Reforming Australia’s Federal Environmental Laws

The independent review of Australia’s carbon crediting scheme and consultation on Safeguard mechanism reforms

The Final Report of the Independent Review of Australian Carbon Credit Units (ACCUs) was released on 9 January 2023 (the Report). We considered the independent review in our October update on the proposed biodiversity certificates scheme.

The aim of the Report was to advise on ways to strengthen the integrity of Australia’s carbon crediting framework. The Panel, headed by Professor Ian Chubb, has disagreed with criticisms of the framework, stating that the ACCU Scheme (the Scheme), “was fundamentally well-designed when introduced” ^[1] and that its “arrangements are essentially sound”, however several recommendations for improvement have been made. ^[2] The Recommendations of the Report focus on four key themes: governance, transparency, methods for generating ACCUs, and First Nations’ participation.

The Government has accepted all recommendations of the Report in principle. ^[3]

This update provides an overview of the existing ACCU Scheme and the Panel’s recommendations based on the four key themes mentioned above.  We discuss the implications of the recommendations and the legislative amendments likely to follow, as well as how the Report fits within the Australian Government’s broader plan to reform our national environmental laws.

An Executive Summary of the Report can be found here and the Terms of Reference can be found here.

The ACCU Scheme and Safeguard Mechanism

The ACCU Scheme was established in 2011 under the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). An ACCU is a unit issued to a proponent of an ‘eligible offsets project’ by the Clean Energy Regulator (CER), representing one tonne of carbon dioxide sequestered or avoided by a project. ^[4]

There are number of requirements that must be satisfied by a proponent before a project can be declared an ‘eligible offsets project’ and begin generating ACCUs. For example, the proponent must be a fit and proper person, and the project must utilise an approved methodology to generate ACCUs.

The Scheme aims to incentivise projects to reduce emissions as part of the Australian Government’s Emissions Reduction Fund (ERF). The Australian Government has legislated targets to reduce greenhouse gas emissions by 43% by 2030 (based on 2005 levels), and ‘net zero’ by 2050. ^[5] As the Panel states in their Final Report, the Scheme will only help Australia to reach this goal if ACCUs represent real emissions abatement. ^[6] The ERF also includes a Safeguard Mechanism, which requires Australia's largest greenhouse gas emitters to keep their net emissions below an emissions limit (a baseline). The government will gradually reduce emissions limits under the Safeguard Mechanism to help Australia reach net zero emissions by 2050.

The Safeguard Mechanism operates under the framework of the National Greenhouse and Energy Reporting (NGER) scheme and applies to facilities with direct scope 1 emissions of more than 100,000 tonnes of carbon dioxide equivalent (t CO2-e) per year. This extends to businesses across a broad range of industry sectors, including electricity generation, mining, oil and gas, manufacturing, transport, construction and waste. Around 215 facilities are included in the Safeguard Mechanism, and account for about 28% of Australia’s total emissions. ^[7] Safeguard facilities are able to surrender ACCUs to offset emissions in excess of their baseline.

The Department of Climate Change, Energy, Environment and Water (DCCEEW) is consulting on options to reform the Safeguard Mechanism to help industry reduce emissions in line with Australia's climate targets. DCCEW released a Safeguard Mechanism reform position paper on 10 January 2023 which is open for consultation until 24 February 2023. Safeguard Mechanism reforms are intended to commence on 1 July 2023. On 1 December 2022, the Senate referred the Safeguard Mechanisms (Crediting) Amendment Bill 2022 to the Environment and Communications Legislation Committee for inquiry and report by 2 March 2023. ^[8] The Government is also seeking feedback on the following draft subordinate legislation:

• National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rule 2023
• Carbon Credits (Carbon Farming Initiative) Amendment (No. 2) Rules 2023
• Australian National Registry of Emissions Units Rules 2023
• Safeguard Mechanism Legislation Amendment (2023 Measures No 1) Regulations 2023 ^[9]

The Australian Government proposes:

• gradually reducing baselines to help Australia reach net zero emissions by 2050
• introducing credits for facilities that emit less than their baseline, known as Safeguard Mechanism Credits (SMCs)
• providing tailored treatment to emissions-intensive, trade-exposed facilities so businesses are not disadvantaged compared to international competitors and emissions do not increase overseas.

