The effect humans are having on the global climate is a hot topic, with human-induced global warming expected to reach 1.5°C by 2040. Governments around the world have set a net-zero target by 2050, but the decarbonisation process is more complex than meets the eye. Find out more about how carbon credits can help to supplement this process.
The effect humans are having on the global climate is a hot topic. If the current trends in greenhouse gas (GHG) emissions continue, human-induced global warming is expected to reach 1.5°C by around 2040. In response to this, governments around the world have set a target of net zero emissions by 2050, with interim targets set to benchmark how progress is being made by 2030.
With the effects of climate change becoming more apparent every day, decarbonisation is increasingly essential to society. Unfortunately, the decarbonisation process is more complex than meets the eye. Because of the inherent complexities of each industry and organisation, decarbonisation does not have a ‘one size fits all’ approach and will be easier for some industries than others. While this is a complex field with many moving parts, the most important thing is to start now. This can be done by measuring emissions and addressing any easy improvements to reduce emissions, while carbon credits can be used to offset emissions in industries that cannot decarbonise as quickly.
What are carbon credits?
Carbon credits are a transferable, certified record that represents one tonne of carbon dioxide equivalent. They can broadly be split into two groups:
- Those that avoid or reduce emissions of GHGs to the atmosphere, or
- Those that remove existing GHG emissions in the atmosphere.
Carbon credits and the corresponding carbon market came into being in 1997 when parties to the Kyoto Protocol committed to limit or reduce their emissions. Countries with emissions to ‘spare’, that is, emissions falling within their allocated cap but not used, could sell this excess to other countries under Article 17 of the Kyoto Protocol. This concept has evolved into domestic and regional trading systems such as the European Union emissions trading scheme.
The carbon crediting system is only possible due to climate change being a global environmental issue, in that any GHG released mixes throughout the atmosphere, so any reduction in GHG emissions contributes to the overall decarbonisation effort. Put simply, the more parties on board, the greater the overall reduction.
How do carbon credits work in Australia?
In Australia, the Government’s core policy tool to address climate change is the Emissions Reduction Fund (Fund), whose main objective is to meet the international GHG emissions reduction targets. The Fund is administered by the Clean Energy Regulator (Regulator) and has three key components:
- Emission reduction credits, known as Australian Carbon Credit Units (ACCUs),
- An emission reduction purchasing process, and
- The safeguard mechanism.
The Regulator also administers the Australian National Registry of Emissions Units (ANREU), a national registry required as part of the Kyoto Protocol that supports the issuance, holding, transfer, and acquisition of ACCUs. An ANREU account is required to be able to hold ACCUs.
The Regulator issues ACCUs to projects that have eligible activities as set out in the methodology determinations, which currently cover:
- Carbon capture and storage
- Energy efficiency
- Mining, oil and gas
- Vegetation management, and
- Waste and wastewater.
Once a project has been approved and ACCUs are allocated, it will appear on the public register published by the Fund, which outlines the description, location and ACCUs issued to date for every project. Those companies that need ACCUs for mandatory or voluntary surrender can either set up a project, or purchase ACCUs through either the Carbon Market Institute’s Carbon Marketplace or by directly contacting projects on the register.
Regardless of whether a carbon credit is surrendered for mandatory or voluntary reasons, it is transferred to the Regulator and marked as surrendered to ensure that it is no longer in circulation. All voluntary cancellations surrendered to the Government are held on a public registry.
What is the market for ACCUs?
To encourage continued investment in emission reduction activities in the Australian economy, the Regulator operates a reverse auction once a year where projects bid against each other to sell carbon credits to the Regulator through a carbon abatement contract. These contracts are set as either:
- Optional delivery, where the contract provides the right but not the obligation to sell carbon abatement to the Government, or
- Fixed delivery, where the contract obligates provision of ACCUs at a set price for the duration of the contract.
While the individual contract prices are withheld, as it is confidential commercial information, all other details of the contract are published on the public contract register.
The safeguard mechanism came into effect on 1 July 2016 to ensure that these emission reductions are not counteracted by increases in emissions elsewhere. The safeguard mechanism applies to large facilities that produce more than 100,000 tonnes of carbon dioxide equivalent emissions. Once a facility exceeds that threshold, it must either ‘surrender’ carbon credits to offset the difference or apply for a larger ‘baseline’ of acceptable emissions. Several types of baselines are available under the safeguard mechanism based on the particulars of the facility, with information about the approved baselines released each year on the Regulator’s website.
The Regulator’s auction and safeguard mechanism initially formed the primary market for carbon credits; however, as more organisations and governments have started setting net zero and interim targets, the voluntary demand for carbon credits has grown. The demand will continue to grow as more companies implement decarbonisation strategies, as seen in the corresponding launch of voluntary markets such as the London Stock Exchange Voluntary Carbon Market.
Are ACCUs a financial product?
ACCUs are considered a ‘financial product’ under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, meaning that an Australian financial services licence (AFSL) may be needed to provide financial services for ACCUs. That said, under the Corporations Act 2001, as far as the carbon abatement contracts are concerned, advice about entering into a carbon abatement contract does not require an AFSL.
For the tax treatment of ACCUs generally, the following applies:
- The supply of ACCUs is GST-free,
- The cost of obtaining an ACCU is tax deductible, and
- The proceeds of selling an ACCU are “assessable income on revenue account in the income year the ACCU is sold”.
Here to help
If you need assistance with any aspect of the carbon credit system, from applying for a project to trading ACCUs, please contact one of our sustainability experts.
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