AASB S2 Pillar 4: The role of carbon credits

Article

Published: November 11, 2025 |

Our sustainability webinar series breaks down the complex world of sustainability, making it a little easier for you to understand the basics and begin driving change within your organisation.

As organisations continue to adapt to the evolving climate reporting landscape, Pillar 4 of AASB S2 Climate-related Disclosures spotlights a critical question: will carbon credits be used to achieve net zero targets? While previous webinars have explored the governance, strategy, and risk management pillars of climate disclosures, Pillar 4 shifts the focus to metrics and targets specifically, how entities measure, track, and disclose their carbon footprint, and the role carbon credits play in decarbonisation strategies.

In this article, we explain the latest guidance on carbon credits, share what Australian organisations need to know, and offer our tips to help you make sense of where sustainability and financial reporting meet.

Our carbon mitigation hierarchy

The carbon mitigation hierarchy isn’t just a theoretical model; it’s a practical roadmap for organisations looking to decarbonise effectively and credibly. As highlighted, each step in the hierarchy comes with real-world choices and consequences, especially in the Australian context.

(Click the diagram to expand)

Practical tips for applying this hierarchy

Here’s how you can put each step of the hierarchy into action:

1. Avoid	The most effective way to cut emissions is to avoid creating them in the first place. Aletta shared a practical example: instead of sending multiple team members to international conferences, send just one representative who can brief the rest of the team. This simple change can significantly reduce travel-related emissions and costs.
2. Reduce	When avoidance isn’t possible, the next best step is to reduce emissions by making activities less carbon-intensive. This could mean upgrading to more efficient machinery, adopting new manufacturing processes, or switching to lower-emission technologies. The focus here is on continuous improvement—finding smarter ways to do the same work with a smaller carbon footprint.
3. Restore	Restoration is about replacing emissions by transitioning to renewable energy sources. Aletta pointed to Tasmania’s electricity grid, which has the lowest emissions factor in Australia thanks to its high share of renewables. Moving towards solar, wind, or hydro power not only reduces emissions but can also future-proof your organisation against rising energy costs and regulatory changes.
4. Offset (only as a last resort)	Offsetting is reserved for those emissions that simply can’t be avoided, reduced, or restored. The webinar emphasised that carbon credits should only be used for these residual emissions—not as a shortcut or an excuse to delay action elsewhere. When offsets are necessary, it’s crucial to: Use only high-quality credits from official programmes (such as the Australian Carbon Credit Unit scheme). Ensure credits are uniquely serialised, issued, tracked, and cancelled to avoid double-counting. Understand the difference between nature-based and technology-based offsets, and seek robust assurance.

Why the hierarchy matters

Not all offsets are created equal. With regulatory expectations rising, both investors and auditors are scrutinising the quality and credibility of carbon credits. The hierarchy isn’t just best practice, it’s increasingly a compliance requirement under AASB S2 and the Safeguard Mechanism. Decisions at each step can affect both your sustainability and financial reporting, especially if you plan to use offsets (which may create a liability in your accounts).

Ultimately, the carbon mitigation hierarchy is more than a checklist—it’s a mindset. Start with avoidance and reduction, invest in restoration, and only use offsets for what’s truly unavoidable. Make sure every step is backed by quality data, credible credits, and clear disclosures.

With the hierarchy in mind, it’s important to understand how carbon credits are defined and managed under AASB S2.

Understanding carbon credits under AASB S2

AASB S2 sets out clear expectations for how organisations should approach carbon credits in their sustainability reporting. The standard doesn’t just ask if you’re using carbon credits—it wants to know how you’re ensuring their quality, traceability, and integrity.

What are carbon credits?

Under AASB S2, carbon credits are defined as emissions units issued by official carbon crediting programmes. These credits must meet strict requirements:

Quality: Only credits from recognised, reputable programmes (such as the Australian Carbon Credit Unit (ACCU) scheme) should be used. This helps ensure that the emissions reductions or removals are real and verifiable.
Traceability: Credits must be uniquely serialised, issued, tracked, and cancelled via an electronic registry. This prevents “double-dipping”—using or selling the same credit more than once.
Assurance: There must be robust systems in place to verify that credits are genuine and not subject to fraud or error.