We will address the detail of these proposed reforms in a separate update. 

ACCU Review Recommendations

Improved Governance

(a) Key findings

One of the Panel’s aims was to define and separate the key roles within the Scheme, especially those relating to integrity. The Panel found that the Scheme contained all functions necessary for good governance, but that separation of these functions would enhance confidence and transparency. ^[10]

Two key reasons cited by the Panel for this lack of confidence is that the ERAC is not seen as an independent expert committee and that the many functions of the CER result in a perceived conflict of interest. ^[11] These factors form the basis of recommendations 2 and 3. To reduce the perceived conflict of interest, the Panel has recommended that the responsibility for purchasing ACCUs by the Australian Government be moved away from the CER to another government body. ^[12]

(b) Implications

Changes to the functions of the CER will mean that proponents of ‘eligible offsets projects’ who are looking to sell ACCUs to the Australian Government via a carbon abatement contract will need to liaise with a different government agency.

Establishment of the CAIC should provide industry stakeholders with greater opportunities for consultation about the development of new methods and amendment of existing methods for generating ACCUs than has previously been the case, with new method development in the past generally focussed on delivering set priorities identified by the Minister for Climate Change and Energy.

Transparency

(a) Key findings

The Panel recommends legislative changes to create a default presumption that data relating to the ACCUs be made public. ^[13] This is intended to allow communities and industry to better assess, understand and manage carbon abatement activities conducted under the ERF. ^[14] The Report does not specify exactly what types of data will be excluded from the default presumption, but it does state that the CER should be empowered to consider when blanket commercial-in-confidence provisions in the CER Act hinder rather than enhance the Scheme. ^[15]

The Panel found that the OIS were fit for purpose, but recommended that two requirements be reinstated:

1. Sequestration of offsets should provide for adjustments to take account of significant cyclical variations; and
2. Emissions from any source or sources as a consequence of carrying out the project are to be deducted from the net carbon abatement equivalence amount. ^[16]

In addition, the Panel recommends the development of clearly defined ACCU Scheme Principles. ^[17]

The Panel recommends that proponents claiming co-benefits should provide evidence and verification of such co-benefits to the CER before publishing any claims in respect of those co-benefits. They state that clear and consistent information about co-benefits will make for a more resilient and credible Scheme.

The Panel also recommends greater public consultation in the method development process, especially with First Nations. The CAIC would set the consultation timeline on a case-by-case basis to ensure that the qualities of the draft methods are adequately tested through public consultation. ^[18]

(b) Implications

While the Panel does not recommend specifically what ACCU data should be made public, companies should expect that further information about their use of ACCUs will be published. This will result in increased public oversight and scrutiny of proponents’ use of ACCUs.  It is also unclear at present how any new legislative provisions giving effect to this recommendation will interact with existing provisions addressing disclosure and access to information, including both under the NGER scheme legislation as well as freedom of information laws.  

If the Government adopts the recommendation to develop ACCU Scheme Principles, proponents may be required to declare that their ‘eligible offsets projects’ will meet and continue to meet the relevant criteria and standards under applicable ACCUs Scheme Principles. ^[19]

Proponents should expect increased evidentiary standards to verify their claimed co-benefits and should therefore ensure that the co-benefits they are claiming can be clearly supported.  Ensuring clear evidentiary support for claimed co-benefits will also serve to assist in managing greenwashing risks.

In the development of new methods, industry should expect greater responsibility to engage with the local community. ^[20]

Methods

(a) Key findings

The Panel found that the current process for method development is not fit-for-purpose. ^[21] The Panel also points out that method development needs to better account for the wide range of variability in Australia’s environment, recommending a more modular approach that encourages greater uptake of bespoke method activities. ^[22]

The CAIC will accept EOIs for new methods and will publish written reasons for their decision in relation to the proposed method. ^[23]

In addition to the existing review processes under the CFI Act, the Panel also recommends that the public or the Minister should be empowered to initiate a method review. ^[24]

The Panel found that the HIR method is sound, however the implementation, monitoring and enforcement of the method requires a more robust approach. The Panel raised additionality concerns in relation to the avoided deforestation method, stating that it is “unclear if any additional projects should be registered”. ^[25] In relation to landfill gas methods, the Panel found that some project baselines are too low and do not incentivise proponents to go beyond the regulatory minimum. ^[26]

(b) Implications

Industry should expect to have greater opportunities for input in method development. The new process recommended by the Panel also suggests that methods will be greater suited to the local conditions of the proponent’s individual landholding and activity. The use of methods that are more aligned to local conditions may increase the accuracy of measuring carbon abatement achieved by projects.

