Bowen’s move to review carbon markets welcome amid need for data transparency

Climate and Energy Minister Chris Bowen. Illustration: Krygsman

New Climate and Energy Minister Chris Bowen is committed to a review of the operation of carbon markets as one of his first steps towards a credible climate policy.

The review comes a decade after the Gillard government established the Clean Energy Regulator (CER) in 2012 to regulate the issue of carbon offsets in Australia, among others things.

The review is widely supported and timely. The one thing everyone in the game agrees on, as Carbon Growth Partners chief Rich Gilmore said, is that “there is no way Australia or the world will get to its 2050 target without an efficient offsets program”.

Indeed,it gets better than that, because while the previous government did its best to trash the carbon market with frequent politically inspired interventions, it also ran a credible Australian offsets market – without much fanfare .

Climate Friendly’s Josh Harris argues: “Now is a good time for such a review to strengthen the Australian market in areas such as data transparency.”

The key is a database, so that more details of what is being done on a property are known. This is because unlike a wind turbine, which is highly visible, a carbon project often is not.

Green Collar’s James Schultz said the review should “address deforestation through the structure of the carbon market and beyond – there is a clear imbalance when methods are seeking to avert deforestation and regenerate vegetation, while our land clearing rate remains unchecked and increasing”.

“Actively reducing land clearing alongside operating the carbon market will increase our ability to preserve ecosystems and habitat, to aid in efforts to reduce the extinction crisis, while at the same time significantly contributing to mitigation of climate change,” he said.

One concern in deforestation is how a landowner establishes that there were plans to clear the land that had been abandoned – earning carbon credits.

The CER has almost prided itself on its lack of transparency, including progress on its own markets review and tenders with ChiX, the ASX and others seeking to run the market.

The good news is Australia is sitting on a genuine growth industry, a potential rural windfall in selling carbon offset credits using the abundant rural landmass, and an experienced carbon project advisory network with international credibility.

Project developer Green Collar is two-thirds owned by Ontario Teachers and KKR, and rival Climate Friendly is part-owned by Mitsui and private equity firm Adamantem.

Software developer Carbon Count has attracted global interest in its management system for helping to grow soil carbon credits.

Fresh from last year’s success with the Wilmot soil carbon project sale to Microsoft, the Armadale-based project developer Impact Ag is developing a soil carbon project for News Corp executive chair Rupert Murdoch on his Montana ranch in the US.

There is a family connection: Wilmot is chaired by Murdoch’s son-in-law Alasdair Macleod.

EY’s Blair Comely is maximum bullish on the offsets market, and thinks it will be a global market with prices between $US80 and $US1560 a tonne by 2035.

Others are less sure of the progress to a global market, saying regional hubs are the first step and the key for Australia is to create a high-integrity market. Short term, the Australian market is in oversupply after last year’s rule change, which allowed people with fixed-term contracts in the compliance market (who were meant to sell the carbon credits back to the government) to instead sell them into the voluntary market at a higher price.

This cut the market price from $60 to $26 overnight, but it is now $37, in the middle of what some see as a medium-term range-bound market between $30 and $40.

Long term, in Australia and globally, blue sky abounds in offset markets, as the accompanying table shows.

The Bowen review should match efforts to encourage more supply in Australia with a transparent, liquid and high-integrity market to encourage more demand, which in turn advances Australia’s case to be the regional hub. The $2.7bn Australian offsets program works by issuing carbon credits to companies that must cut their carbon emission through the safeguards program or voluntarily.

The industry has a list of changes to improve the market.

There is concern that it is too slow in approving credits, which were subject to political review.

There are clear governance issues around the CER, with an emphasis on transparency and perhaps a split in function so the CER doesn’t approve carbon reduction methods and regulate them too.

The former head of the Emissions Reduction Assurance Council, Professor Andrew Macintosh, has raised some genuine concerns over the validity of some of the methods.

EY’s Comely thinks the market will work out a distinction between “avoidance credits” like not chopping trees down, and “removal credits” where you are actively doing something new to remove carbon from the atmosphere.

He says these removal credits will generate premiums.

The issue here is “additionality”, what is done in addition to what would have happened anyway.

Market Advisory Group’s Raf Wood is keen for the review to clarify two key issues: what to do with voluntary credits and safeguard baselines.

Telstra is an active user of the offset markets, but arguably is clean compared to a big emitter like an AGL or a cement company.

The argument is whether voluntary credits should count against Australia’s running total, but equally the distinction between voluntary and required offsets is arguably now dead.

The exception is national claims of emission reductions, which take on new importance as markets globalise, with the aim being to avoid double counting and meaningful cuts.

Just how the baselines are drawn up is crucial because a 5 per cent cut in emissions has a different impact for a coal-fired power station and a shopping mall.

In past years emissions-intensive export industries won concessions because they competed in a global market where others were not playing by the same rules. Arguably this has now changed because more countries have rules.

Carbon Growth’s Gilmore stresses the need for liquidity and transparency. “Policy certainty is the key to market confidence and rigour around additionality.”