Integrity constitutes a fundamental aspect of a successful carbon market.[1] Purchasers of carbon credits will want to buy carbon credits with an assurance of the integrity of those credits, including that the credits:

  • represent real, additional emissions reductions or removals from a carbon offset project under a valid methodology; and,
  • reflect the delivery of co-benefits or broader environmental benefits as a result of the carrying out of the carbon offsets project.

However, there has been growing criticism of the integrity of different carbon markets. In Australia, a research group from the Australian National University claims that up to 80% of Australian Carbon Credit Units (ACCUs) issued to carbon offset projects under the human-induced regeneration, avoided deforestation and landfill gas Emissions Reduction Fund (ERF) methodologies made under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) lack integrity.[2]

Conscious of these concerns and criticisms, the recently elected Federal Labor Government has announced a review into the integrity of Australia’s carbon credit market.[3]

An independent panel (‘Panel’), led by former chief scientist, Professor Ian Chubb, will review the current Australian carbon credit scheme to “make sure it remains a strong and credible scheme supported by participants, purchasers and the broader community”.[4] The Panel is expected to provide its report, along with recommendations, to the Federal Government by 31 December 2022. Opportunities will be extended to any person to make submissions to the Panel on the review, but no specific deadlines or processes for public consultation have been announced.

What you need to know

Terms of reference

The terms of reference for the Panel broadly refer to the consideration of any matters relevant to the integrity of ACCUs and expressly require the Panel to evaluate and report on:

  • whether the governance of the scheme is appropriate (including whether the scheme’s governance structure is fit for purpose, whether the scheme’s settings / legislative requirements are appropriate to ensure good governance and confidence in scheme integrity, and whether the scheme has appropriate levels of transparency);
  • whether the methods by which ACCUs are generated meet the offsets integrity standards, including consideration of some of the methods that have recently been subject to particular criticism (i.e. human-induced regeneration, carbon capture and storage, avoided deforestation and landfill gas);
  • whether method development and review processes are effective; and
  • the broader impacts of activities incentivised under the framework, including opportunities to maximise non-carbon benefits of projects with positive outcomes for agriculture, biodiversity and the participation of First Nations people, and the requirements for use of ACCUs under Climate Active, Australia’s globally recognised carbon neutral certification scheme.

Potential implications

Any changes to the ERF scheme or methodologies made under the CFI Act for generating ACCUs will play out against the backdrop of a broader domestic and international dialogue on the integrity of carbon markets. We expect that examples of emerging best practices in other regulatory and voluntary carbon markets will inform the Panel’s ultimate findings and recommendations.

For example, the Voluntary Carbon Markets Integrity Initiative (a multi-stakeholder platform supported by the UK government) recently published its first iteration of the draft ‘Provisional Claims Code of Practice’ (‘Code’) which is intended to provide clear and transparent guidance on how companies can make claims about credits they buy and, in turn, ensure that public confidence in the integrity of voluntary carbon markets is not undermined.[5] The draft Code is currently open for consultation.

In addition, the Integrity Council for the Voluntary Market, has also recently announced that it will launch a “definitive set of global threshold standards that will set a global benchmark for carbon credit quality” in the coming months, which will “set new threshold standards for high-quality carbon credits, provide guidance on how to apply the [Core Carbon Principles (CPP)], and define what carbon-crediting programs and methodology types are CCP-eligible”.[6]

It will be important for project proponents, carbon farmers, carbon brokers / traders and ACCU purchasers involved in carbon offset projects reliant on the methodologies specifically called out in recent criticisms to make submissions to the Panel. This is particularly so if there is clear evidence to suggest that projects being delivered under those methodologies are delivering successful emission reduction / removal and environmental outcomes. In the absence of the criticised methods being robustly defended, there is a risk that those methods may be substantially reformed (potentially unnecessarily so) or potentially even revoked.

We would expect, in the ordinary course, there to be savings and transitional arrangements made for any methodologies that might be substantially reformed or revoked. This would minimise any practical disruption to carbon contracts on foot for ACCUs generated from such methodologies and enable ACCUs already generated, delivered or surrendered to remain unaffected. Nevertheless, it would be prudent for existing ACCU purchasers who have forward delivery carbon contracts in place to review the sufficiency of the change in law clauses that are contained in those contracts to deal with any reforms introduced by the Federal Government that impact on the ability of a carbon offset project to deliver ACCUs in the future.

It is also not clear, at this stage, whether the review into ACCU integrity may have implications for the timing and design of the Australian Carbon Exchange.[7] Having said that, it is worth observing that on 30 June 2022, the Clean Energy Regulator (CER) issued a Public Interest Certificate in relation to the Australian Carbon Exchange procurement process, which effectively means that the CER regards the development of the Exchange to be a time sensitive, critical procurement process which is in the public interest to not be suspended in the event of complaints being made about the process.[8]

In a context where the market for ACCUs is surging and there is increasing demand being placed on the Federal Government to develop and introduce a wider variety of ERF methodologies for generating ACCUs, any reform stemming from the ACCUs review will need to ensure that the Australian carbon market can continue to grow and meet such demand while ensuring the integrity of the scheme and the achievement of real and additional emission reduction or removal outcomes.