targets and build in increased future ambition,” McFadzean says.

“While the government’s proposed redesign significantly improves on the Coalition’s version of the safeguard mechanism in several respects, it contains some serious flaws, including the decision to allow companies to use unlimited offsets and credits to meet their safeguard mechanism obligations. There’s a risk the safeguard mechanism will not be strong enough for Australia to meet its 43% by 2030 target.”

In contrast the Australian Industry Group’s CEO Innes Willox has welcomed the safeguard proposals from government.

“A core part of Australia’s climate balancing act is to build our competitiveness for the net zero emissions world that is coming without undermining our competitiveness in the messily transitioning world we operate in today,” Willox said in a statement. “The Government’s initial measures to help trade exposed facilities invest in their future and to moderate their potential costs will be helpful.”

Australia should aspire to better credits

Despite his criticisms of the existing scheme, Macintosh is hopeful the federal government will go further than the Chubb Review and reform the rules for existing ACCU projects.

“[Credits] absolutely can be [a good way to reduce carbon emissions] with a well-designed, well-administered scheme,” he says.

“But at the moment we don’t have that, and unfortunately the recommendations that have been made… don’t solve the major problem with the very large number of existing projects that have low integrity, and are generating large numbers of low integrity credits.

“I really hope that not only do we see some of the governance reforms that the review has recommended, implemented, but also that the government takes further steps to make sure the problems with existing private projects are fixed.”

The federal government will need to legislate its reforms, and the Greens – which hold the balance of power in the Senate – have indicated they will push the government to block new fossil fuel builds in their negotiations.

In the meantime, Macintosh says the public can look toward to how quickly the government overhauls the credit and safeguard systems as an indicator of their progress to reduce greenhouse gas emissions.

“It’s implementing what they put forward in the safeguard mechanism and then fixing the problems with the offsets.

“They have put forward a very good policy in the safeguard mechanism.

“The biggest hole in it, is the integrity of this carbon credit scheme. Fix that and you’re away.”