The dodgy, so-called “offsets” that undermine Australia’s central climate policy

In the first article in our two-part series on our new report for The Australia Institute, we explained how Australia’s central policy for decarbonising large industrial facilities (like coal mines and gas production plants) was failing to drive down emissions because it lets big polluters rely on an unlimited amount of so-called offsets in lieu of reducing their own emissions.

In this second instalment, we explain the problems with carbon offsetting in general, and dig into the key problems with the carbon offsets used in Australia’s scheme.

Carbon offsetting’s chequered history

Carbon offsets have been around a long time: instead of cutting emissions from your own activities, you can pay for carbon credits generated by someone else who has done something to benefit the climate, and thereby claim that you’ve cancelled out the climate impact of your emissions.

Mostly, purchasing offsets is a voluntary transaction available to individuals (e.g., when they buy a plane ticket) or companies who want to make claims about being “carbon neutral” or “net zero”. But now that offsets can be used in Australia by companies to comply with their legal obligations under the Safeguard Mechanism, demand for offsets has been supercharged, so it’s even more important that their effectiveness, or integrity, be scrutinised.

Because offsets have been around, in many different guises around the world, for decades, experts have been able to extensively study their effectiveness. They find that, in general, offset projects that purport to avoid greenhouse gas emissions or remove carbon from the atmosphere are massively over-credited relative to the actual emissions avoided or removed, and that many offsets do not drive any real or additional emissions cuts at all. In other words, many offsets are “low-integrity”, or simply fraudulent.

The systemic problems with offsets explain why most other jurisdictions with carbon trading schemes either prohibit their use entirely (e.g. in the EU and UK), or strictly limit the amount they can use (e.g., to 5% of compliance obligations in South Korea and 6% in California). Australia is one of a small handful of jurisdictions, including Kazakhstan, that allows companies to use unlimited offsets to meet their legal obligations.

So what are the offsets that Australian companies can use under the Safeguard Mechanism?

Australia’s menu of carbon credits

The Safeguard Mechanism allows two types of carbon credits to be used as offsets.

The first kind are Safeguard Mechanism Credits (SMCs). In our first post, we explained how companies whose Safeguard Mechanism-regulated facilities emit more than their baselines have to use offsets to bring their “net” emissions back to their baseline level. Well, SMCs are credits generated by companies whose Safeguard Mechanism-regulated facilities emit less than their baselines for a given year. For example, if a coal mine has a baseline in a given year of 1 million tonnes of carbon dioxide equivalent but actually emits 900,000 tonnes that year, the regulator will give that facility 100,000 SMCs, which it can keep for itself to use in later years if it needs, or sell to the operators of other facilities that are in excess of their facility baselines.

But the baselines are effectively arbitrary numbers, and many companies have been given SMCs merely because their emissions are below their baselines despite doing absolutely nothing to decarbonise. So many of these credits are merely “hot air”.

The second type of credits are Australian Carbon Credit Units (ACCUs). ACCUs are generated by projects outside of the Safeguard Mechanism that use a government-authorised methodology to (claim to) avoid greenhouse gas emissions or remove carbon from the atmosphere. They can get their project accredited with the regulator, who issues them with a number of ACCUs, each of which nominally represents one tonne of carbon dioxide equivalent that their project purportedly avoids or removes.

But the kinds of projects that generate the vast bulk of these ACCUs have been subjected to strong and persistent criticism from experts who have found that most of them are likely not to represent real, additional emissions abatement at all.

Most ACCUs that have been used to date—and the biggest source of ACCU growth—come from projects that purport to store carbon in vegetation. But, according to one expert, “People are getting ACCUs for not clearing forests that were never going to be cleared; they are getting credits for growing trees that are already there; they are getting credits for growing forests in places that will never sustain permanent forests”.

Vegetation projects face an even more fundamental problem: they can at best store carbon for a few decades—maybe a hundred years. By contrast, when fossil fuels are dug up and burned, a large fraction of the resulting carbon dioxide lasts in the atmosphere for thousands of years. So, even if these vegetation projects are genuinely additional to what would have otherwise occurred, they are inherently incapable of offsetting the full harm to the climate system caused by fossil fuels.

Can offsets be fixed?

Fans of offsets (usually people who benefit from them financially) perennially promise that they can be improved through better governance. But this is naïve (and/or self-serving). There is a fundamental market dynamic that leads to lower quality credits: buyers want access to the cheapest credits available in order to comply with their legal obligations; the cheapest credits tend to be the lowest quality (e.g., doing nothing at all is very cheap!); and this focus on low-price over high-quality drives a race to the bottom among offset producers.

While a well-intentioned government intent on ensuring climate integrity might be able to mitigate this dynamic somewhat, we shouldn’t expect they will be able to come close to avoiding these problems entirely. As a former offsets developer put it: “When people write offset rules, they always ignore the fact that there are 1,000 smart people next door that will try to game them”.

And as for whether we have a well-intentioned government intent on ensuring climate integrity—or a government intent on designing climate policies that give the impression of serious action but that actually serve the interests of the fossil fuel industry—we’ll let you be the judge.

Fergus Green and Frances Medlock are the authors of the Australia Institute’s new report, ‘Safeguarding the Fossil Fuel Industry? How Carbon Offsetting Undermines the Safeguard Mechanism’.

Dr Fergus Green is an Associate Professor in the Department of Political Science and School of Public Policy, University College London and an Honorary Senior Fellow at the Melbourne Law School, University of Melbourne.

Frances Medlock is a policy and law reform lawyer currently undertaking a Masters in Climate Change Policy & Politics in the Department of Political Science and School of Public Policy, University College London.