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Australia’s Carbon Market Under Fire – Why We Shouldn’t Let It Burn

Australia’s carbon market, and the scheme that underpins it has come under fire, with claims, kicked off by a report penned by Prof. Andrew Macintosh, circulating that the Emissions Reduction Fund (ERF) is a sham and that credits issued are ‘hot air’; devoid of integrity and real impact. These allegations sit within a broader challenge arguing against the use of carbon credits or offsets altogether – the argument being that credits are a way for business to avoid the difficult task of decarbonisation.

Other organisations, notably the Carbon Market Institute (CMI), will in time respond to the scientific and regulatory allegations levelled against the Human-Induced Regeneration (HIR) and Landfill Gas Methods in particular, and by implication the ERF more generally. That work is already underway, but for those seeking answers now, what we offer here is an insight into our experience working under the ERF as advisors and auditors since its inception in 2011. We have asked our Managing Director, Matt Drum, a highly regarded Auditor, and one of the country’s most experienced Registered Greenhouse and Energy Auditors (RGEAs), to weigh in and provide his perspectives.

Following are our top three insights when it comes to offsets, from over a decade of working in the Australian carbon market.

Insights into Carbon Offsets and Australia’s Carbon Market

1. Carbon offsets play a key role in the decarbonisation journey and offsetting underpinned by a vibrant commercial market, is the only way to guarantee innovation and future supply. How organisations (and countries) use offsets however is critical.  

Prioritise emissions reductions:

The first key step for any organisation on the decarbonisation journey, wishing to pursue carbon neutrality and net zero, is to build a robust emissions reduction strategy. In other words, prioritise reducing your own emissions to minimise the need for offsets. If approached in this way, offset use is limited to balancing out those emissions that cannot be avoided altogether, or at least those that cannot be avoided at this point in time. An effective, mature market that values (and prices) carbon offsets and emissions reduction activities accordingly, will inevitably steer investment decisions towards expediting decarbonisation technology and innovation.

“You can’t offset your way out of trouble! It is very hard to predict the supply and price of offsets into the future. We’ve seen that in the Australian context as ACCUs have gone from $15 to $62 and back to $35 in around 24 months due to market forces and unforeseen regulatory intervention. Short to medium and even long-term emissions reduction activities are much easier to plan and implement with price certainty and many activities will actually reduce opex over time. Focus on emissions reduction first, and plan to reduce your reliance on offsetting over time.Matt Drum

2. Checks and balances exist to protect the integrity of the scheme and the credits created under it. One fundamental pillar to protecting the integrity of the scheme is audits.

The Australian offsetting scheme is actually world leading, our approach to reducing emissions is lagging:

Each carbon project under the ERF is subject to regular audits throughout the life of a project. These audits are conducted by an independent third party, such as Ndevr Environmental, and auditors under the scheme must meet rigorous independence and code of conduct requirements. The scope of audits is extensive, ranging from checks to ensure all relevant consents have been obtained (e.g. where native title exists) through to technical testing to provide assurance over the abatement claims by the project owner. We have audited a significant number of projects, including HIR projects, which have drawn the bulk of the current negative attention.

It must be noted however the audit regime frequency has been reduced since the inception of the ERF predecessor (the CFI) back in 2011. The CER, landholders, project developers and agents must carefully consider the balance between protecting scheme integrity and maximising expedience and profits whenever a proposition is put forward to reduce the frequency and scope of third-party audits.

Abatement testing in the context of these projects involves reviewing evidence of the implementation of required management activities, for example, mustering and sales records showing a reduction in livestock numbers, or invoices confirming the upgrade of infrastructure such as fencing to restrict movement of feral animals. It also involves GIS-based reviews of the vegetation on the property and changes in that vegetation over time, and the project owner’s technical compliance with the specific requirements of the Method for setting up and maintaining carbon estimation areas (those areas of the property that generate abatement). Our procedures often also involve field work to confirm on-ground conditions, and changes in those conditions over time, facilitate by GPS-based technology. Interviews with landholders and owners of the project, are the final piece of the puzzle.

Importantly the ERF requires HIR projects to meet regeneration milestone checks at least every five years throughout their 25-year lifecycle – compliance with this requirement is also audited and we are starting to see projects come up against those milestone assessments. These checks are designed to ensure that regeneration is occurring in all parts of the carbon estimation area, at progressively higher rates and progressively more granular levels as the project (and vegetation) matures. Areas that are not showing the requisite level of regeneration must be carved out of the project; and this will reflect in a reduction in the offsets that can be claimed.

