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Article 6. What does the future hold for carbon offsets?

Risk and Opportunities from the Paris Agreement’s Article 6

The Paris Agreement’s last puzzle piece, Article 6, will again be debated at the 2021 Conference of Parties (COP26) in Glasgow. It provides for the creation of an opt-in voluntary international carbon market, and while many are hoping that it will finally be resolved in Glasgow, it is imperative that its carbon trading rules are well-designed.

As proposed, Article 6 will effectively replace the Clean Development Mechanism of the Kyoto Protocol. This may cause a phase-out of the workhorse Kyoto era offsets, that trade well below Australian Carbon Credits Units (ACCUs), but which may not always meet contemporary accountability standards.

Significantly too for the Australian Government – Article 6 also includes a measure to avoid the double-counting of emissions reductions, meaning that countries couldn’t sell credits globally while also claiming those savings towards their Nationally Determined Contribution (NDC).

This could see the Australian government competing with international buyers for ACCUs with dramatic financial consequences; currently it freely claims the benefit when ACCUs are purchased and surrendered by private entities.

These and other elements of Article 6 have significant implications for both public and private sectors worldwide. If implemented, it could raise climate ambition around the world by rewarding real carbon savings and creating a viable path forward for hard to abate sectors. It could, however, also dramatically raise the price of Australian Carbon Credit Units (ACCUs) and precipitate a widespread phase-out of international Kyoto-era units, with significant implications for net-zero and carbon neutrality under Climate Active.

In the last 12 months, the ACCU spot price has more than doubled to over A$34; a price high by local Australian and Singaporean standards, but low globally. For comparison, prices in the EU market passed €61 in August this year (approx. A$95) and Canada’s carbon price will increase until reaching C$170 in 2030 (approx. A$185).

If adopted by Australia, it’s reasonable to expect that ACCUs will reach parity with these global benchmarks given their strong reputation and Australian backing. But whether the Australian government will choose to participate remains an open question for several reasons.

The anticipated significant ACCU price increases stemming from Australian participation will detrimentally impact the ability of Australian companies to meet their obligations under the Safeguard Mechanism and Climate Active. It also means the current policy of meeting climate targets by purchasing abatement under the ERF is much less viable or cost-effective.

Opting out of global trading though would mean our burgeoning offset industry will miss a significant revenue opportunity. Regional Australia in particular, would also forgo compelling secondary benefits that stem from nature-based offset projects including regional employment, biodiversity protection and salinity prevention.

Ultimately, the need for a robust global carbon trading framework will only grow as the world heads toward net zero. Article 6 is likely to be approved in the future if not at COP26, and that framework is likely to be eventually adopted by the Australian government.

To prepare, entities that rely on offsets should develop realistic pathways to structural decarbonisation that can be employed as offsets become more and more costly per unit. Project developers should also look at their long-term supply pipeline for projects, including projects that are only viable at significantly higher ACCU prices – this can include sourcing land now to revegetate when ACCU prices allow, something many organisations are actively exploring.

Ndevr Environmental has significant experience working with entities to reduce their reliance on ACCUs and carbon offsets more generally; and unpack viable pathways to ACCU creation from industrial and nature-based offset projects. Please get in touch if your organisation is seeking to improve your net zero strategy by reducing your reliance on offsets or understanding how to develop your own offset portfolio. environment@ndevrenvironmental.com.au

To learn more about Article 6 of the Paris Agreement, we recommend reading this thoroughly annotated version by Carbon Brief.

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