Business goes for price over integrity in the Australian carbon market

Australia’s carbon trading market appears to be thriving, with voluntary cancellations of carbon offsets under the Australian National Registry of Emissions Units (ANREU) surpassing 2021 levels by around 15 per cent.

But the trend is buoyed by a tendency by corporations to chose cheaper credits over those of higher quality, according to a new market update by RepuTex advisory.

RepuTex says the uptick in voluntary activity reflects the growing volume of net-zero commitments among Australian companies, with many companies purchasing carbon offsets to meet their carbon neutrality commitments.

According to the report, 14.8 million units have been surrendered over the 2022 calendar year with one month still to go. A carbon credit can only be claimed once it has been surrendered by the original holder and cancelled on the carbon market.

But all carbon credits are not created equal, and the new report finds that more than 90% of all voluntary cancellations in the past year have been in the form of low-cost credits called Certified Emissions Reductions (CERs), indicating that most companies are still favouring price over integrity.

A question-mark over integrity

Carbon credits, representing units of CO2 either abated or sequestered, have been called into question, both because they can incentivise companies to continue polluting and simply pay-off their own emissions, and because not all credits are considered legitimate representations of carbon abated.

CERs, which came into being under the old Kyoto Protocol framework known as the Clean Development Mechanism (CDM), were designed to enable developed countries to invest more in carbon credits in less developed countries, addressing both climate and equity goals.

But according to RepuTex, the CDM is plagued by an issue of oversupply and relaxed rules.

As a result, CERs are now significantly low-cost, often as low as $US1 to $US2 per tonne, reflecting a lack of market confidence in their abatement value. Despite this, international CERs are still eligible under the Australian Government’s Climate Active certification scheme.

Cheap and questionable

The overwhelming demand for lower-quality, low-cost credits comes despite a massive increase in stakeholder scrutiny, in part driven by whistle-blower Andrew MacIntosh’s explosive claims, substantiated in a series of papers in March this year, that the ERF is wasting billions of dollars of taxpayer money on junk credits.

“People are getting ACCUs [Australian Carbon Credit Units] for not clearing forests that were never going to be cleared,” MacIntosh said at the time.

“They are getting credits for growing trees that are already there; they are getting credits for growing forests in places that will never sustain permanent forests; and they are getting credits for operating electricity generators at large landfills that would have operated anyway.”

Nonetheless, companies are overwhelmingly opting for the lowest cost projects from the international carbon market.

And, while the report notes that price does not always reflect quality, many of those lowest-cost projects are subject to additionality concerns – doubts that the carbon supposedly abated would have been generated in the first place, since the projects would likely have been economically viable even without a carbon revenue stream.

The low cost of some of these CERs, hovering around $US1.50 per tonne, is in stark comparison to higher quality carbon removal and sequestration projects, which generate credits valued at around $US10-15 per tonne via large voluntary registries.

A flight to quality?

Despite these concerns, RepuTex says that as the market evolves, corporations are expected to invest more heavily in higher-quality credits, particularly as the public becomes more climate-savvy.

“Stakeholder and regulatory pressure is expected to continue to support a ‘flight to quality’,” the company said, “with voluntary buyers expected to increasingly source high quality offsets as they seek to avoid greenwashing risks.”

This trend is observed in international markets, where many corporate voluntary buyers source nature-based removal and sequestration projects in the place of avoidance projects, to strengthen their reputation.