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How well is Australia's carbon market operating? More
importantly, how is the market helping the country achieve its
stated goal of net-zero emissions by 2050?
The questions have prompted heated debates in recent weeks, with
the next federal election expected to be held in less than two months'
time.
The ruling Liberal-National coalition trumpeted the
government-sponsored Australian Carbon Credit Units' (ACCUs')
decarbonization advantages. Government data shows over 18 million
ACCUs are to be issued in 2022, up from 17 million ACCUs in 2021
and 16 million ACCUs in 2020. Each unit represents a metric ton of
carbon emissions either stored or avoided, Australia Energy
Minister Angus Taylor suggested.
The federal Clean Energy Regulator (CER) said that 2021 was a
record year for the carbon market in terms of liquidity and
pricing. A total of 7.5 million ACCUs changed hands, compared with
3.4 million transacted in 2020. Spot prices rose from A$16.60
($12.40) to A$51 through the year.
But the rosy picture was recently tainted by Andrew Macintosh, the former
chair of the ACCU mechanism's integrity committee, who said there
are serious "governance flaws" in Australia's carbon market.
Based on the current market design, qualified entities earn
ACCUs from the CER by operating projects that reduce or avoid GHG
emissions. The carbon credits are generally sold to the
government-run Emissions Reduction Fund (ERF) via auctions, as well
as to voluntary, speculative or compliance buyers in the secondary
market.
Macintosh, who had chaired the Emissions Reduction Assurance
Committee under successive coalition governments in 2015-2020, said
70%-80% of the ACCUs are issued to projects related to avoided
deforestation, human-induced regeneration of native forests, and
the combustion of methane from landfills.
"All of the major emission reduction methods have serious
integrity issues, either in their design or the way they are being
administered," said Macintosh, who is a law professor at the
Australian National University.
"People are getting ACCUs for not clearing forests that were
never going to be cleared; they are getting credits for growing
trees that are already there; they are getting credits for growing
forests in places that will never sustain permanent forests; and
they are getting credits for operating electricity generators at
large landfills that would have operated anyway," he added.
The CER has already spent A$1 billion ($750 million) on
purchasing ACCUs and has contracts to purchase a further A$1.6
billion, Macintosh said. "By issuing ACCUs for these low-integrity
abatement projects, the regulator is throwing good money after bad
and undermining Australia's ability to meet its long-term emission
reduction targets."
While attacks on the carbon market's
integrity—often from Australian nonprofits—are not
uncommon, such accusations from a leading emissions expert in the
election year has the potential altering future market development,
observers said.
"To have such a senior figure come out with such claims was a
significant development," consultancy Demand Manager CEO Jeffery
Bye told S&P Global Commodity Insights' Net-Zero Business
Daily. "It will be interesting to see where this goes—at
the moment, the claims are a little esoteric for the general
public, but this could shift in an election year if the opposition
runs a campaign on the matter."
In response to Macintosh, the CER said the ACCU issuance has
"rigorous assessment processes" underpinned by decarbonization
methods of "high integrity." But Australia's main opposition
parties were quick to lambast the government over the alleged
integrity issues.
The Greens party has referred
the allegations to the Auditor General while calling for a full,
independent inquiry into the claims, and its leader Adam Bandt
described the market scheme as "another rort [dishonest practice]
from a terrible government."
In an interview with Australian
Broadcast Corp., Chris Bowen, Labor's climate change and energy
spokesman, promised to launch a review of the carbon market over
integrity and other issues like biodiversity if his party wins the
federal election.
"I have concerns with the scheme … I will want an independent
advice giving me and Australian people the confidence," Bowen
said.
Market reform
Separately, the Australian government has revised the ACCU
scheme in a way that proved to be unpopular among some market
participants.
The CER announced 4 March that ACCU project developers can pay a
fee to exit their fixed delivery contracts with the government and
sell their credits to private buyers in spot trading. The rule
change does not affect optional contract holders, who can sell
their ACCUs to either the government or the private sector.
In the past, the developers had to pay a penalty called buyers'
market damages (BMD) capped at their contractual prices to
terminate their fixed delivery contracts.
With over 75% of the government's fixed delivery contracts
priced under A$13 per ACCU, well below the spot price in recent
quarters, the CER said the new rule would lead to an "orderly
process" as project developers exit their contracts without
"reputational risks."
But ACCU spot prices dropped from A$50/mt on 3 March to
A$35.4/mt on 4 March following the announcement, government data
showed. Demand Manager said ACCUs
recently traded at A$31/mt.
The rule change came out of the blue and could release up to 100
million ACCUs at a value of up to A$2.4 billion to the private
sector over the next decade, according to the Carbon Market
Institute.
"We are concerned about the message this sends to the market
about the ability for government intervention without transparent
and public consultation at any point in time," the trade group's
CEO John Connor said in a statement. "The government
needs to be clear about the intended use and timing of … the exit
payments."
According to the CER, the exit fee will be calculated by
multiplying the contract price by the quantity of ACCUs to be
released. Bye said the current spot ACCU price will thus represent
the minimum value to incentivize the exits of contracted parties,
plus some administrative expenses and risks premiums in the
secondary market.
"From the government's perspective, this achieved a few
goals—it dropped the price of ACCUs in the private market for
corporate Australia to meet carbon neutrality goals and it
effectively turned the ERF program from a cost base potentially
into an income source, allowing them to extend the life of the ERF
without the need for budget support," Bye said.
Election advances
In October, Australia joined almost all other industrialized
nations by committing to net-zero emissions by 2050. But the
government has kept its interim target of cutting emissions by 26%
to 28% from 2005 levels by 2030, despite having projected that the
country is on track for a reduction of
30-35%.
The Labor promises a 43% reduction by 2030 partly via
strengthening the Safeguard Mechanism—and experts said the
party could effectively usher in a cap-and-trade system for
emissions if it wins office.
Introduced by the coalition government, the Safeguard Mechanism
sets baseline emission levels for Australia companies with Scope 1
emissions of more than 100,000 mt of CO2-equivalent and allows
major emitters to acquire ACCUs to offset their excess
emissions.
But critics said that the scheme has limited decarbonization
effects because the current administration has been too willing to
raise the baselines, that the emitters seldom need carbon
credits.
"A change in government could create a baseline and credit
system that increases accountability for Australia's biggest
emitters each year, which is anticipated to create more certainty
around ACCU offset demand growth," said Bret Harper, research
director at Melbourne-based energy consultancy RepuTex.
"This will depend on how the election numbers play out and
whether parties have the numbers in enact the climate policies they
have laid out or whether these may have to be negotiated with other
parties," he added.
If the coalition remains in power, Bye said Australia could
continue the path of "privatization of carbon abatement" by
establishing rules that limit demand for carbon credits from
regulated emitters and promote voluntary purchases.
"Such a path is politically more achievable since it does not
rely on 'the big stick' of regulation, however it would in all
likelihood not be sufficient to meet the deep cuts required," Bye
said.
Posted 29 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.