11 Jan 2023

Independent review of the Australian offset market and what it means for buyers of ACCUs

Climate Active minimum ACCU requirements to be rescinded. ACCU project-level data to be made publicly available. More abatement evidence to be required of project developers. ACCU market governance functions to be refreshed. New Integrity Committee to be established.

These are some of the recommendations of the independent Chubb Review into the integrity of the ACCU market, released earlier this week.

The Review is monumental – the first such policy review of the entire ACCU scheme. Its findings and sixteen recommendations provide refreshed assurance of the ACCU market. They signal confidence in the market. This is a welcome sign for buyers of ACCUs who have been seeking more certainty to make informed long-term purchasing decisions for ACCUs which are almost certain to grow in value as stricter compliance measures and voluntary action come into effect.

Whilst calls for an independent review originally stemmed from academic criticisms, it was also largely welcomed by market participants – such as TEM – who recognise that independent review and assurance is integral to good governance and continuous improvement. This is particularly the case in an evolving and rapidly maturing market.

Importantly, the headline finding of the review is that the Panel has determined the ACCU scheme to be sound. It has found that opacity in certain elements of the scheme is an underlying issue that needs to be addressed. Much of the existing concern about the scheme that has been circulated in the media has stemmed from this opacity. As a result, many recommendations from this Review intend to increase the scheme’s transparency, including relating to projects, governance, and decision-making.

TEM sees this as a fundamental pillar in the scheme’s overall credibility and effectiveness. Without sufficient transparency in the market, we cannot expect to have adequate continuous improvement.

Within the Review, areas to improve the scheme’s credibility and effectiveness pertain to four key themes:

  1. 1. Governance,
  2. 2. Methodologies,
  3. 3. Project impacts, and
  4. 4. The Climate Active program

Below, we provide our insights on the findings and recommendations of each of these four key themes.

1. Governance

Transparency of scheme information, and clarity of government agency roles, are key here.

These are critical in ensuring the scheme’s integrity, the integrity of its administrators, and allowing for greater public access to important information.

While there will be limits to public accessibility of information due to commercial sensitivities, creating transparency where possible will be of interest to corporate carbon credit purchasers. It will allow for renewed confidence in how the scheme is run, as well as creating additional accountability for scheme participants and administrators.

The Review also proposes a refresh of the process for developing new ACCU methods which entails a more industry-led approach. This will ensure the methods are fit for purpose, and that those methods have uptake by the industry. This is important for the scheme’s efficiency and impact. In turn, this is critical for ensuring that Australia’s decarbonisation efforts are streamlined, cost-effective and deliver maximum impact.

On government agency roles, it’s suggested that more segregation of the scheme’s governance would be beneficial in avoiding any conflicts or perceived conflicts of interest. This is equally as important for good governance as it is for providing credit purchasers with trust in how the scheme is run.

2. Methodologies

Four of the most prominent ACCU methodologies were focussed on in detail: human-induced regeneration (HIR), avoided deforestation (AD), landfill gas (LFG) and carbon capture and storage (CCS).

HIR projects have been of particular interest in the public eye recently. For these projects, the Review recommended that:

  • HIR project developers be required to provide more evidence showing a link between the problem a specific project is seeking to address (e.g., degradation of the land due to livestock grazing) and the activities the project undertakes to reverse the issue, and
  • These activities should be nominated and publicly listed on the project register, and results from project audits should be published.

These suggestions are welcomed by TEM. They would be favourable for the overall credibility of projects and increase the accountability of project proponents.

There may also be a number of changes which could restrict access to certain credits in the market moving forward. The Review suggests that:

  • No new avoided deforestation projects be allowed to be undertaken, and
  • The ability for landfill gas projects to receive credits should be more restrictive.

Combined, these changes would quell many of the concerns that have circulated about the ACCU market. It would reduce information asymmetry, which would stamp out speculative scrutiny targeted at projects for which information is currently confidential as it is defined as ‘protected information’. By consequence, this would be helpful to corporates wanting to invest in climate action through purchasing carbon credits.

3. Project impacts

The Review found that there are potential adverse social impacts arising from ACCU projects, and that they could be prevented with the appropriate measures in place. This includes: strengthening legislative requirements of how project proponents engage with Native Title holders before they register a carbon project; increasing regulatory oversight of consent processes; and ensuring greater representation of First Nations Australians in the scheme.

It also calls for the government to continue supporting and building the capacity of rural and remote communities, including First Nations Australians, to participate in and benefit from the ACCU scheme.

The proposal to improve requirements around proper engagement with Native Title holders is very welcome. Amending legislative requirements in this regard would be key  in recognising and protecting Indigenous rights within the context of the carbon market.

Improving processes for how project proponents seek consent from Traditional Owners is an issue that TEM has repeatedly and publicly championed, including through our submission to the Chubb Review and demonstrated through our membership of the voluntary Carbon Industry Code of Conduct.

4. The Climate Active Program

Lastly, the Review assessed whether the government’s Climate Active program should mandate participants to allocate a minimum portion of their offsets portfolio to ACCUs (alongside international credits). This was a change that was announced by the previous government, and due to be introduced in July 2023.

Somewhat surprisingly, the Review recommends rescinding this change. If the government proceeds to adopt the Review recommendations (as it has indicated it would), this would allow Climate Active participants more flexibility in their approach to offsetting their emissions.

Now that we have the Review and its sixteen recommendations, it’s a matter of time before the government formally approves the recommendations. It’s not certain that all will be enacted, but the government has at least signaled its in-principle support of each of the proposed changes.

In the interim, the market shock that some had anticipated would be the result of a scathing Chubb Review has not, and will not, play out. While this may be much less exciting to the traders and speculators in the market, it means that we can charge on with tackling the enormous decarbonisation challenge that lies ahead of us. It should also provide buyers of ACCUs confidence in making informed long-term buying decisions.

Important information

This information has been prepared by Tasman Environmental Markets Australia Pty Ltd (TEM), a corporate authorised representative (ABN 97 659 245 011, CAR 001297708) of TEM Financial Services Pty Limited (ABN 58 142 268 479, AFSL 430036). This material is for general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation, or needs. While we believe that the material is correct, no warranty of accuracy, reliability, or completeness is given, except for liability under statute which can’t be excluded. Before making an investment decision, you should first consider if the information is appropriate for your circumstances and seek professional financial advice. Please note past performance is not a guarantee of future performance.