Efficient trading in emissions credits is the lowest-cost path to addressing climate change. Our best knowledge today indicates that removing carbon dioxide from the atmosphere will be necessary to achieve a stable climate by offsetting emissions that are either too difficult or too expensive to eliminate.
These two forms of offsetting are critical if Australia is serious about a net-zero objective.
Grattan Institute’s latest report, Towards net zero: Practical policies to offset carbon emissions, explains why this is the case, and what governments should to do to ensure that offsetting works credibly and efficiently.
Three earlier Grattan reports identified practical actions that Australian governments can take now to reduce transport, industrial and agricultural emissions. These actions would also create momentum towards net zero by 2050. Some of these actions build on existing mechanisms – the Emissions Reduction Fund and the Safeguard Mechanism. They create and facilitate trading in credits across sectors.
Market mechanisms to reduce emissions are lower cost than alternatives because they allow trading between parties for whom the cost of reducing emissions is high and others whose costs are low.
The federal government established the Emissions Reduction Fund (ERF) with two elements: to enable Australian Carbon Credit Units (ACCUs) to be created with integrity, and for project proponents to be paid via a reverse auction process.
Companies that have made voluntary commitments to reduce emissions are now driving a rapid expansion in the demand for ACCUs.
A narrower version of credit trading applies to the Safeguard Mechanism when companies whose emissions exceed a set baseline buy ACCUs to offset the difference.
Need for integrity
Concerns have been raised about whether some ACCUs represent real emission reductions, but the processes applied by the Clean Energy Regulator to ensure integrity are generally sound and continuing improvements should ensure that remains the case. This is critically important if buyers and sellers are to have confidence in the commodity being traded.
The same need for integrity applies when the credits have been created in other countries and/or accredited by different bodies. Integrity concerns have led governments in some countries to either restrict the use of such offset credits in their market or apply a discount to their value. This is the case with the EU Trading Scheme, which restricts the use of international credits created by some projects in other countries.
Australia is in a good position to integrate domestic and international emissions reduction credits into its suite of climate policies. The government is taking steps to ensure the integrity of such credits.
As the market is evolving rapidly, now is the time for the government to be clear on the role of offsetting in its policies. Actions being taken now to support offsetting should be accompanied by close oversight to maintain market confidence and environmental integrity.
Actions taken today can accelerate emissions reduction and build momentum towards the objective of net zero by 2050. The ERF, financed through the Commonwealth’s budget, provides a financial incentive to support these actions. Ultimately, the budget allocation will limit its contribution to emissions reduction.
Our best knowledge today indicates that there will be emissions that will be hard or expensive to avoid. The only option will be to take deliberate action to remove CO2 from the atmosphere. Balancing emissions with removals is what net zero means in practice and, at its simplest, looks to recreate the climate stability that predated the industrial revolution.
While research and development to support low-emission technologies will minimise the need for CO2 removals, emissions in Australia could still be of the order of 100 million tonnes a year by 2050.
Actions that could offset those emissions include planting trees, rebuilding the carbon in our soils, and directly capturing CO2 from the air and storing it underground.
The challenge is that permanent removal of CO2 at such scale through these actions is uncertain or expensive – or both. The technologies are at different stages of development, and considerable work is required to quantify their potential supply and costs.
The federal government should plan to step back from being a market participant and the primary funding source. Its best roles will be as market maker, and supporter of R&D and early-stage deployment.
Australia can make substantial progress now to reducing emissions, and offsetting reduction credits will help keep costs down. Alongside, we need to sort out the potential and role for CO2 removals.
Net zero beckons.
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