The Australian context

The ACCU scheme, governed by the Clean Energy Regulator, is Australia’s official framework for generating and managing carbon credits. The scheme encourages projects that reduce emissions or store carbon, and provides a transparent registry so buyers can check the provenance and quality of credits. When purchasing credits, organisations should always check that:

The credits are registered and tracked in the official registry.
The project methodology is approved, and the credits are not already claimed elsewhere.
The credits align with the type of offset needed (e.g., nature-based vs. technology-based).

Important note:
Treat carbon credits with the same rigour as any other asset or liability, ensure quality, traceability, and transparency, and make sure your disclosures under AASB S2 and your financial statements tell a consistent story.

Carbon credits and the safeguard mechanism

Australia’s Safeguard Mechanism is a regulatory framework designed to limit emissions from the country’s largest industrial facilities. Under this scheme, facilities are required to keep their emissions below set baselines, which are being tightened over time to help Australia meet its climate targets.

How do carbon credits fit in?

Facilities that exceed their emissions baselines can use Australian Carbon Credit Units (ACCUs) to offset their excess emissions. This creates a direct link between the Safeguard Mechanism and the carbon credit market:

ACCUs must be surrendered to the government to demonstrate compliance, not just purchased or held.
Only high-quality, officially recognised credits (such as ACCUs) are accepted, ensuring integrity and traceability.

Recent updates and what’s next:

The Australian Government has recently increased its ambition, announcing a new interim target of a 62 to 70 per cent emissions reduction by 2035 (up from the previous 43 per cent by 2030).
This means the annual baseline decline rate for facilities, currently 4.9 per cent, is likely to become even more stringent in the coming years.
Organisations should expect ongoing changes to compliance requirements and should plan for a greater reliance on high-quality carbon credits as part of their decarbonisation strategy.

Key concepts explained

Confused by all the sustainability lingo? Here’s a quick guide to some of the big terms Aletta broke down in the webinar:

Net zero: Getting as close as possible to zero emissions, then balancing what’s left by removing carbon from the atmosphere.
Carbon removal: There are ways to actually remove carbon from the air. Nature does this with trees and soils (reforestation, healthy farms), while technology can lend a hand with things like direct air capture (fancy machines that “vacuum” carbon from the sky).
Permanence: Ensuring that carbon removals last for the long haul, often 25 to 100 years. It’s not enough to sweep carbon under the rug; it needs to be locked away securely.
Nature-based vs. technological solutions: Nature-based solutions rely on the planet’s own systems (forests, wetlands, oceans) to absorb carbon. Technological solutions use human-made inventions. Both have their place, but nature’s biodiversity is a powerful ally, and tech still faces some big challenges.

Where carbon credits meet financial statements

As sustainability and financial reporting become increasingly intertwined, the way organisations account for carbon credits is gaining new importance. Under AASB S2, carbon credits are not just a sustainability tool; they’re an asset or liability that must be recognised and measured with care.

When an organisation purchases carbon credits to offset emissions, these credits may be classified as inventory (if held for sale) or as intangible assets (if held for use in offsetting emissions). The distinction matters: it affects how credits are valued, disclosed, and tracked over time. For-profit and not-for-profit entities may also apply different accounting standards, so it’s essential to understand which rules apply to your organisation.

The key is consistency. Disclosures about carbon credits in your sustainability report should align with your financial statements. Auditors and stakeholders will expect to see a clear link between your decarbonisation strategy and your financial reporting, especially if you plan to use offsets, which may create a liability for future purchases.

Make your carbon credits count

Ready to make your carbon credits count? Contact our national sustainability reporting team to discuss how we can help you build robust, transparent reporting and take the next step in your sustainability journey.

For more details and related resources: