Independent analysis by The Australian National University and University of New South Wales suggests that a substantial proportion of carbon credits issued under Australia’s carbon offset scheme do not represent real and additional emission reductions.

The experience in Australia is not unique. Academic research on other carbon offset schemes suggests most of them have similar integrity problems. In many cases, there is a high risk the credited abatement does not represent real and/or additional emission reductions.

Other integrity issues associated with carbon offset schemes include non-permeance (where carbon sequestered in vegetation and soils is released back into the atmosphere), leakage (where reductions achieved on the project site are negated by emission increases elsewhere) and a lack of transparency.

The details of carbon offset schemes can be complex, but the significance of the integrity problems is not. If the problems are not fixed, it will undermine the efforts to reduce greenhouse gas emissions and decarbonise the economy. Low integrity carbon credits can also distort markets by giving consumers and investors a false impression about the efforts companies are making to contribute to net zero targets.

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What are carbon credits?

Australian carbon credit units (ACCUs) are tradable financial instruments. Each ACCU is supposed to represent 1 tonne of real and additional abatement of greenhouse gas emissions from registered offset projects.

Australia’s carbon offset scheme is administered by the Clean Energy Regulator.

Under the scheme, landholders, energy users and other facility operators can register projects that avoid emissions or sequester carbon dioxide (CO₂) in trees, soils or geological formations. Proponents who undertake offset projects in accordance with a set of rules, known as methods, are granted ACCUs.

ACCUs can be sold to facilities with emission reduction obligations under the Australian Government’s Safeguard Mechanism to offset their emissions. ACCUs can also be sold to the Clean Energy Regulator, who purchases ACCUs on behalf of the Australian Government, and to companies and individuals wanting to voluntarily offset their emissions (e.g. to support ‘carbon neutrality’ or ‘net zero’ claims).

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What do high integrity carbon offset projects look like?

High integrity carbon offset projects generate real and additional greenhouse gas abatement.

‘Real’ means the projects must generate an actual reduction in emissions or increase in sequestration that is directly attributable to the project activities.

‘Additional’ means the emission reductions, or increase in sequestration, generated by the project would not otherwise occur, without the incentive provided by the offset scheme.

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Why is it important?

Australia’s carbon offset scheme is a central piece of the Australian Government’s climate policy. It interacts with the Safeguard Mechanism, which is intended to be a key mechanism for reducing Australia’s emissions and achieving its climate change mitigation targets (43% reduction by 2030 and net zero by 2050).

Under the ‘enhanced’ Safeguard Mechanism, approximately 215 large polluting facilities will be subject to mandatory emission limits (called ‘baselines’) based on the emissions-intensity of their operations. These baselines will decline over time, with the intent of incentivising emission reductions.

Facilities covered by the Safeguard Mechanism will be able to meet their baselines by cutting onsite emissions or buying and surrendering either:

• Safeguard Mechanism Credits – a form of emission permit issued to covered facilities if their emissions are below their baselines; or
• ACCUs – offsets.

For many of the covered facilities, it is likely to be difficult and expensive to directly reduce their onsite emissions, at least in the short- to medium-term. Due to this, a significant number of facilities are expected to rely heavily on ACCUs to meet their compliance obligations – effectively paying someone else to reduce their emissions, where the costs of reducing emissions are lower.

There are three main implications if the ACCUs do not represent real and additional abatement.

• If low integrity ACCUs are used by facilities covered by the Safeguard Mechanism, it will result in an increase in greenhouse gas emissions. ACCUs allow facilities covered by the Safeguard Mechanism to increase their emissions above their baselines. If the ACCUs do not represent real and additional abatement, there will be an increase in emissions from covered facilities but no offsetting emission reduction elsewhere. The net effect will be to increase emissions and thereby undermine Australia’s ability to achieve its emission reduction targets.
• If low integrity ACCUs are purchased by the Clean Energy Regulator and retired, it is a waste of public money – the proponents are being paid for carbon abatement services they have not provided.
• If low integrity ACCUs are used by private individuals and entities to meet voluntary carbon neutrality goals, emissions will be higher than they otherwise would be if the credits had integrity. It can also lead to consumers and investors being misled about the greenhouse credentials of the goods and services they buy and the companies they invest in.

Another adverse impact of low integrity ACCUs is they can crowd out high integrity offset projects (e.g. environmental plantings and other reforestation projects in previously cleared areas). In simple terms, low integrity ACCUs are cheap to produce compared to high integrity ACCUs. This draws resources towards low integrity projects because they provide higher returns. The presence of large numbers of low integrity ACCUs in the market also depresses the ACCU price, reducing the viability of high integrity projects.