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Focus: Federal Government releases draft National Carbon Offset Standard

09 February 2009

In brief: Late last year, the Federal Government released a National Carbon Offset Standard Discussion Paper, together with a draft National Carbon Offset Standard. Partner Grant Anderson (view CV) and Senior Associate Sarah Birrell describe the principal elements of the proposed standard, which has significant implications for the voluntary carbon market in Australia.

How does it affect you?

  • The Federal Government's proposed National Carbon Offset Standard (the Standard) will significantly restrict the kinds of carbon offsets that will qualify for compliance with it, and this is likely to have an adverse impact on the voluntary carbon market.
  • The introduction of the Carbon Pollution Reduction Scheme is likely to result in significant revisions to the Greenhouse Friendly initiative. Accordingly, businesses that produce or buy carbon offsets approved under this initiative should closely monitor developments in this area.  
  • Interested parties will need to make submissions on the design of the Standard by 27 February 2009.

Background

At the end of last year, the Federal Government released a draft of its much anticipated National Carbon Offset Standard, along with a National Carbon Offset Standard Discussion Paper that sets out the policy reasons for the approaches adopted in the Standard. The purpose of the Standard is to provide national consistency in the regulation of voluntary carbon offsets, and to enhance consumer confidence in the voluntary carbon market by providing guidance on what constitutes a genuine carbon offset. 

The voluntary carbon market is distinct from the market for carbon permits that will be created as a result of the implementation of the Federal Government's proposed Carbon Pollution Reduction Scheme (CPRS). While the latter (mandatory) market will develop in response to the demand of liable entities for the carbon permits (Australian Emissions Units (AEUs)) that they require to acquit their obligations under the CPRS, the voluntary market provides carbon credits that can be used by a business to meet voluntarily assumed corporate social responsibility commitments – for example, to offset the carbon footprint of the business or of products and services sold by the business. Of course, while such commitments are voluntarily assumed, advertising (and meeting) these commitments generates potentially substantial commercial benefits as consumers are becoming increasingly aware of the environmental impact of the products and services that they buy. 

Although the voluntary and mandatory carbon markets are distinct from each other, the CPRS is likely to have significant implications for the voluntary carbon market. In particular, the broad coverage of the CPRS means that there is less scope for offset activities. This, in turn, means that schemes such as the Greenhouse Friendly initiative, which recognises offsets from a broad range of activities, is unlikely to survive in its current form. Indeed, the Federal Government has announced that this initiative is currently under review and that it will announce its proposals for the reform of the Greenhouse Friendly program early this year.1 The effect of the CPRS on voluntary abatement activity is an important factor in shaping the nature of the carbon offsets that the Standard recognises.

The integrity of voluntary carbon offsets has recently attracted some regulatory scrutiny, particularly from the Australian Competition and Consumer Commission, which has released guidelines on green marketing and carbon claims  in an effort to educate businesses about the need to avoid misleading consumers when promoting their environmental credentials or the environmental attributes of the products or services that they sell. In fact, similar concerns have already resulted in the development of other voluntary carbon offset standards, such as the 2007 Voluntary Carbon Standard, and in the publication of various registers of offset providers and their offsets. The Standard is intended to establish an Australian benchmark, compliance with which will provide assurance as to the integrity of voluntary carbon offsets that are sold in Australia.

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Carbon offsets

Domestic carbon offsets

The challenge that the CPRS poses for the voluntary carbon market is that, by capping emissions from covered sectors, it breaks the link between individual action and aggregate emissions.2 In other words, where an entity reduces its emissions in a covered sector, this simply allows other entities to increase their emissions within the scheme cap,3 with the result that there is no net reduction in aggregate emissions. This outcome has attracted considerable criticism, because it reduces the incentive for consumers to adopt low emissions and energy efficient technologies (such as rooftop solar panels), as their energy savings do not translate into an overall reduction in allowable emissions (although they will still translate into reduced energy costs).4

A corollary of this is that the scope for voluntary offsets is limited to emissions reductions in sectors that are not covered by the CPRS, which will be very few if (or when) the CPRS is extended to agriculture. But, even then, such offsets may fail to satisfy the requirement for additionality (and so fail to qualify as a legitimate carbon offset) because:

  • the Government proposes to introduce measures that are designed to cause abatement in uncovered sectors at a price that is similar to the carbon price under the CPRS; and
  • net emissions from uncovered sectors (ie inclusive of abatement activity) are taken into account in determining Australia's national targets – so, for example, the 2020 target of reducing Australia's greenhouse gas emissions by between 5 and 15 per cent of 2000 levels applies to emissions from all sectors and not just those covered by the CPRS .

