Reforming Australia’s Federal Environmental laws - developing Australia’s biodiversity market, the proposed biodiversity certificates scheme

On 26 August 2022, the Government announced the creation of a biodiversity certificates and trading scheme (BCS). The announcement follows the recent State of the Environment report which found that Australia’s environment is under extreme pressure, with biodiversity continuing to decline and the number of threatened species increasing. [1]

The BCS will allow landowners to sell and purchase biodiversity certificates, operating in a similar manner to the existing Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act), which regulates the issue and trade of Australian Carbon Credit Units (ACCUs). The BCS aims to reward landowners that restore or maintain local habitats by awarding biodiversity certificates, which may then be sold to other parties. The biodiversity market is intended to operate in parallel with the carbon market. The development of the BCS is occurring alongside the independent review of the integrity of ACCUs and the review of the Safeguard mechanism considered in our earlier KWM Insights. ^[2]

The Government released a fact sheet on the BCS that describes the scheme in further detail. The Department of Climate Change, Energy, the Environment and Water (DCCEEW) sought feedback by survey and submissions on the proposed BCS. The survey closed on 16 September 2022. DCCEEW yet to release any results of the survey and submissions. We will issue a further update when that does become available.   

The Emissions Reduction Fund, current activities for creating ACCUs, and co-benefits  

The Emissions Reduction Fund (ERF), administered by the Clean Energy Regulator, was established in 2014 by the CFI Act and is further enabled by the Carbon Credits (Carbon Farming Initiative) Rule 2015 (CFI Rule) and the various methodology determinations (ERF Methods) made under the CFI Act.

For ‘eligible offsets projects’, ACCUs can be issued for every tonne of carbon dioxide equivalent (tCO2-e) sequestered, or emissions avoided. ACCUs may be held or sold to generate income, including to the Australian Government through a carbon abatement contract in auctions generally held twice a year, to companies and other private buyers, and on the secondary market. For example, ACCUs may be used:

• by state, territory and local governments to meet policies and commitments to offset emissions,
• by businesses and corporations to voluntarily offset all or part of their operational or supply chain emissions (e.g., carbon neutral commitments, Climate Active certification), or
• to reduce an industrial facility’s net emissions number below that facility’s emissions limit (its baseline), to comply with the Safeguard Mechanism. ^[3]

There are a range of project types and ERF Methods which can reduce emissions and earn ACCUs. Current ERF methods include opportunities for industry and for the land sector. These include industry opportunities in carbon capture and storage, energy efficiency, landfill and alternative waste treatment, mining, oil and gas and transport; and in the land sector opportunities in agricultural, savanna fire management and vegetation (e.g., avoided clearing of native regrowth, avoided deforestation etc). ^[4]  More than 1300 projects are registered under the scheme, and over 115 million ACCUs have been issued as at August 2022. ^[5] The Clean Energy Regulator maintains a register of ERF projects. ^[6] Prices for ACCUs surged during CY21 to a spot price of more than $55/tonne and currently sit around $30/tonne^{. [7]}

ERF projects follow methods that meet the Offsets Integrity Standards in section 133 of the CFI Act. ERF projects must:

• be new (not have begun to be implemented)
• go beyond business-as-usual activities
• not be required by law
• not be receiving financial support from specified government programs, such as New South Wales and Victorian Government energy efficiency schemes
• follow an approved ERF method, which sets out the rules for carrying out the project and estimating emissions reductions
• meet the eligibility criteria and not be an excluded activity listed in Division 2 of the CFI Rule. ^[8]

In addition to emissions stored or avoided and earning ACCUs, ERF projects can provide a range of other direct benefits or ‘co-benefits’, including environmental, economic, social and cultural benefits for farmers, businesses, landholders, Indigenous Australians and communities. ^[9] Examples of co-benefits can include:

