Australian carbon units and certificates are likely to gain a greater share of the Australian voluntary market due to a range of factors.

Future supply of international units is uncertain. New large-scale renewable energy projects are no longer eligible under voluntary offset standards administered by Verra⁵⁴ and Gold Standard⁵⁵, except where carbon finance is required for implementation. This may see VERs and VCUs lose further market share in the future, as supply of these units from international renewable projects decreases over time. Credits generated between 2015 and 2021 from reduced deforestation and forest degradation in the UN scheme known as REDD++ are to be excluded.

The 26th UN Climate Change Conference of the Parties (COP26) made progress in settling market rules under the Paris Agreement. The ‘Clean Development Mechanism’ under the Kyoto Protocol will be replaced by the ‘Sustainable Development Mechanism’ under the Paris Agreement. Existing projects can transfer by 2025, subject to meeting the new methodologies. Credits from these projects will be clearly labelled and can only be used towards countries’ targets in the period to 2030. CERs already issued under the CDM may continue to be used towards countries’ targets, provided the project was registered after 2012 and certain other conditions are met. However, the CDM will no longer register, renew crediting periods, or issue CERs for post-2020 emissions reduction activities.

Countries will be able to use markets to help meet their targets and new rules have been agreed to prevent double counting of emissions reductions. Bilateral and multi-lateral co-operative approaches can also be established between countries for the purpose of trading International Traded Mitigation Outcomes, like the Australian Government’s Indo-Pacific Carbon Offsets Scheme.

There has been increasing media interest in providing transparency on the provenance of international carbon units being cancelled in large numbers by Australian corporates. This is expected to continue, progressively shifting demand to high quality ACCUs.

In contrast, ACCU supply has increased year on year at an average rate of 10% since 2017. A further step up in growth is expected as supply from new methods emerge and ACCU spot prices increase (see ACCU chapter for further information).

Future LGC supply expectation also remains positive owing to strong investment in new projects as corporations and industry switch to electrification from renewables. As statutory demand for LGCs remains fixed from 2021 until 2030, supply of LGCs available for the voluntary market is expected to progressively increase moving forward.

It is likely that Australian companies with voluntary ambition to reduce their net emissions in Australian operations will increasingly focus on buying high quality Australian carbon units and certificates where the emissions reduction has a high level of integrity and delivers economic benefits in Australia.

Future development of carbon markets

As interest in developing effective carbon markets grows, the need to ensure the integrity of carbon units, governance of carbon markets, and standardisation of market frameworks across the industry is taking a particular focus. A private sector-led initiative has resulted in the formation of the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) which aims to scale an effective and efficient voluntary carbon market to help meet the Paris Agreement goals and address these key needs. Six key topics for action spanning the entire carbon markets value chain have been identified which look to support the scale-up of voluntary carbon markets. Table 4.2 below shows the 6 principles and provides high-level insight into Australia’s progress.

The TSVCM has published a blueprint which provides recommended actions against the 6 key topics (see Figure 4.7). Australia’s carbon market already rates well against most actions and is well-placed to develop and advance all metrics, through already established frameworks, recent initiatives like the CERT report and the proposed Australian Carbon Exchange and through rapidly increasing private participation in the market.

The TSVCM blueprint considers clear and measurable impacts in reducing carbon emissions and full environmental and social integrity. Australia’s carbon market is closely aligned with the TSVCM principles, producing high-integrity units underpinned by government legislation. ACCUs issued under the ERF can deliver environmental, social and economic co-benefits, which is a consideration for the TSVCM. The Clean Energy Regulator has observed the market is starting to distinguish different types of offset projects and is willing to pay a premium for co-benefits.

The government’s Long-term Emissions Reduction Plan highlights the crucial role the carbon market will play in achieving Australia’s net zero emissions by 2050 target. This includes supporting new low emission technologies such as carbon capture and storage as well as providing a new income stream for the land sector.

Transparency initiatives like the CERT report will likely facilitate further growth of voluntary carbon markets as the volume and type of offsets used to attain a net emissions position will be on public record. It is possible that this additional scrutiny may also influence unit preferences. Consultation on the CERT guidelines has recently concluded. Eleven corporations across multiple sectors have already indicated they will participate in the CERT pilot when it is formally launched later this year. Interest from these early movers is encouraging, and a lot more engagement is expected before the pilot opt-in cut-off date of 30 January 2022 . There is no limit on the number of NGER reporters (above the publication threshold) who can participate in the CERT pilot.

Footnotes

⁵⁴ Verra, Revision to Scope of VCS Program, April 2019.

⁵⁵ Gold Standard, Renewable Energy Eligibility, August 2019.

⁵⁶ The Taskforce on Scaling Voluntary Carbon Markets – Final Report (see Page 6, Overview of recommended actions)