Carbon market reform might not be perfect policy, but it will be effective

Photo credit: John Giles/PA Wire

Carbon market participants have now discovered what the federal government’s efforts to fight climate change will mean for them.

Last Monday, the much-anticipated Chubb review was released, giving certainty to ACCU integrity. Then, last Wednesday, the government told market participants how facility emission limits will be set and what measures will be on offer to help businesses manage transition risks and costs under the Safeguard Mechanism.

Firstly, the Chubb review (an independent science-based review of ACCU integrity) has clearly and firmly rejected claims that the market is deeply and fundamentally flawed.

As expected by most active participants in the industry, it has recommended some governance and transparency upgrades that will improve efficiency moving forward.

There should now be no doubt that ACCUs are indeed being provided for actions that are additional to business-as-usual efforts. A robust review process is a good thing, and this review is probably the best thing that could have happened for market integrity. Critics should respect its findings and allow markets to move on with confidence now.

The crediting changes are set out in the Safeguard paper (which provide details on the proposed new Safeguard credits) and in the Chubb review of Australian Carbon Credit Units (which has made 16 recommendations, all accepted in principle by the government).

Chubb’s recommendations will make it easier to establish new and bespoke ACCU-generating projects, and businesses should explore whether these changes will provide them with new opportunities.

In particular, Chubb’s recommendations will allow projects to be tailored to particular sites and circumstances (through proposed new modules that would sit under generic methods that establish rules for ACCU creation).

Last Wednesday, after a broad consultation process, the government released final details on proposed rules and regulations for the Safeguard Mechanism.

There were two important aspects the market was seeking clarity on – limit-setting, and transition support – as these will have major ramifications for business decarbonisation efforts.

The new approach to setting emission limits (known as baselines), described in the Safeguard position paper, will transform the policy from fluff to tough.

Most importantly, we now know the formula for setting facility-specific emission limits, as well as the annual decline rate (an average of 4.9%). This decline rate is material, and will certainly drive emissions reduction activity across all Safeguard-covered facilities.

The limit-setting formula also involves an elegant hybrid approach to calculating emissions intensity, which means that over the years out to 2030 the Safeguard will increasingly reward sites that emit less greenhouse gas than peers who are producing the same goods or commodities.

The Safeguard paper acknowledges that Safeguard credits – which will only have value among the pool of Safeguard large emitters – won’t necessarily be for actions that are additional.

But they will be for abatement actions and choices that are important, and that need to happen as fast as possible.

In any case, additionality doesn’t matter for Safeguard credits – all that matters is that the pool of facilities covered by the Safeguard achieve the total emission reductions required of them.

The headline component of measures to manage transition costs and risks faced by Safeguard facilities is the government’s undertaking to be ready to step in and sell them ACCUs if they need them under a proposed “cost containment measure”. While many have referred to this as a cap, it is best to think about this measure as a strategic reserve of ACCUs, which the government would use to reduce market volatility.

Under these measures, if necessary, the Government would sell ACCUs in its reserve to businesses in FY24 at a price of $75, proposed to rise by CPI plus 2% each year, to help constrain their exposure to high abatement costs.

That equates to a price of at least $100 by 2030, which is estimated to be above the cost of deploying most widely available abatement technologies. Importantly this means that it won’t dampen expenditure on in-house emissions reduction efforts.

Attention has so far focused on the ramifications for buyers of having a strategic reserve of ACCUs for available to them.

But it’s also worth noting that if the government is going to establish a strategic reserve it first needs to buy the ACCUs.

One potential purchasing strategy could be to buy ACCUs that have significant nature or social benefits – which would extract even more value from having a reserve and would align with government plans for a nature repair market.

In response to these multiple changes, the first task for all large emitters will be to review the carbon strategies they’ve developed that cover their in-house emissions reduction schedule and their credits procurement strategy. Those who haven’t yet prepared such a strategy now have greater certainty on how this should be done.

It is a safe bet that most existing plans will need reworking to accommodate the new measures – a process that might trigger a painful feeling of déjà vu for many businesses that have grown weary of endless policy shifts.

However, to those of us who are veterans of the years of twists and turns in Australia’s emissions reduction efforts this time feels different.

This might not be a perfect policy suite, but it’s definitely going to be effective, and it finally feels like we have a package that is going to last the distance.

Raphael Wood, Principal, Sustainability and Climate Change at Aurecon

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