‘With specific regard to human induced regeneration projects, which have come under the most fire, I am confident that over the life of the projects only genuine abatement will be rewarded with ACCUs. My experience gained digging deep into hundreds of HIR projects across NSW, QLD and WA does not match the recent statements made by Andrew McIntosh former Chair of ERAC.

As an auditor you can never say with absolute certainty that every single tonne of abatement over a vast project area is 100% true and correct for every annual report. You take a risk-based approach and apply materiality thresholds. There may be some over statements and in fact under statements from time to time. When we find misstatements under audit they must be corrected. However the general principles of methodologies (and estimating offsets in general) are that conservative estimates are used at all times. Conservative approaches to stratification, conservative approaches to calculating biomass in the project area and regions, and conservative issuance of ACCUs. The application of this principle provides an additional level of comfort.

Importantly the relatively recent introduction of the quantifiable regeneration assessments at 5, 10 and 15 years has been a vast improvement in the HIR Methodology, and has significantly reduced the risk of over crediting projects. If a project does not meet clear, quantifiable hurdles (e.g. stem count per hectare) then that area/s will be carved out and any over issuance of historic credits are netted out of future ACCU issuances.

In short, we must remember these projects have a 25-year crediting period, and they may not perform uniformly over that period as biosystems and weather systems all interact over vast areas under the chaos of nature. However from an auditor’s perspective I am confident that the appropriate checks and balances are in place to ensure only genuine abatement is awarded with ACCUs for HIR projects.

Rather than focussing our time and energy pulling apart the one climate policy that is actually achieving something, we should be addressing the fact there is no policy incentive for industry to actually reduce emissions. Our country’s direct emissions outside of the electricity sector continue to increase (see our Tracking 2 Degrees reports for details) and currently only private sector pressure from investors is driving climate action. In my opinion we should be addressing this glaring issue rather than tearing down a program that is achieving positive results for the climate and Australian landholders’. Matt Drum

Carbon abatement and sequestration is not the only benefit under the scheme

Co-benefits are many, real and becoming quantifiable:

Our work provides us with confidence in the scheme and the impact these projects can have not only in reducing emissions through sequestration of carbon in vegetation, but also improving biodiversity and delivering positive land-based outcomes that benefit wildlife, farmers, local communities and Australians at large.

For many farmers we have interviewed over the years, the income from carbon credits has enabled them to shift their agricultural operations to a more sustainable model. Instead of maximising herd size, often beyond sustainable levels in order to keep operations going, landholders are able to reduce their stock levels and work in a more sustainable manner with their land. Other projects, notable savanna burning projects, continue to have a massive positive social impact through involving Traditional Owners in burning programs and using the income generated through carbon credits to benefit those communities in various ways.

It should be remembered that there are also guidelines and best practice approaches that can, and do, exist outside the legislative framework to promote high-integrity projects. A good example here is the Oxford Principles for Net Zero Aligned Carbon Offsetting which present a new gold standard for offsetting that many organisations are embracing.

“Although we don’t actively quantify co-benefits from carbon projects they are certainly real and significant and we’ve seen them first hand during our field-work as auditors and advisors. Some of the social and cultural benefits I’ve seen come out of the Arnhem Land Fire Abatement (ALFA) projects for example are a real shining light. There are a number of developed and developing standards that are looking to better quantify and standardise the treatment of co-benefits. In particular the Aboriginal Carbon Foundation’s Co-benefits Verification Framework and Accounting for Nature (AFN) are two of note. We are working closely under the AFN program with the hope that once co-benefits are quantifiable and verifiable, their value will become tangible and similar to carbon, a market will develop that accelerates co-benefit investment and development.” Matt Drum  

From our long history of working with the ERF we wanted to weigh in with experience on why it’s worth preserving – and continuously improving. We encourage and welcome review and investigation of the ERF and the ways in which the integrity of Methods can be improved. This is vital for ensuring the scheme continues to deliver credible abatement that is aligned with shifts in industry and societal goals as a whole.

A wealth of information, including independent, peer-reviewed studies is also available for further reading and research and we’d recommend the HIR study and King Review.

For more information on carbon offsets strategy and audits, reach out to Michaela or Matt for more information or call 03 7035 1740.

*Image Credit: Arnhem Land Fire Abatement. Savanna Burning Method.

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