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Australia to limit international credits for carbon targets

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The Australian federal government’s proposal to restrict its largest emitters from using international carbon credits to achieve emissions reduction goals has been met with opposition from industry and markets.

  • Australia plans to ban the use of international carbon credits by the country’s largest emitters to meet emissions goals in the proposed safeguard mechanism.
  • The government’s stated intention is to encourage the development of domestic carbon offset projects.
  • Criticisms of the domestic carbon market may force changes before the proposal becomes law in 2022-23.

The new rules would limit the use of international credits and are intended to drive investment in Australian carbon credit generating projects. There is concern that reliance on a nascent domestic credits market could put Australian industrials at a competitive disadvantage.

Pushing back, heavy polluting industries have requested economic aid and more gradual emissions reduction targets, while critics of the existing Australian carbon credit market argue that adopting international standards would help improve integrity and competitiveness.

Tackling the largest emitters via the safeguard mechanism 

Australia’s safeguard mechanism (SGM) limits the amount of greenhouse gas emissions by the country’s heaviest polluters, including mining, oil and gas, transport, waste and manufacturing companies.

The legislation has been in place since 2016, and applies to all facilities that emit more than 100,000 tons of Scope 1 emissions per year. According to government estimates, the 215 large industrial facilities covered by the SGM accounted for 28% of Australia’s national emissions in 2020-21.

Any facility that exceeds its emissions limit, or baseline, will be required to purchase Australian Carbon Credit Units (ACCUs), which equate to 1 ton of CO2 that has been stored or avoided.

The SGM operates on a production-adjusted, or emissions intensity, baseline which is favoured by industry, but has been criticised by climate action groups for being a moving target. It calculates net emissions levels as sum of the covered Scope 1 emissions from a facility plus the difference between ACCUs issued for abatement activities and ACCUs surrendered for the facility. 

To meet Australia’s goal of reducing national emissions by 43% by 2030, from 2005 levels, the baseline for heavy emitters would need to fall by 27%, driving corporate interest in use of carbon credits.

The proposal to disallow using international credits implies a robust domestic carbon market with well established transparency and trust standards.

Protecting heavy emitters from competitive disadvantage 

The goal of the SGM is to help Australia reach its net zero emissions by 2050, and provide assistance to emissions-intensive, trade-exposed (EITE) facilities in ways that ensures they don’t suffer a competitive disadvantage, while also preventing “carbon leakage” overseas.

The most recent consultation by the government was on disallowing the use of international credits to meet the baseline, as well as gradually reducing the baseline over time so that heavy emitters reduce their actual Scope 1 emissions. This will critical in meeting the country’s net zero goal.

In response to the consultation, heavy emitters like resources firm BHP Billiton (ASX:BHP) and independent oil and gas producer Woodside Energy (LON:WDS) have asked for economic support for their decarbonisation efforts to maintain their competitive advantage.

Woodside believes the use of international credits could be aligned with Australian compliance rules. It says that including them would benefit the economy, by increasing liquidity in the carbon market, which would help reduce the cost of emissions reduction. 

As exporters, Woodside also says that the use of international offsets could meet customer requirements, while also complying with Australia’s regulations. It points to the Japanese and Korean compliance markets as models for using international units in national compliance schemes.  

The integrity of the ACCU market and the credits themselves, have also been criticised by market participants and researchers alike, which makes disallowing international credits that much more confusing.

Criticism of ACCUs may require a rethink by the regulator

In its submission to an independent review of the ACCU marketplace, market participant Greencollar cited concerns over a lack of transparency in the credit issuance process, and concerns over governance of the Emissions Reduction Fund (ERF), the mechanism that operates the ACCU marketplace.

One of the criticisms of the domestic market has been about the integrity of what the ERF calls human-induced regeneration (HIR) methodologies. The HIR method allows landholders to earn ACCUs for regenerating native forests by changing land management practices.

According to the clean energy regulator, which manages the ERF, practices such as grazing by livestock or feral animals, weeds or mechanical clearing suppresses natural regrowth. The idea is that removing such “suppressors” will facilitate the regeneration of vegetation.

As the debate continues, Greencollar has called for Australia to adopt international best practices from the likes of Verra and Gold Standard in improving its system of credit issuance. 

Managing carbon credits in isolation raises questions 

By limiting the use of international credits, Australia faces a series of interconnected challenges: how can it protect the global competitive advantage of its heavy emitters if they are only allowed access to domestic credits? At the same time, questions about the integrity of the domestic market undercuts the credibility of its net zero goals.

The quality of credits used to establish decarbonisation goals and pathways may be a prerequisite for global partners doing business with Australian heavy industry. Net zero goals cannot be achieved in isolation.

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