The upshot is that, for the purposes of the Standard, it is only abatement in emissions from sectors that are not covered by the CPRS and that are not included in the calculation of Australia's international commitments that is considered to be truly additional. Abatement within a sector that is not covered by the CPRS, but is included in the calculation of Australia's international commitments, will simply free up Assigned Amount Units (AAUs) that can be used to cover an increase in other entities' emissions without breaching Australia's international commitments.

Usually, the concept of 'additionality' is applied at the project level to determine the extent to which a project results in abatement that is additional to what would have occurred under a business-as-usual scenario. As a result of measuring a project's additionality by reference to its net impact on national emissions (after taking into account the response of other industry participants), the Government is adopting a much narrower concept of additionality, which inevitably translates into the Standard recognising a correspondingly more limited range of carbon offsets.

Applying the Government's additionality test, the only potential sources of domestic voluntary carbon offsets are non-Kyoto compliant forests, non-forest revegetation, crop and grazing land management, avoided deforestation and savannah fire management. Although this is quite a restricted range of sources, at least it does leave some scope for the generation of offsets from emerging technologies, such as biochar.

However, before domestic abatement from even these sources will qualify under the Standard, it is also necessary to demonstrate that the abatement is additional within the more commonly accepted meaning of that term (ie that the abatement is both beyond that which would be undertaken as business-as-usual investment and beyond that which is required by regulation) and permanent. These requirements may prove an impediment to the generation of Standard-compliant carbon offsets from some of the abatement activity referred to above. For example:

  • deforestation is regulated at the state level, and so avoided deforestation might not satisfy the requirement for additionality; and
  • at least some forms of biosequestration are generally not considered to be permanent, with the result that special measures (eg an obligation to retain the vegetation for a predetermined period of time and/or to provide some form of insurance such as a buffer to compensate for its premature destruction) might be necessary.

In addition, it is likely to be quite costly to generate domestic offsets that comply with the Standard: 

  • the generation of such offsets is required to be underpinned by a robust measurement methodology, and the amount of abatement generated must be quantified under ongoing monitoring arrangements and independently verified at least once every 12 months;
  • the offsets must be registered, and transactions in them recorded, in a system that precludes those offsets from being double counted; and
  • an annual report must be lodged with the Department of Climate Change, specifying the abatement generated by the project, the quantity of abatement sold, and the name of any purchaser of that abatement, during the reporting year.

These costs may prove a considerable disincentive to small-scale offset projects.

It is only if all of these requirements are satisfied that the resultant carbon offsets will be granted, and retain, approval from the Department of Climate Change as offsets that comply with the Standard.

The proposed approach outlined above is something of a contrast to the Greenhouse Friendly initiative, which recognises carbon offsets produced from a range of projects and activities undertaken in Australia, including carbon offsets produced by generating renewable energy, implementing energy efficiency measures, and engaging in afforestation and avoided deforestation activities.

Australian emissions units and international units

The Standard also proposes to recognise the following types of units as eligible carbon offsets where they are voluntarily surrendered (ie are not surrendered to meet obligations under the CPRS):

  • AEUs that are issued under the CPRS; and
  • certain categories of international units that are generated under the Kyoto Protocol, namely Certified Emission Reductions (CERs) (other than temporary CERs), Emissions Reduction Units (ERUs) and Removal Units (RMUs).

