Restoring Integrity in the Carbon Market

featuring Ben Oquist

Speech delivered by Ben Oquist, executive director of the Australia Institute, to the Smart Energy Conference 2022, 5 May 2022

E&OE transcript

I would like to acknowledge the Gadigal of the Eora Nation, on whose stolen land we meet, and pay my respects to elders past and present. And I extend this respect to all Aboriginal and Torres Strait Islander peoples in attendance today.

[introductory remarks & acknowledgments to conference attendees]

Today I want to talk about one of the big debates coming in climate policy – integrity.

While much debate has rightly been on the level of climate ambition, we are now set to focus on the integrity of that ambition. And it is about time.

A decade ago, Labor and the Greens, as well as three independents, built Australia’s Carbon Pricing Mechanism. From 2012 to 2014, it reduced Australia’s emissions by 2%. The economy grew by over 5%.
No towns were wiped out, lamb roasts stayed well below $100.

And then the policy was axed.

In the wake of the repeal, when Australia became the first and only country to kill off a climate market mechanism, it was unclear what would emerge next, if anything.

Former Prime Minister, then backbencher Malcolm Turnbull was not optimistic, issuing his famous warning that any alternative to the carbon price would simply be ”a con, an environmental fig leaf to cover a determination to do nothing”

What emerged was the Direct Action policy which aimed to take the burden off big emitters and move it onto the taxpayer, with the government buying emissions reductions from the private sector through the Emissions Reduction Fund.

Support for Direct Action
Despite criticism, Direct Action had a number of cautious supporters, including the Australia Institute which conceded that the Emissions Reduction Fund was better than having no climate policy at all.

The Australia Institute strove to be constructive and to ensure that the ERF was properly governed and had integrity, because, quite frankly, the alternative would have been a complete policy vacuum and the end of the Carbon Farming Initiative altogether.

The Institute helped to negotiate amendments to the regime that improved governance arrangements, such as giving the Emissions Reductions Assurance Committee veto power over methodologies so that the Minister could not interfere. These negotiations also secured the Climate Change Authority’s future.
What could be saved was saved and the Australian Renewable Energy Agency, the Clean Energy Finance Corporation and the Renewable Energy Target survived and have since unleashed over tens of billions in renewable investment.

What couldn’t be saved had to be rebuilt in the vein of Direct Action and over the years the Institute has continued to work on improving the methods that underpin the Emissions Reduction Fund and banning the carryover of Kyoto Credits which would have reduced demand for the ERF.

Integrity problems – Emissions Reduction Fund not reducing emissions and credits have no integrity

However, in the last few years it has become increasingly clear that, regardless of whether the original vision of the Emissions Reduction Fund was fit for purpose, Australia’s only climate policy and entire carbon credit scheme is in crisis and in urgent need of reform. It is completely lacking in integrity.

And this is what I wish to discuss today. Because it’s a big problem and it’s only going to get bigger as emissions from fossil fuel production increase in Australia, and the Emissions Reduction Fund is pushed to deliver increasingly more ‘abatement’ to offset this growth.

I don’t need to say that it’s a problem for our climate.

But beyond that, it’s a problem for any government who takes the Emissions Reduction Fund on as part of their climate policy.

It’s a problem for taxpayers when billions of dollars of public money is being wasted. It’s a problem for those businesses who are participating in the carbon market in good faith who now risk being accused of greenwashing.

And it’s a problem for those landholders and traditional owners who are relying on the benefits that the carbon market brings.

ERF was never meant to be only climate policy
The Emissions Reduction Fund was never designed to carry the full weight of Australia’s climate policy. Even when it was being implemented the coalition indicated it would operate “alongside existing programs that are already working to offset Australia’s emissions growth, such as the Renewable Energy Target (RET)”.

As we know the RET concluded in 2020 and was not renewed, nor replaced with other policies designed to bring down emissions.

As a result of being placed under such pressure, it is unsurprising that – despite its name – the scheme has not only failed to reduced emissions, but its foundations have begun to crumble.

Over half of the funding of the $4.5 billion allocated to the Emissions Reduction Fund has been committed to the purchase of just 217 million tonnes of abatement. That’s less than half of Australia’s annual emissions.

Now there are questions over whether this abatement is even real. Last month the former chair of the government’s own Emissions Reduction Assurance Committee, along with several of his colleagues, all experts in this field, indicated that around 80% of Australia’s carbon credits lack integrity.