Proponents using landfill gas methods with concessional baselines should expect their baselines to rise. ^[27]

First Nations

(a) Key findings

The Panel found that the current consent requirements in the CFI Act are not adequate, given that they allow for projects to be registered prior to obtaining the necessary consents. The Panel recommends that free, prior and informed consent from First Nations be obtained before a project is registered. ^[28]

Further, the Panel recommends that First Nations’ knowledge should be better integrated into the Scheme.

(b) Implications

Industry will need to ensure they understand and employ the FPIC principles in obtaining consent from First Nations prior to project registration, rather than seeking the imposition of conditions on any declaration of an eligible offset project that such consent be subsequently obtained prior to commencing project activities.

Implementation of the Recommendations

The Australian Government has accepted all 16 recommendations in principle. A suite of changes will follow the publication of the Report, including the following key legislative amendments:

• New legislation passed in order to re-establish ERAC as the CAIC;
• Amendments to the CFI Act to move responsibility of issuing ACCUs away from the CER to another government body;
• Amendments to the CFI Act and the National Greenhouse and Energy Reporting Act 2007 (NGER Act) to enable data sharing, including the insertion of a default presumption that data be made public; and
• Amendments to the CFI Act to apply FPIC principles in obtaining consent pre-registration of the project require community consent before project registration.

As well as the above legislative amendments, we expect to see publication of new performance standards for carbon offsets projects and a new set of offsets integrity principles. Drafting of the principles will likely involve proponent and community consultation. Given the focus on the importance of data sharing, we also expect to see the establishment of a new national online platform aimed at sharing ACCU data.

Relationship to broader environmental law reforms

Late last year, Federal Environment Minister Tanya Plibersek announced an overhaul of Australia’s environmental laws. ^[29] See our recent update on these reforms here. The Panel’s focus on improved governance, increased transparency and First Nations participation is consistent with the Government’s announcements on environmental law reforms, including for example its proposal for a federal Environmental Protection Agency.  ^[30]

The Panel’s recommendations also share common themes with those of the Independent Review of the EPBC Act.  

Proposed Australian Carbon Exchange

The Report does not mention the Australian Carbon Exchange (ACE) - a proposed online exchange platform to facilitate the purchase, clearing and settlement of ACCUs and potentially other types of carbon units and certificates. However, the recommendations of the Report align with the transparency aims of the ACE. Recommendations for increased data sharing and verification of co-benefits could be directly achieved through the establishment of the ACE.

However, it is unclear how the recommendations in the Report are consistent with the ‘streamlining’ aims of the ACE, which look to reduce the time taken to develop new ERF methods and assess applications for registering new ERF projects. ^[31] The Panel’s recommendations for increased community consultation and more bespoke ACCU methods may potentially increase the existing timeframe for these processes.

Proposed Biodiversity Certificates and Trading Scheme

On 26 August 2022, the Australian Government announced the creation of a biodiversity certificates and trading scheme (BCS). The BCS will allow landowners to sell and purchase biodiversity certificates, operating in a similar manner to the CFI Act and the ACCU Scheme. KWM released a detailed analysis of the BCS in October last year.

In Recommendation 13, the Panel states that the CER should develop procedures to support transparency of different co-benefits of ACCUs. The BCS could support this recommendation by allowing proponents to earn biodiversity certificates for any co-benefits produced in the generation of ACCUs.

Climate active

At Recommendation 16, the Panel states that the mandatory requirement for Climate Active organisations to use a minimum 20% ACCU to achieve their emissions offsets should not come into effect as this would go against the flexibility that is central to the Climate Active program. The Panel also states that the cost of such a requirement would likely force some organisations to leave the Climate Active program. ^[32]

We will keep you updated further consultation and implementation of proposed changes as they develop, including the Safeguard Mechanism reform position paper mentioned above.