16 Jan 2023

Trickle-down assurance: the layers of integrity in Australia’s carbon market

There are four key layers necessary to safeguarding the integrity of the ACCU market: scheme integrity, methodology integrity, project integrity, and credit integrity. The Chubb Review sets a new benchmark for the improvement of the first two of these, which will in turn trickle down to improving assurance of the latter two.

Whilst assurance of the integrity of one of these can’t necessarily completely assure the integrity of the others, they are intertwined. If the assurance of one of these layers were to fail, the others can to some extent serve as a backstop.

In the ACCU market, a clear example is where projects undergo mandatory third-party audit on a regular basis to ensure the integrity of the credits awarded to that particular project. For most projects, this entails at least three audits over the lifetime of the project, including additional audits if certain abatement thresholds are met. Auditors must be registered under the National Greenhouse and Energy Reporting Regulations, and must be free from any conflicts of interest. If the independent audit finds that there’s an issue with the project, for example with the calculation of the number of emissions abated, the credits are not awarded, or they are revoked. This provides for a level of assurance not only of the project, but of the credits in circulation.

This week, the publication of the independent Chubb Review has provided independent assurance of the integrity of the scheme and of a number of its project methodologies [1]. These projects represent 628 of the projects registered,and over 94.8 million ACCUs awarded to date – approximately 37% of projects, and 77% of credits. This is important because the IPCC states that “all pathways that limit global warming to 1.5°C with limited or no overshoot project the use of carbon dioxide removal” over the 21st century.

It is also important in light of criticisms that have emerged in the media and public commentary over the course of more than 18 months. The overwhelming majority of industry participants that benefit (financially or otherwise) from the ACCU market welcomed the announcement of an independent review led by Professor Chubb, regardless of whether or not they agreed with the premise of the criticisms.

To bolster the Review, separate independent analysis and advice was sought from the Panel members. This was provided by the Australian Academy of Science and made publicly available. It looked into the integrity of four ACCU methodologies, but its purpose was not to look at individual projects. It found some limitations with these methods, issues which mostly stem from an underlying asymmetry of information.

This additional analysis of the methods helped inform the Chubb Review’s findings. Importantly, the Australian Academy of Science released a statement welcoming the findings and recommendations of the Chubb Review. We now have two independent sets of analysis and review that provide a level of assurance of the scheme’s current standing, and recommendations for future continuous improvements to the scheme. This provides a benchmark of expectations for how the scheme should function moving forward.

However, in the wake of the Review’s release, two new sets of criticisms have emerged and have been peppered throughout the media:

  1. Criticisms that the Review does not disclose enough detail on the information the Panel heard; and
  2. Criticisms that the Review does not address the integrity of individual projects or credits.

Below, I explain why these two criticisms detract from the Review’s recommendations which will actually seek to address these very issues.

A lack of publicly accessible information around the scheme has been recognised as problematic, and recommendations seek to rectify this on a grand scale.

As with any proper independent assurance and review process, the Chubb Review allowed for public submissions as well as private discussions with the Review Panel. Of the stakeholders that provided written submissions, some 162 were made public. TEM’s submission is one of these. An undisclosed number of others were kept confidential, as requested by the submitters.

The Review reveals that dozens of stakeholder meetings were also held in private with the Panel members. The topics discussed in each of those meetings are listed in the appendix of the report, and included the landfill gas method, gateway checks conducted by the Clean Energy Regulator, and lived experiences of the scheme, amongst many others.

Importantly, these discussions included the most prominent critics of the scheme who provided insights to the Panel on their perspectives and experiences with the scheme. The Panel members attended site visits to human-induced regeneration and avoided deforestation projects, and separately met with accredited project auditors. From this, we can gather that the Panel heard from a range of voices on a range of topics, and witnessed some of the impacts of the scheme first-hand.

Much of this information is not currently publicly available by virtue of the fact that a number of submissions were made in confidence, and due to existing confidentiality provisions within the scheme. This has led critics to label the reviews as nonconclusive, or not trustworthy. Some call for no offsets to be used until proper assessment is undertaken. Others call for project audits to be undertaken (which they are, as explained earlier).

Yet these criticisms fail to recognise that the suggested changes would pave the way for more transparency of the scheme – of its governance, of how key decisions are informed, and of project-level information. Suggested transparency provisions include with relation to:

  • Amending the Carbon Farming Initiative Act to increase transparency of the scheme and of projects;
  • More transparency of decisions regarding methodology development approvals;
  • Clearer definitions of the Offsets Integrity Standards, including their interpretation and application;
  • Provision of advice from the Climate Change Authority to the Minister regarding additionality of projects and conservativeness of the scheme; and
  • Regulation of carbon service providers, such as TEM.

Amendments such as these would in turn assist in addressing concerns of the integrity of individual projects and credits.

Secondly, by making improvements to the overall governance of the scheme and its methodologies, increased accountability will be enforced on individual projects, and on scheme participants.

Many of the criticisms are focussed on the fact that the Review did not provide assessments and assurance of individual projects – a topic which the Review never set out to cover. From a practicality perspective, it would have been futile to review the integrity of any or all of the 1600+ ACCU projects without first reviewing the integrity of the scheme and the methods which enable for the projects to be carried out.

It’s important to emphasise that the Review did not set out to audit or investigate individual projects or the use of carbon credits. It covered the first two layers of assurance – scheme integrity, and methodology integrity. Assurance of project-level integrity sits within the remit of the CER and accredited auditors. An additional voluntary scheme, the Carbon Industry Code of Conduct, provides for another layer of oversight of projects and of carbon service providers that sign on to the industry code. TEM has been a signatory since 2019.

Credit level integrity is a separate complex topic, being tackled by agencies such as the Australian Securities and Investments Commission, the Climate Change Authority and various voluntary carbon market standard-setters.

Regardless, each of the layers of integrity assurance are intertwined, and improvements to the overarching functionality of the scheme will trickle down to these other facets. Despite the fact that the Review didn’t delve into project-level assurance, a number of the Review’s proposals will overlap with increasing project level integrity. These include:

  • Allowing for public comparability of projects, for example through the publication of audit reports;
  • More public availability of project level data;
  • A Carbon Abatement Integrity Committee (CAIC) to form a refreshed body for assuring method integrity;
  • Additional requirements for HIR projects to be able to receive ACCUs;
  • No new avoided deforestation projects;
  • More stringent criteria on landfill gas projects (separately, the proposed Safeguard Mechanism reforms could see this method phased-out entirely); and
  • Reducing the scheme’s complexity, thereby allowing more participants to understand and partake in the market.

Unfortunately however, the headline statement of the Chubb Review findings (that the scheme was found to be “sound”) is not particularly newsworthy, causing many media outlets to run with headlines from comments of critics who aren’t appeased by the two independent assessments.

Looking through these criticisms, we can find the nuance and sophistication in the Review’s recommendations. This gives us a glimpse into the outlook of the market moving forward, where a new baseline of expectations has been set, and where trust in the scheme will continue to be assured.

[1] Human induced regeneration; avoided deforestation; landfill gas; and carbon capture and storage

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.