This is consistent with the Federal Government's White Paper on the CPRS, in which it is stated that the Government will allow the voluntary surrender of AEUs and eligible international units.5

To ensure that each AEU that is voluntarily surrendered represents a real reduction in permitted emissions, the Government will cancel an international unit for each AEU that is so surrendered. While the White Paper suggests that the international units that may be cancelled for this purpose will be limited to the kinds of international units that can be used to meet a liable entity's CPRS obligations, this seems to be unnecessarily restrictive. For example, there seems to be no reason why an AAU could not be cancelled for this purpose even though AAUs cannot be surrendered to meet a liable entity's CPRS obligations.

To ensure that each international unit that is voluntarily surrendered represents a real reduction in permitted emissions, the Government will cancel that unit so that it cannot be used to meet Australia's international obligations. While the White Paper again suggests that the only kinds of international units that can be voluntarily surrendered are those that can be used to meet CPRS obligations, the Discussion Paper is somewhat broader and contemplates the surrender of all kinds of CERs (other than tCERs and lCERs), ERUs and RMUs, whenever they are issued. However, it is unclear why the Government should not also be willing to cancel any kind of international units (ie including tCERs, lCERs and AAUs), as the intention, where they are voluntarily surrendered, is that those units should not be used to meet Australia's international obligations in any event. Having said this, it may nevertheless be justifiable for the Standard not to recognise at least tCERs and lCERs for another reason: namely, they currently represent non-permanent emissions reductions and so would not satisfy the requirements for permanence.

Cancelling an international unit, whether on the voluntary surrender of an AEU or on the voluntary surrender of that international unit, entails putting it into the national voluntary cancellation account (as opposed to the national retirement account) so that it cannot be used to meet Australia's international obligations. Entities that wish to surrender AEUs and international units will therefore need to open and maintain an account in Australia's national registry.6

Although the White Paper contends that the voluntary surrender of AEUs and international units should result in emissions reductions that are additional to those effected under the CPRS, it must be said that unlimited access both to AEUs under the transitional price cap and to international units seems to render this illusory.

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Relationship with existing standards

The Discussion Paper notes that offsets that are created in other countries, and are not generated under an emissions trading scheme or as a result of another form of government regulation, could satisfy the requirement for 'additionality' because they neither constitute business-as-usual emissions reductions for an Australian entity nor contribute to the achievement of Australia's international obligations. However, except to the extent they are eligible Kyoto units of the type described above, the Standard does not recognise carbon offsets that are accredited under existing voluntary standards (such as the 2007 Voluntary Carbon Standard). The reason given for this is that such offsets are not recognised as part of any international framework, it being suggested that this is required for the Government to be satisfied that those offsets represent robust and verifiable abatement.7 This is a very short-sighted view, which ignores the fact that a number of the existing voluntary standards do result in carbon offsets that are additional, measurable and permanent. 

An additional problem with this approach is that, while the Standard is said to be voluntary, if it does become widely accepted by carbon offset purchasers then it will diminish the recognition of these other voluntary offset standards in Australia and so potentially reduce the amount of voluntary abatement that occurs in this country. It would be particularly unfortunate in this regard if the Government further entrenched the Standard, eg by attaching more favourable tax treatment to Standard-compliant carbon offsets as compared with other carbon offsets.

Carbon offset purchasers under the Greenhouse Friendly initiative also have the opportunity to support a wide range of domestic offsetting activities, and to establish links with local communities in doing so. It would be detrimental if the introduction of the Standard were to detract from this.

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Carbon neutrality under the Standard

The Discussion Paper suggests that the introduction of the CPRS will alter the concept of 'carbon neutrality', in the sense that liable entities that acquire and surrender AEUs to cover all of their emissions, where those emissions are from sources covered by the CPRS, will now be 'carbon neutral'.

As a consequence, the Government is asking stakeholders to consider whether the term 'carbon neutrality' is appropriate in the context of the introduction of the CPRS. Instead, it suggests that the term 'additional voluntary action' may be more appropriate because it recognises that the action that is being taken in acquiring voluntary carbon offsets is beyond that required to meet obligations imposed under the CPRS.

