A brief history of carbon markets and offsetting in Australia

In recent years, carbon markets have evolved to become a vital component of a comprehensive corporate climate strategy. For companies navigating this landscape for the first time or looking to increase their climate commitments, understanding how to effectively integrate carbon credits into their broader climate action plan is crucial. We break it down below, providing an overview of where we started and where we’re going.

The early evolution of carbon markets in Australia

Carbon markets have played a significant role in the global and Australian efforts to mitigate climate change. In Australia, the journey began with the establishment of the Clean Development Mechanism (CDM) under the Kyoto Protocol, which allowed businesses to purchase carbon credits from developing countries to compensate for their emissions. This system laid the groundwork for future carbon markets within the United Nations system and for country and regional level emission trading schemes, but its design and execution involved compromises, and reforms were needed to improve methodologies and integrity.

Australia’s subsequent move to a cap-and-trade system with the Carbon Pricing Mechanism (CPM) starting in 2012 under the Gillard Labor government was another milestone, a system that required large polluters to pay for their emissions, complementing the Carbon Farming Act (CFA), a voluntary mechanism that allowed land and landfill owners to create tradable reductions or removals. Although short-lived in Australia due to volatile energy and climate political environment, the CPM represented an attempt to establish a price on carbon within Australia, sparking more businesses to engage with carbon markets.

Those few years under the CPM, were in fact, the only time in Australian history where emissions decreased meaningfully in absolute and relative terms (outside the reductions caused by economic shutdowns during the pandemic), providing a real-life case study for the effectiveness of carbon pricing as a policy instrument.

Voluntary action and the role of corporate Australia

In 2014, Australia shifted focus to the Emissions Reduction Fund (ERF) under the incoming Coalition government. Created as a government-administered and taxpayer funded mechanism for Australia to achieve its national emission reduction commitments, it also doubled up as voluntary avenue for businesses to participate in carbon markets and invest in Australian carbon projects on a voluntary basis. This ultimately led to the creation of the Australian Carbon Credit Units scheme (ACCUs), which further solidified the role of carbon credits in achieving national emissions reduction targets.

In addition to the ERF, the Safeguard Mechanism was introduced to prevent leakage of emissions amongst major emitters. Under the Safeguard Mechanism, large companies are required to keep their emissions within baseline limits, and if they exceed these limits, they must purchase carbon credits to offset the excess – at least in theory – in practice there were many loopholes.

Throughout this, many Australian corporates have gone above and beyond what was mandated, and reduced emissions voluntarily, by investing in reductions and removals through carbon projects here in Australia and overseas. This was enabled by the government’s ‘Climate Active Program’, which provided a framework for corporate emissions accounting, reductions, and offsetting to obtain ‘carbon neutral certification’ as a company or for a product or precinct.

While this was always designed as “entry-level” corporate climate action, it made a raft of organsiations in Australia measure their emissions, set themselves targets, and by the virtue of paying for offsets, gave them a defactor price on their carbon emissions during a decade in Australia where government ambition was low and compliance mechanisms were leaky and highly selective. Carbon neutrality, as in simply “measure and offset’, would no longer be considered best practice, and Climate Active is expected to evolve and reform once the dust of the 2025 Australian federal election has settled.

A new era of climate action

Today, carbon markets are more closely aligned with Nationally Determined Contributions (NDCs), which are national climate targets set under the Paris Agreement – a global treaty aimed at limiting global warming to 1.5°C. The NDC targets guide Australia’s overall climate goals, and carbon credits play a key role in helping businesses and industries contribute to reducing national emissions.

The evolution of carbon markets in Australia reflects both the country’s commitment to reducing emissions and the increasing need for high-quality, reliable credits to meet climate goals. As we look ahead, carbon markets are evolving into more dynamic, sophisticated systems. The integration of carbon credits into corporate strategies is no longer just about meeting regulatory requirements – it’s a vital element of a broader, more transparent approach to environmental, social, and governance (ESG) goals.

Our CEO, Michaela Morris, was recently featured on climate and sustainability podcast, Track Changes hosted by Murray Griffin, discussing a range of factors impacting carbon markets and the role of carbon credits on the global journey to net zero. Listen via YouTube below or via Apple Music and Spotify.