Carbon offsets and Australia’s Safeguard Mechanism

Facilities that are covered by the Safeguard Mechanism must ensure their ‘net emissions’ remain below prescribed emission limits, called ‘baselines’. Under the Safeguard Mechanism reforms, these baselines, which are based on emissions-intensity, will decline each year, with the aim of generating 205 million tonnes of emission reductions by 2030.

Under the scheme, a facility’s ‘net emissions’ are equal to its actual (scope 1) emissions, less any surrendered credits. These can either be Safeguard Mechanism Credits (SMCs) (a form of emission permit issued to covered facilities if their emissions are below their baselines) or Australian carbon credit units (ACCUs) (a type of offset). This means that, if a facility wants to increase its emissions above its baseline, it must surrender SMCs or ACCUs.

In theory, allowing covered facilities to surrender ACCUs to meet their obligations should reduce the economy-wide cost associated with meeting Australia’s emission reduction targets. However, for the scheme to work, the ACCUs must represent real and additional abatement. If they do not, they allow covered facilities to increase their emissions above their baseline, without there being an offsetting reduction in emissions elsewhere. This will reduce the emission reductions the Safeguard Mechanism is able to generate.  

To address these risks, the Australian Greens and a number of Independents argued for restrictions on the use of low integrity ACCUs. The Australian Government rejected these suggestions, ensuring covered facilities will have unfettered access to ACCUs to meet their obligations.

Claims have been made that the deal between the Government and Australian Greens over the Safeguard legislation has addressed the risks associated with low integrity ACCUs. These claims are largely unfounded. Unless further changes are made, low integrity offset projects will undermine the effectiveness of the Safeguard Mechanism.

Here, we fact-check some of the most widely disseminated claims about the amendments and promises made as part of the deal with the Australian Greens.

Claim 1: The new ‘hard cap’ on gross emissions means that facilities will not be able to use offsets to buy their way out of emissions reductions and/or that low integrity offsets won't have as significant an impact on the effectiveness of the scheme.

The hard cap refers to a requirement that rolling 5-year average gross emissions from covered facilities must decline over time. The legislation does not prescribe by how much they must decline, only that the five-year average must progressively fall. So, in the year 2028/29, the cap on gross emissions needs to be below the average of annual gross emissions over the period 2023/24 to 2027/28.

If gross emissions are likely to exceed the hard cap, it triggers a process whereby the Minister must consider and consult on changes to bring emissions down.

In addition to the hard cap on gross emissions, there are also prescribed targets for cumulative net emissions over the period 2021-22 to 2029-30 (1,233 MtCO2-e), and for annual emissions in 2030 (100 MtCO2-e) and 2050 (MtCO2-e).  

These caps largely reflect what the Government had already announced and they are unlikely to materially alter emission outcomes or the extent to which covered facilities rely on offsets.

Most notably, the hard cap on gross emissions is unlikely to ever come into effect and truly cap emissions. This is because the cap is too high to matter. Click here for more information.

In addition, as a matter of law, the caps on gross and net emissions are process requirements, which leave the Government with leeway in how it responds in the event it appears the caps may be breached.

The same applies to the part of the Government-Greens deal that requires each facility to justify their use of offsets if they account for more than 30 percent of each facility’s baseline emissions reductions. There is no requirement for the Minister to do anything in relation to this information.

Due to all this, it is false to claim that low integrity credits won't now have as significant an impact upon the scheme's effectiveness in reducing emissions. Neither the gross or net caps, or any other part of the Government-Greens deal changes the fact that only credits from projects that achieve real and additional abatement actually cancel out emissions from a facility.

Claim 2: The deal will significantly improve the integrity of ACCUs through a freeze on the purchase of HIR credits until an independent audit of these projects is completed.

The Independent Review of ACCUs recommended crediting to HIR projects be paused until projects demonstrate compliance with key method requirements. In the 2023-24 budget, the Government committed $5.9 million ‘to conduct audits of human induced regeneration projects’.  

Following the publication of the report of the Review, the Clean Energy Regulator paused crediting for a short period. As of June 2023, crediting of HIR projects had recommenced.

While crediting has recommenced, the Clean Energy Regulator has taken three measures in response to the recommendations of the Review and a direction issued by the Minister.

Measure 1

It has implemented a process whereby it will reassess the information provided by proponents on whether there was suppression of regeneration during the baseline period, and whether the project activities are likely to lead to regeneration of forest cover. In essence, this process involves the Regulator checking its previous administration of the method.

Measure 2

In May 2023, the Clean Energy Regulator announced that all HIR 'regeneration gateway checks', which occur at 5-yearly intervals, will now be subject to third-party audits, paid for by the Regulator.

The regeneration gateway checks occur at years 5, 10 and 15 and, in principle, are supposed to ensure that regeneration is progressing towards forest cover.

The gateway checks at years 5 and 10 are non-statutory and are undertaken against a set of guidelines published by the Regulator. The standards set under the guidelines for the 5- and 10-year gateway checks are lax, in that they can be satisfied solely on the basis of the presence of woody cover, even if the cover pre-dates the commencement of the project activities.  

  • The 5-year gateway check merely requires proponents to demonstrate, at 100 hectare scale, that canopy cover from woody vegetation that is 2m tall is equal to or greater than 7.5% in the relevant carbon estimation areas (CEAs) (either that or there has been a 5% increase in canopy cover over 5 years at 100 ha scale).
  • The 10-year gateway check requires proponents to demonstrate, at 10 hectare scale, that canopy cover from woody vegetation that is 2m tall is equal to or greater than 10% (either that or there has been a 5% increase in canopy cover over 5 years at 10 ha scale).

The 15-year gateway is statutory and being prescribed under s 9AA of the CFI Rule. It requires 90% of CEAs to have achieved forest cover at year 15.

For older projects, the timeline runs from the date the projects were registered. For new projects, it runs from when regeneration is modelled to have commenced. The differential treatment was designed to give old projects more time to demonstrate regeneration.

Given the lax nature of the requirements for the 5- and 10-year gateway checks, the new taxpayer funded audits are unlikely to materially improve confidence in the performance of HIR projects. Indeed, due to the extent of pre-existing mature trees and shrubs included in CEAs, many of the CEAs are likely to have satisfied the requirements when the projects were first registered.

Measure 3

The Clean Energy Regulator has announced it will commission 'an independent expert to regularly review and report on HIR regeneration gateway checks in aggregate for publication'. This is supposed to 'provide greater transparency about the outcome of regeneration gateway checks across the HIR project portfolio'.

It appears unlikely these new processes will result in material improvements in the integrity of HIR projects. There are also concerns the Government will seek to get around the issues with HIR projects by allowing them to transition onto a proposed new method, known as the Integrated Farming Method.

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