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Feature: Australia carbon market under pressure to restore investor confidence

Highlights

Integrity concerns impact carbon credit suppliers and buyers

Calls for measures to boost credibility of regulatory mechanisms

Claims of faulty methods, shortcomings being investigated: minister

  • Author
  • Ivy Yin
  • Editor
  • Kshitiz Goliya
  • Commodity
  • Energy Transition
  • Topic
  • Energy Transition Environment and Sustainability

Australia's carbon market will have to take strong measures to restore investor confidence amid recent allegations by a group of academic researchers that projects underpinning carbon credit supply were flawed and failed to reduce emissions as per claims, according to speakers at a recent industry forum.

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The allegations that surfaced in March have raised concerns about the integrity of the Australian carbon market and made investors in Australian Carbon Credit Units, or ACCUs, jittery. Market participants said lack of credibility impacted farmers and project developers on the supply side, as well as corporate buyers, carbon traders, and hedge funds on the demand side.

"We've seen that the lack of trust and the lack of integrity impeded the growth of the market over the last 20 years," Mark Kenber, Co-Executive Director of think tank Voluntary Carbon Market Integrity Initiative, or VCMI, said at the 6th Carbon Farming Industry Forum held recently.

"If we don't want to repeat those same mistakes, we need to embrace full market governance, transparency, supply and demand side integrity," Kenber said.

"The lack of ability to scrutinize that market has discouraged buyers already in the market or looking to enter the market from doing so, thinking of the reputational risk of being associated with a market that has all these horror stories posted about it," Kenber added.

Government defense

The controversial research by Andrew Macintosh and Don Butler, professors with the Australian National University, pointed out flaws in the system such as over-estimating emission abatements, and enrolling projects with "no additionality" which means emission reductions that would have happened even without financing from the carbon market.

The research highlighted "Human-induced Regeneration (HIR)" projects which allow landholders to earn ACCUs for the regeneration of native forests. It said the total forest area under these projects had barely increased and the actual emission abatement was much lower than the carbon credits issued.

HIR is the most popular project type in Australia, and as of November 2021 accounted for 32% of all registered projects, 27% of all issued ACCUs, and more than 50% of all ACCUs contracted through the government purchasing scheme, the research said.

"I believe these criticisms are completely unfounded," Angus Taylor, Minister for Industry, Energy and Emissions Reduction, said in response to the allegations, at the forum organized by the Carbon Market Institute, an industry body.

He said the Clean Energy Regulator and Emissions Reduction Assurance Committee had looked into the first round of claims made by the academics and other groups, engaged substantively with them, and found those claims were not supported by evidence.

Regulators have started looking into the new claims, and the outcome of the investigations will be released publicly once complete, the minister said.

Shayleen Thompson, executive general manager with Clean Energy Regulator, or CER, which oversees the Australian carbon market, defended existing mechanisms, saying people are required to provide evidence of land use and new technologies are being rolled out to improve efficiency.

Trust and integrity

"Ultimately, the carbon market success is tied to its integrity, so we need the federal government to show it thoroughly investigated and addressed or allayed concerns around the market's integrity, in order for farmers to have the confidence to get involved," Fiona Davis, CEO of non-profit organization Farmers for Climate Action, said at the forum.

Australia's Carbon Farming Initiative, or CFI, is a voluntary carbon offsets scheme and a component of the Emissions Reduction Fund, or ERF, that provide incentives for businesses to reduce emissions by purchasing ACCUs.

Under CFI, landowners can earn carbon credits by changing how the land is used to store carbon or reduce emissions. However, such projects require investment and certainty that the carbon offsets scheme will generate returns.

"Everybody participating in the market depends on it functioning smoothly and reliably, and those coming into the carbon market from the financial sector will be more than familiar with the damage that misconduct can cause, especially when standards of behavior are expected to be very high because trust is relied upon by those that have a lower level of knowledge about that particular market," Virginia Malley, review panel chair of Australian Carbon Industry Code of Conduct, said at the forum.

"They include the retail clients and the less experienced clients as well. And I'm sure you'll agree that we have that type of clients coming into the carbon market. In fact, we're dependent upon that," she added.

Transparency at core

Lack of transparency is a common issue with voluntary carbon markets worldwide, and speakers said carbon registries with important information tend to be inaccessible to the public at a time when disseminating information is critical to the carbon industry's growth.

"We need to have real radical transparency end to end about how the market is working and what it is doing," VCMI's Kenber said.

He said transparency is needed not just for the carbon credits, specifications and projects, but also the share of proceeds, investors, and the impact on the local community.

The consequence of limited information sharing is that academics, journalists, and NGOs will "find examples of bad behavior, and that will tarnish the market as a whole," Kenber added.