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Calculation of carbon footprints under the Standard

Under the Standard, the calculation of the carbon footprint of an organisation, product or service is required to conform with the principles of relevance, completeness, consistency, transparency and accuracy. Essentially, this requires the calculation to define the appropriate boundary of the carbon footprint; to measure all of the emissions within that boundary accurately, using a consistent methodology over time; and to document clearly the assumptions and methodologies used and the resultant outputs.

The measurement of an organisation's carbon footprint entails:

  • defining the organisation's boundary, which should include all the facilities under the operational control of the one corporate group (as those terms are defined for the purposes of the national greenhouse and energy reporting system);
  • calculating at least the scope 1 and scope 2 emissions attributable to sources within the boundary, with the calculation of scope 3 emissions being voluntary (albeit desirable where they are large relative to the organisation's scope 1 and scope 2 emissions); and
  • calculating those emissions in accordance with the requirements of the national greenhouse and energy reporting system,8 and having their calculation verified by an accredited independent reviewer.

The measurement of the carbon footprint of a product or service entails undertaking a life cycle analysis (in accordance with accepted international standards) that identifies the emissions attributable to all stages in the life cycle of the product or service (eg inputs, production, transportation, use and disposal). Again, such emissions are to be calculated in accordance with the requirements of the national greenhouse and energy reporting system9 and verified by an accredited independent reviewer. 

Given that an entity that purchases AEUs to meet its CPRS obligations may be considered to be offsetting the emissions covered by those AEUs (see above), the Discussion Paper requests stakeholders to consider whether the determination of an activity's 'carbon footprint' should be based on its total emissions or instead only on such of the activity's emissions as are from sources that are not covered by the CPRS. The effect of adopting the latter approach would be to treat the compulsory surrender of AEUs as representing real and measurable abatement whereas, in reality, they represent an entitlement to emit a specified volume of greenhouse gases.

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Surrender of and reporting on carbon offsets

Under the Standard, eligible carbon offsets that are used to offset the emissions associated with an organisation, product or service (whether such offsets take the form of approved domestic abatement or voluntarily surrendered AEUs or international units) are required to be voluntarily surrendered within three months after the end of the annual reporting period in which the relevant emissions occur. Moreover, the organisation that claims the benefit of that offsetting will be required:

  • to develop a management plan, both for monitoring the greenhouse gas emissions that are being offset and for acquiring and retiring the carbon offsets that are to be used for that purpose; and
  • to publish an annual report on its carbon offsetting activities that, among other things, records progress as against the management plan.

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Benefits of complying with the Standard

Businesses that use the Standard will be entitled to advertise that the offsets they generate meet the Standard or that they have offset their emissions (or the emissions of a product or service that they sell) in accordance with the Standard. Compliance with the Standard is to be monitored by the Australian Competition and Consumer Commission and, where a claim of compliance with the Standard is made incorrectly, this is likely to constitute a contravention of the Trade Practices Act 1974 (Cth).

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The next step

Interested parties who wish to make a submission on the Standard and issues raised in the Discussion Paper must do so by 27 February 2009. If you would like assistance in drafting your submission, or any other information in relation to the Standard, please contact any of the people below.

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Footnotes
  1. Discussion Paper, at p.32.
  2. Discussion Paper, at pp.5, 7.
  3. This is a somewhat simplified explanation, because emissions for a year can legitimately exceed the applicable annual cap where those emissions are covered by eligible international units, AEUs issued for reforestation and synthetic greenhouse gas destruction, or AEUs issued under the transitional price cap. It is also the case that not all emissions sources within a covered sector attract liability under the CPRS, although their emissions will be taken into account in calculating the scheme cap.
  4. The Age, 'Switch to solar undermined by Rudd climate plan', 19 December 2008; 'Green homes may pay for the big polluters', 26 January 2009; 'Solar not being taken seriously, says enthusiast', 31 January 2009.
  5. White Paper, pp.7-43 to 7-45.
  6. See further White Paper, section 7.7.2. 
  7. Discussion Paper, at p.22.
  8. This requires the use of a default methodology or a higher order methodology, which are referred to as methods 1 to 4 in the National Greenhouse and Energy Reporting (Measurement) Determination 2008.
  9. See previous footnote.

For further information, please contact:

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