What's next for Australia's Carbon Market

Can the Federal Government accelerate our transition to Net Zero by 2050 in part by reforming the Carbon Trading mechanisms in Australia? As we await the details – the indications are positive.

On an otherwise quiet Friday afternoon in March this year, the Australian Government announced its intention to exit the market for Australian Carbon Credit Units (ACCUs), and sent the fledgling Australian carbon price into a nose dive. By close of business ACCUs were down 25 per cent to $35.40 per tonne, dropping below $30 on the following Monday before a slight “dead cat bounce”.

Although the Emissions Reduction Fund (ERF) and Carbon Farming Initiative had always been foreshadowed as mechanisms to establish carbon trading, with the expectation that the government would extract itself at some stage, the sudden shift caught many by surprise. The move also created a $1.3 billion windfall for ACCU traders, who would be able to exit existing contracts with the Federal Government for $25 per ACCU, and trade the same units in the private market for $35.

Integrity at stake

The ERF and ACCUs had attracted some high profile and well-founded critics over the years. Significant concerns have been raised regarding the integrity of carbon abatement contracts, and the uncomfortably close relationship between the Clean Energy Regulator (CER), the Emissions Reduction Assurance Committee (ERAC) and the Federal Government.

Moreover, as a market mechanism to reduce carbon emissions and increase mitigation, the ERF has been largely ineffective, with Australia’s total carbon emissions increasing over the period it has been operational.

While the Albanese Government has yet to clarify what changes will be made to the approach, the writing is on the wall for potential market participants according to Alison Reeve, deputy director of energy and climate at the Grattan Institute.

“We will need a mechanism for trading carbon abatement, as there are some industries which will simply not be able to operate without some kind of emissions,” says Reeve. “But the focus needs to shift to a reduction in overall emissions in preference to offsetting. Government needs to clarify the role it will play in the market. Rather than investing in developing new methods for ACCUs to be recognised, it needs to invest in the integrity of the trading system itself.”

The early days

Carbon Credits and carbon trading in Australia have a long and fraught history, starting in 2011, with the Gillard Government’s ill-fated carbon pricing mechanism and the “Carbon Farming Initiative”.

Initially touted as a way for farmers, forest growers or landholders to generate ACCUs and sell them into lucrative international markets, the Carbon Farming Initiative promised “clear rules” to identify, price and trade emissions abatement activities. Each carbon credit represents one tonne of carbon dioxide that has either been stopped from going into the atmosphere or sucked out of it.

ACCUs were supposed to provide a mechanism to encourage some industries to accelerate the adoption of low emissions technologies and practices, and others to mitigate carbon emissions.

It all seemed fairly straight forward... right? Well, maybe.

A different approach

Railing against what was described as “great big tax on everything”, in 2013 the incoming Abbott Government repealed almost all of the carbon pricing legislation created by the former government, and significantly modified the Carbon Farming Initiative.

By November 2014 the then Environment Minister Greg Hunt committed $2.55 billion to the Emissions Reduction Fund, and proposed a substantial expansion of the types of carbon abatement activities which could be registered for ACCUs. The ERF would enable the Federal Government to purchase ACCUs via carbon abatement contracts from industry through an auction scheme.

The very first auction was held on in April 2015, and saw ACCUs traded for $13.95, with 43 contractors awarded 107 contracts, resulting in the abatement of 47 million tonnes of carbon emissions.

Hailed as a “stunning” success by Minister Hunt, and a “a recipe for fiscal recklessness on a grand scale”, by then backbencher Malcolm Turnbull, by 2018 the ERF had spent $2.3 billion on ACCUs representing 191.7 million tonnes of carbon abatement over the subsequent decade, or roughly 3 per cent of expected emissions.

“The original vision for the scheme offered by Greg Hunt, is that it would create a private market for ACCUs,” notes Alison Reeve. “But the Government had to keep pumping money into the ERF because that market never eventuated.”

Current carbon accounts

Although there is a small private market, the Australian Government remains the largest investor in ACCUs, in large part because outside of the ERF auctions, there is no open platform where ACCU trading can take place. Moreover, there remain significant concerns regarding the integrity of the abatement projects for which ACCUs have been issued, with suggestions that up to 80 per cent cannot demonstrate actual abatement or that the activity would not have been carried out as part of regular management practices.

“The real challenge will be demonstrating the integrity of existing ACCUs and developing a standard auditing process that would enable market participants to increase supply, without further diluting the integrity of existing stock,” Reeve says.

And while the Federal Government has yet to clarify its preferred abatement mechanisms, in an address to the National Press Club on 29th July this year, Minister for Climate Change and Energy Chris Bowen outlined plans to create a policy framework to accelerate Australia’s transition to Net-Zero by 2050. In this address, Minister Bowen highlighted his intention to work in partnership with government and business to “unleash pent-up private investment in energy generation” and “provide a sensible and stable policy framework.”

The indication is that a new market design is on the way which would enable Australian investors, emitters and abatement projects to trade in international markets, which are currently worth US$851 bn.

The opportunity is huge. As pointed out in a recent Carbon Farming scorecard report from the Carbon Market Institute; “Australia has a comparative natural and technical advantage in carbon removal, collectively due to its significant land and coastal resources, mature and modern agricultural sector and an already skilled and knowledgeable carbon sector.”
The report suggests that up to 7 per cent of anticipated global demand for carbon credits by 2030 could be met by carbon projects in Australia.

By providing “clear rules” to identify, price and trade emissions abatement activities, the Federal government may be able to return Australia’s carbon trading scheme to what it was originally designed to do; provide a way for way for farmers, forest growers or landholders to generate ACCUs and sell them into lucrative international markets, while accelerating Australian’s transition to a low-carbon future.