Concerns are not new
Concerns over Australia’s carbon credits are not new, having been raised by academics since 2016. The Australia Institute and the Australian Conservation Foundation raised significant issues with one of the largest carbon credit methods last year.

Recently concerns have multiplied and diversified to the point that we now have the ACCC, the CEOs of Qantas and Telstra, and an increasing number of scientists and academics casting significant doubt over the integrity of longstanding carbon credit methods and new methods such as soil carbon and carbon capture and storage.

Rather than address these concerns the government has not only aggressively defended the integrity of the Emissions Reduction Fund, it has attempted to discredit its critics. It has also continued to rapidly expand the Emissions Reduction Fund and boost the supply of carbon credits. This approach is because there is no appetite to acknowledge flaws in Australia’s only mechanism to meet Australia’s climate targets. Integrity issues are being deliberately overlooked as part of the government’s concerted efforts to increase the number of carbon credits available as offsets to the private sector.

The ERF as a gas expansion policy
In fact, just as other climate policies in Australia have become trojan horses for the continued support of the gas industry this is now the risk for the ERF too. (What has happened to Neville Power and the gas-led recovery?)

Boosting supply and conflicts of interest
The Government has made no secret that it wants to expedite and simplify the processes to generate carbon credits onto the market.

Unfortunately, when the quantity of available carbon credits is the primary objective, the quality is compromised.

These changes have included ‘fast tracking’ method design, inviting industry to design carbon credits; and giving too much power to the Clean Energy Regulator, so that it now designs the credits it regulates, issues, and buys.

It has also seen industry interests appointed to key executive and advisory roles in the bodies governing the Emissions Reduction Fund, as we revealed with freedom of information documents earlier this year.
Unless the influence of the fossil fuel industry and other private sector interests are acknowledged and addressed it is difficult to see how integrity will be restored to the Emissions Reduction Fund and Australia’s burgeoning carbon market.

The impact
If carbon credits are too affordable and too readily available they will be used by industry as a ‘get out of jail free card’ instead of actually investing in systematic change to reduce emissions.
This is where it will hurt you. The smart energy solutions.

Instead of investing in what works to lower emissions like renewable energy, clean storage and electrification, many will be able to simply purchase cheap carbon credits.

This also enables the expansion of polluting industries instead of facilitating industry transitions and the systems required to decarbonise our economy.

Role of carbon market
Let me be clear, there is a role for carbon credits.

Carbon credits will have a role to play, but the role should be specific, well understood. Carbon credits should be used in hard-to abate sectors, after genuine efforts to reduce emissions are fulfilled.

Carbon credits will only help reduce emissions in Australia if they are part of a broad scheme that incentivizes legitimate, additional and permanent carbon credits, when used as a last resort in combination with other climate mitigation policies.

We are well aware that a broad network of people rely on the Emissions Reduction Fund, from landholders to indigenous communities, who engage with the Emissions Reduction Fund in good faith.
Failing to address issues within the Emissions Reduction Fund is letting these parties down, in addition to perpetuating the risk to government, proponents and market participants buying, selling and creating ACCUs. Not to mention Australia’s international reputation.

Here is what needs to happen
A fully independent review of the Emissions Reduction Fund and its governance is required to restore integrity and confidence in the scheme. Of course, the shape and depth of such a review may depend on the extent to which the Emissions Reduction Fund plays a role in future climate policy.

While a credible review would assess the success of the Emissions Reduction Fund to date and ask the fundamental question ‘is the Emissions Reduction Fund an effective mechanism to reduce emissions?’, there are three broad areas for review that could be addressed in the short term:

  1. the interaction of the Emissions Reduction Fund with other climate policies,
  2. the governance and administration of the Emissions Reduction Fund and
  3. the integrity of Emissions Reduction Fund carbon credit methods.

And it is critical that any review should be wholly independent, free from political or vested interests and have sufficient technical expertise to understand the issues at hand for it to have any credibility.

Delay is the new denial. Legitimate climate action is undermined by false solutions claiming to reduce emissions.

Carbon capture and storage and so-called ‘clean’ hydrogen made from fossil fuels are the headline false solutions under the current Federal Government and are more effective at perpetuating polluting industries and preventing transition than reducing emissions.

Australians can only have confidence in the Emissions Reduction Fund scheme if it is overseen rigorously, transparently and wholly independently, free from the influence of vested interests. If we do not restore integrity to the methods and governance of the Emissions Reduction Fund with urgency, we risk it becoming another false solution. And we just can’t afford to let that happen.

Thank you.

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