Australia: Carbon Markets: The International and Domestic State of Play

Published on Dec 21, 2021

Recent developments, both international and domestic, are creating new opportunities for carbon markets to provide a supporting role in achieving emission reduction targets. These developments also reflect an ever-increasing interest in carbon markets, and the role they can play in assisting organizations to meet their emission reduction objectives.

In the international sphere, the conclusion of COP26 brought with it developments in the framework governing carbon markets. On the domestic front, 2021 has seen strong growth in demand for Australian Carbon Credit Units (ACCUs).

Carbon credit trading provides one answer to the question: How do we deal with hard-to-abate sectors of the economy? The clear movement towards more robust, transparent, and effective carbon trading mechanisms presents an opportunity for businesses and governments to meet their emission reduction targets.

We provide an update on the state of play in both international and domestic carbon markets below.

International carbon markets

COP26

Part of the framework for international carbon markets has been solidified following the conclusion of COP26. Parties were able to agree on a range of rules relating to the operation of Article 6 of the Paris Agreement. Article 6 has been described by the Clean Energy Regulator as the 'engine of international cooperation' in the global effort to reduce emissions.

The key outcomes for carbon markets from COP26 were:

  • The now resolved issue of old or existing certified emissions reductions (CERs): CERs generated under the Kyoto Protocol's Clean Development Mechanism (CDM) may still contribute towards a country's first Nationally Determined Contribution (NDC), provided the offset project was registered after 1 January 2013. Any currently operating CDM projects are only permitted to generate CERs until 2025.
  • The creation of rules relating to double counting of carbon credit units: The rules provide that a host country must authorize new Paris-era carbon credit units for internal purposes to meet its NDC, or for an external non-NDC related international mitigation purpose. Further, the Article 6 mechanism will allow businesses to invest in international carbon credit units. It will also allow them to communicate whether the purchased credits contribute to the national NDC or to separate emission reduction targets for individual corporate purposes.
  • Post-Paris carbon credits, or Article 6.4 credits, will be managed by a registry: The registry is to be overseen by a supervisory body within the United Nations Framework Convention on Climate Change. The form of interaction between the Article 6.4 registry, other international registries, and domestic registries will be discussed further at COP27.
  • The agreement for a fixed tariff on emissions trading: To generate funding for climate adaptation in developing countries. Negotiators agreed that this will be set at 5% of all emissions reductions created under Article 6.4, which will be levied at the point of issuance. This tariff will only apply to the trade of voluntary emissions credits, but not to national transfers under Article 6.2.
  • The increased recognition and integration of co-benefits: Parties noted the widespread support for carbon markets to contribute to additional environmental benefits, alongside reducing carbon emissions. Co-benefits include climate mitigation, adaptation, cultural preservation, and other sustainable development initiatives. In an Australian context, the Clean Energy Regulator has stated in its Quarterly Carbon Market Report that it: 'has observed the market is starting to distinguish different types of offset projects and is willing to pay a premium for co-benefits.'

During the COP26 conference, Australia also welcomed Fiji and Papua New Guinea as international partners in Australia’s recently established Indo-Pacific Carbon Offsets Scheme. The Scheme is modeled on Australia’s Emissions Reduction Fund, and is designed to develop a high-integrity carbon offset scheme in the Indo-Pacific region.

Taskforce on Scaling Voluntary Carbon Market

The Taskforce on Scaling Voluntary Carbon Markets (Taskforce) is a private sector-led initiative, aimed at scaling an effective voluntary carbon market.

There are over 250 member institutions of the Taskforce, which is chaired by Bill Winters, Group Chief Executive at Standard Chartered, and sponsored by the Institute of International Finance. Broadly, the Taskforce has focused on making carbon offsets more investible by standardizing the market.

The Taskforce has now published its Phase II Report, containing proposals for the future framework conditions for privately trading voluntary emission reduction certificates. Among other things, the report proposes the establishment of an independent umbrella governance body, with a mandate to:

  • implement, host and curate a set of Core Carbon Principles (CCPs);
  • provide oversight to standard setting organizations on adherence to CCPs, and participant eligibility; and
  • coordinate the work of, and manage the interlinkages between, individual governance bodies.

On 21 September 2021, the Taskforce confirmed the composition of the new governance body. The confirmed individuals will sit within a Board of Directors, Executive Secretariat, Expert Panel Co-Chairs, and Senior Advisory Council.

Domestic carbon markets

Supply and demand for carbon credits

On the domestic front, 2021 has seen a surge in carbon trading activity. The Clean Energy Regulator's latest Quarterly Carbon Market Report for September 2021 records a 25% increase in the supply of ACCUs on 2020 levels. This supply is now likely to exceed 2021 expectations of 17 million units. The total number of Australian carbon unit and certificate cancellations for 2021 also showed an increase on 2020 levels by 24% at the end of Q3.

Increased demand is being reflected in a jump in the carbon price, with forward trades for delivery in February 2022 recently reaching a price of $45.25. This is compared to an ACCU price a year ago at $16.50 per ACCU.

Australian Carbon Exchange

The Clean Energy Regulator is making headway in creating an Australian Carbon Exchange. The exchange will involve ACCUs credited from approved Emissions Reduction Fund (ERF) projects being traded among market participants, in a similar trading format to that of a stock exchange. The creation of an online carbon exchange is aimed at supporting Australian individuals and businesses to purchase, clear, and settle ACCUs. It is hoped that this initiative will increase market transparency, traceability, and further incentivize emission reductions. The project responds to a key recommendation from the 2020 King Review, which took a deep dive into various sources of low cost abatement.

The Clean Energy Regulator has gone to market to assess proposals for the operation of the exchange, with a predicted launch date in 2023.

Value realization and risk mitigation

Carbon offsetting can assist organizations to deliver on their carbon-related ambitions, particularly for hard-to-abate operational emissions. It can also provide temporary or transitional capacity while more permanent structural abatement options are being considered and implemented.

The increasing internationalization of carbon markets is a positive development from COP26. However, managing the issues associated with permeance and additionality for carbon offset projects remain key to achieving credible and robust outcomes. This is particularly the case until the Article 6 resolutions resulting from COP26 become operationalized.

An effective and scalable carbon offset due diligence process, which is tailored to an organization's objectives and is designed to achieve the right balance between managing risk and moving quickly on opportunities, is critical to realizing value in international and domestic carbon markets.

Key takeaways for governments and businesses

  • Organizations should consider whether, and to what extent, carbon offsetting should play a role in achieving their emission reduction strategies.
  • As international carbon markets open, and a greater range of offset projects are on the table, organizations should continue to assess key issues such as:
    • offsets through an appropriate lens of additionality and permeance; and
    • the veracity of claimed co-benefits.

For advice in relation to carbon markets and assistance with carbon trading opportunities, please contact our team.

Contacts

Joshua Dellios

Partner, Melbourne

Sarah Barker

Partner and Head of Climate Risk Governance, Melbourne

Joel Reid

Partner, Brisbane