Carbon Offset Watch

With the introduction of an emissions trading scheme in Australia - what is the future of offsets? Will there be enough offsets for the voluntary market? Will the same standards be used? Could there be a bigger role for energy efficiency offsets? Should offset providers develop a new business model?

Click here to download the Future of Offsets Discussion Paper from Total Environment Centre. 

Executive Overview of Report:
Australia has shifted rapidly on international and domestic climate policy since the election of the Rudd Labor Government in November 2007. Though probably an unintended consequence, ratifying the Kyoto Protocol and fast-tracking a national emissions trading scheme are making it crunch time for the voluntary carbon market too.

Now gripped by confusion and uncertainty, and lacking cohesion across many diverse players large and small, very mixed views abound about the voluntary market’s evolution – its future size, shape, offerings and very existence. There’s now a key question for the credibility of this trade: whether Australian buyers pursuing beyond compliance action on climate are getting what they expect when purchasing so-called ‘carbon offsets’, in particular those sourced from emission reduction projects carried out in Australia?

Early indications suggest the smallish voluntary market, and especially Australian-based offset origination activities for the voluntary trade, face significant collateral damage from Australia becoming a Kyoto-capped country, and from the impending introduction of a much bigger compliance market for carbon trading. This is because:

·  By ratifying the Kyoto Protocol, effective March 11 2008, relevant carbon emission reductions in Australia now count within Australia’s Kyoto cap (108 percent of the 1990 baseline by 2012), and later within the compliance scheme;
·  Prima facie this means that offsets originated in Australia and sold in the voluntary market are not ‘additional’ because they will be counted within the cap, a binding target that Australia has already committed itself via the United Nations to achieving, and in the future will fall within compliance scheme targets;
·  It is open to conclude that this includes reductions under the Australian Government’s own high-profile Greenhouse Friendly™ initiative1, which in turn is subject to speculation that it must either be phased out or significantly changed;
·  Most official and informal watchdogs consider ‘additionality’ to be crucial to voluntary offsetting credibility (additionality literally means that offsets are in addition to any reductions that would have happened anyway, whether through business as usual or government mandate i.e. to meet a binding Kyoto target, or under an official cap-and-trade scheme like that planned for Australia);
·  Historically, according to market participants, Australian offset buyers including corporations, professional services firms, government agencies, local councils, small businesses and individuals have preferred sourcing all or part of their offsets portfolios from projects involving on-the-ground activity in Australia.

Now, however, they’ll at least need to rethink offset strategies, and either;
o The Australian Government could act to remedy the situation by making voluntary offsets   additional to Kyoto cap and/or compliance scheme reductions (there are proposed mechanisms that could do this), or
o Offset buyers, in particular those who require certainty on quality for reputation and other reasons, will likely turn to purchasing offsets from overseas carbon reduction projects in non-Kyoto capped countries (this is standard in the UK, for example, and may already be happening here).

Unfortunately, there appears to be little headspace at political and bureaucratic levels to deal with the voluntary market’s challenges, mainly because of the resource-draining complexity and sheer workload of getting the compliance market in place. Yet much greater focus is required if Australia wants a healthy and innovative, albeit niche voluntary market to continue operating alongside a big, mainstream compliance one.