Is the cost of going carbon neutral about to get more expensive?

The pace and cost of Australia’s fast growing, multi-million-dollar climate neutral industry may be significantly impacted by the biggest outcome at the recent climate negotiations in Glasgow.

Forget all the speeches and the pledges, the big reform from COP26 was to finalise revised rules for voluntary carbon trading markets. Known at Article 6 of the Paris Agreement, these changes to eligibility for what can be counted as global carbon offsets may materially impact some major Australian companies. Around two-thirds of offsets voluntarily surrendered this year will come from abatement projects in developing countries (1 million tonnes from ACCUs, 6 million tonnes from renewables certificates, 12 million tonnes from projects in developing countries).

The credibility of at least some of these offsets created under the Clean Development Mechanism (CDM) has been questioned by activists and others for the past two decades. That hasn’t stopped some Australian companies from using them to deliver against their latest carbon neutral commitments, at a bargain basement price that may indeed be too good to be true.

How cheap? In the Clean Energy Regulator’s June quarterly carbon market report Certified Emissions Reductions (CERs) created under the CDM cost 56 cents a tonne. That compares to more than $40 for a tonne for offsets from domestic offsets, known as Australian Carbon Credit Units (ACCUs). Meanwhile the price of a tonne of carbon in Europe is well north of AUD$100 per tonne. Current prices for Certified Emissions Reductions on the UN platform start from $2.50 a tonne.

That’s quite a spread.

The Clean Development Mechanism is the world’s biggest carbon offsets market. It was created back in 1997 during the development of the Kyoto Protocol by the United Nations, allowing rich countries with fixed targets to finance abatement via investment in poor countries without targets.

The CDM was one way of addressing the developed-developing country divide that sits at the heart of solving climate change. It effectively created a development vehicle to start driving investment from rich countries to poorer ones and put in the first architecture of a global market for carbon. That was the good news.

The bad news was that verification of the abatement from CDM projects was, to be polite, inconsistent. There have been constant allegations that abatement from some projects has been re-sold, that some certificates are just fakes, that under the new Paris Agreement these emissions reductions were being counted in both the selling and purchasing countries. There is also the problem of additionality, meaning a CDM project needs to prove it would only have proceeded with the investment flow from the CERs, otherwise offsets are being created for a project that would have happened anyway.

More than 2 billion C ERs have been created The integrity concerns were so great that in 2013 the European Union banned the use of these offsets towards compliance in their emissions trading scheme. The value of CERs collapsed and the future of the scheme, while still formally sanctioned and run by the UN, was in doubt.

Negotiators have been trying to evolve the CDM into a new higher integrity scheme that reflects the changes brought by the Paris Agreement, which started in 2016 and involves abatement commitments for all countries. A major sticking point was the status of nearly a billion unused CERs. The Glasgow negotiations will limit the carryover of CDMs to those registered after 2013.

Mindful of this, Australia’s Clean Energy Regulator has developed a Corporate Emissions Reduction Transparency Report designed to provide a voluntary, independent assessment of the climate disclosures by Australian companies. So far 11 companies have opted in for 2022. The CERT will count CERs, but won’t try to verify any offsets.

There are already third-party verifiers of CDM projects like Verra and The Gold Standard, while many of these CDMs are purchased through a number of offset brokers.

Leading large-scale corporate users of non-third-party verified CDMs include EnergyAustralia, Telstra and Westpac. No doubt all will claim their offsets have been independently verified. The cost of voluntary surrender of these offsets is tens of millions of dollars cheaper than the fully verified local ACCUs and other less risky products.

As these cheap offsets dry up, the scarcity of supply is expected to push up the price of remaining offsets, meaning meeting climate targets will get a whole lot more expensive for some companies. Locally generated ACCUs have more than doubled in price this year.

The real test of whether the Glasgow reforms to Article 6 genuinely tighten up the credibility of offset schemes will be the price paid. Those companies relying on super-cheap offsets to validate marketing/sustainability claims may find they become a lot more expensive in the future.