• improving water quality, reducing soil erosion and reducing salinity through revegetation activities
• improving farm resilience and sustainability through increased diversity of land-use activities
• improving the productivity of farms by replenishing the carbon content of soils
• valuing traditional knowledge on fire management and providing an economic opportunity for Indigenous communities while reducing late season wildfire damage in savanna areas
• increasing biodiversity and providing increased habitat for native species [emphasis added]
• lowering the emissions profile and reducing energy costs by increasing energy efficiency for Australian businesses. ^[10]

The co-benefits to biodiversity offered by the ERF align with the goals of the BCS. Some of these co-benefits may also generate tradeable biodiversity offsets under the BCS. ^[11]

Independent review of ACCUs

On 1 July the Government appointed an independent panel to review the integrity of ACCUs under the ERF (the Review). ^[12] The purpose of the Review is to ensure ACCUs and the carbon crediting framework maintain a strong and credible reputation supported by participants, purchasers and the broader community. The Panel is consulting widely during the Review and sought submissions during September 2022.

The Panel will examine governance arrangements and legislative requirements of the carbon crediting scheme, as well as the integrity of the key methods used, and other scheme settings affecting the integrity of ACCUs. It will consider the broader impacts of carbon projects, including for agriculture, biodiversity, participation of First Nations people, and regional communities. The Panel will also examine the requirements for use of ACCUs under Climate Active.

The Review is being conducted in response to concerns recently raised in relation to Australia’s carbon crediting system. These concerns include the integrity of the crediting system’s key methods and the ACCUs issued under it. ^[13]

The Review terms of reference relate to matters including governance and integrity of offsets, including:

• the integrity of ACCUs issued under the CFI Act, with specific reference to the appropriateness of scheme governance, the offsets integrity standards of methods by which ACCUs are generated and any other matters the Panel considers relevant to the integrity of ACCUs; and
• the broader impacts of activities incentivised under Australia’s carbon crediting framework, including the appropriateness of current processes and requirements to manage negative social, environmental and economic impacts, the extent to which carbon projects support positive environmental, social and economic outcomes, opportunities to maximise co-benefits and requirements for the use of ACCUs under Climate Active.

The Samuels Review and restoration objectives

One of the election promises of the new Federal Government is to implement the findings of the Independent Review of the EPBC Act (Final Report) (October 2020) by Professor Graeme Samuels AC (Samuels Review). ^[14]  As part of this election promise, the Government has pledged to protect 30% of land and 30% of sea areas by 2030. ^[15] In early September, Prime Minister Anthony Albanese also stood alongside other world leaders at the UN General Assembly, pledging to reverse biodiversity loss by 2030. ^[16] And just this week, Environment Minister Tanya Plibersek announced a new threatened species action plan which includes a 10-year objective to prevent new extinctions of plants and animals.

Chapter 8 of the Samuels Review relating to ‘Planning and Restoration’, identified the need for greater alignment between biodiversity and carbon markets. The Review stated that greater alignment between the carbon and biodiversity markets could shift restoration efforts toward areas that will assist more threatened species and deliver the dual benefits of:

• increasing the net carbon abatement and threatened species recovery, due to an increase in area being restored
• reducing the overall cost of achieving carbon and threatened species outcomes because both benefits can be realised from one activity.

The Samuels Review includes the following recommendations:

Recommendation 27

The Commonwealth should reform the application of environmental offsets under the EPBC Act to address decline and achieve restoration.

The EPBC Act environmental offsets policy should be immediately amended (or a National Environmental Standard for restoration that includes offsets should be made) in accordance with the recommendations in Box 28.

As part of the second tranche of reform, the Act should be amended or standalone legislation passed to legislate the revised offsetting arrangements, providing the certainty required to encourage investment in restoration.

Recommendation 28

To foster private sector participation in restoration, the Commonwealth should formally investigate and consider:

1. co-investment with private capital to improve the sustainability of private land management
2. establishing a central trust or point of coordination for private and public investment in restoration to be delivered (including offsets)
3. opportunities to leverage existing markets (including the carbon market) to help deliver restoration
4. changes to the tax code that can deliver environmental restoration.

The structure of the biodiversity market and BCS

Some key questions and answers on the proposed structure and operation of the BCS are summarised in the table below