Yallourn Power Station in Victoria will be retired in 2028, following the completion of a battery project in 2026. The closure will, Energy Australia says, reduce the emissions profile of the power ‘gen-tailer’ by 60%
The effectiveness of carbon credit schemes in various territories around the world has been less than stellar in terms of carbon emissions reductions, according to research from numerous independent bodies including Singapore’s Sustainable Fitch and the Australian National University.
These studies generally agree that at least 70% of carbon credits issued have been found to be either not real or not additional. Not additional means they are not creating any real emission reduction, as the project likely would have gone ahead without carbon credit funding.
This figure, a 70% failure rate, refers to the very best performing territories, says Professor Andrew Macintosh, Director of Research at the ANU Law School. And in Australia, he says, we’re a long way from best practice.
“If you follow the principles that we advocate for, and that are really accepted everywhere, it means that you use offsets in far more limited circumstances than where they’re currently used,” Macintosh says.
“But absolutely, we still want carbon credit markets. There are still great opportunities associated with them and they can still reduce the economy-wide cost of greenhouse gas emissions. So yes, we’re still very supportive.”
Any carbon market is better than none
How did we land where we are right now? How did we arrive at a place where a substantial proportion of Australian carbon credit units are low integrity, not representing real and additional carbon emissions abatement?
To answer this question, says Mathew Nelson, EY’s Oceania Chief Sustainability Officer, it’s important to understand that there are two types of carbon markets – voluntary and regulated.
“There’s a very important word when you describe voluntary carbon markets, and that’s the word voluntary. I think we should acknowledge the fact that a voluntary carbon market is unlikely to have the same level of governance structures in place that a regulated market is going to have,” Nelson says.
“The second point is that the purpose of carbon markets is extremely important. They’re about getting organisations and individuals engaged in looking at ways to reduce greenhouse gas emissions, and the necessary ways of getting flows of capital to projects that enable that to happen.”
It’s also important to remember, he says, that the general acceptance of rules in voluntary carbon markets, around what is acceptable and what is not, is very much in the eye of the beholder. In this case, the beholder is the business that invests in the offsets.
Along similar lines, Macintosh identifies three main reasons for failures within carbon markets:
- Too often, vendors can get away with selling low-quality products. In any other market, the low-quality end constantly experiences a tightening of margins, forcing those lowest performers out of business. This hasn’t yet happened in carbon trading markets.
- A large percentage of buyers in the market haven’t shown great interest in quality, leading to the previously mentioned lack of pressure on low-quality vendors. Many buyers have simply been interested in the certificate they receive in return for the investment.
- The regulators, where they are involved, tend to be incentivised more towards ensuring a healthy supply of credits, rather than the integrity of those credits, Macintosh says. This may soon be a thing of the past in Australia since the government’s Independent Review of Australian Carbon Credit Units in 2022. The review recommended substantial governance reforms.
So, as these vital markets are further developed and improved, it’s up to businesses to demand evidence and to conduct due diligence, just as they would with any other investment. But how?
How does due diligence work in carbon markets?
EY long ago committed to being a carbon-negative business, Nelson says. When they entered the carbon credit market, the business treated offsets the same way it treats any other purchase or investment.
“We have a program to reduce our own emissions, but in reality it’s impossible to have zero emissions flights, and our business can’t operate without flights,” Nelson says. “So do we do nothing, or do we do an offset program?”
The EY carbon credits procurement program was run, like any other important purchase, by the organisation’s procurement team.
“We went through appropriate processes,” Nelson says. “We identified the objectives of what we were trying to do. Why were we buying these offsets? What was their purpose? Then we constructed principles and a framework before going out to the offset market.”
The team approached both direct sellers and brokers.
“We said here’s our RFP, we’d love you to respond. This is what we’re looking for. So we set our criteria, we interviewed and assessed, and we did due diligence and reference checks, and looked at who else they’d worked with, etc.”
That exercise, Nelson says, is not foreign to accountants and other finance professionals.
“What the accounting profession brings to this, in the construct of it as opposed to just the finance piece, is a mindset of rigour,” he says.
“They’re able to be very tight in the way they articulate principles, giving people a good framework in which they can explain how they’ve gone about doing what they’re doing and how it fits within that framework.
“Most accounting people deal in standards and regulations that are issued by third parties. In the absence of that, you need to create your own standards and principles that enable you to articulate how you’ve gone about doing things. It guides decision-making and can be really useful in creating the right way to operate.”
What’s best to buy?
Macintosh agrees an internal compass is important, as there are very few places buyers can go to get independent, high quality, credible advice.
“The general advice I give is to start with the project activities that are easy to understand,” Macintosh says. “That’s things like environmental plantings of trees, and small landfill gas sites that have never had facilities to capture methane released from the tip.”
There’s two parts to Macintosh’s recommendation – the activity is easy to see and it is, logically at least, additional.
“You can see the infrastructure. You can see the trees and you can track the plantings from satellite imagery. People generally don’t plant trees at scale in the absence of some incentive, so it is likely to be additional as a result of the carbon credit funding,” Macintosh says.
“Invest in what makes sense, start in the safe part of the playground and you’ll have a greater chance of making the right decision and affecting the right outcome.”
