Carbon credits are imperfect instruments with the potential to protect Australia’s economy as we push towards greater climate ambition. But they could also turn into hot air and stall the green transition if we don’t radically redesign the market.
Life is pretty confusing these days. Disinformation, misinformation, and just plain information, all hurtling at us through a fire hydrant.
Amongst the fog, there are commentators who purport to be able to distil mind-boggling complexity into a neat hierarchy of facts and truths. These people have become irresistible assets for their promise of mountain-top views of the world’s most complex issues.
It’s just that our wonderful world can’t be reduced into neat soundbites of truths and facts, meaning that these commentators often render people’s confusion worse than their original state.
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That’s exactly what’s happening in the world of carbon markets, where the debate has become hyper-polarised between those who see carbon markets as sublime, often with vested interests, and those whose ideological position is to see them as a curse.
An uncomfortable truth is that carbon markets could be either, but by definition are neither, and whether they help us meet the Paris Agreement’s objectives is all in how they are implemented. It’s complex, and for some parts of the debate, there’s no right and wrong, just an uncomfortably grey middle ground.
Cutting the Gordian knot
Who would have thought that burning ancient plants and animals could lock us into a Gordian knot as complex as this one? Burning these fossil fuels has delivered a sugar rush to the global economy so addictive that we simply don’t know how to let go, even as we start turning green at the gills. To stop burning fossil fuels overnight would probably lead to the collapse of financial markets and civilisation, but to keep burning with impunity will also do the same, just slightly further down the track.
The Paris Agreement is a script on how to cut the knot so that we keep global warming to well below 2 degrees. Carbon markets make it into the script, but as an auxiliary to direct decarbonisation, with the agreement putting the onus on developed countries, like Australia, leading with rapid greenhouse gas emissions reductions.
So, when compliance schemes like Australia’s Safeguard Mechanism are designed with an emphasis on carbon markets over direct decarbonisation, they’re rightly criticised as being misaligned with Paris and incapable of cutting the Gordian knot.
Carbon credits are imperfect, but have a place
Carbon markets, in Australia at least, have grown largely around projects that promote and protect nature. Trees are ready-made carbon dioxide removal units that suck in CO2, storing carbon in their trunks, stems and roots, and releasing oxygen back into the air. But there’s a catch. This carbon is vulnerable to being released back into the atmosphere from things like fires, tree felling, and tree deaths during drought and disease outbreaks.
In scientific speak, this carbon is stored in the ‘active carbon cycle’, meaning nature-based carbon projects act as holding pens, precariously storing carbon for 25, 50, or, if you’re lucky, over 100 years. That’s not like-for-like compensation for carbon that has been released from fossil fuels that were geologically stored for millions of years.
Many of these nature-based projects achieve more than just storing carbon; they rebuild ecosystems and safeguard precious biodiversity. But if elsewhere in the economy we’re not decarbonising and phasing down fossil fuels, then these protected ecosystems won’t survive long-term as the full force of global warming cooks our natural environment and turns the credits from these projects into smoke.
Nature-based credits are first-aid responses; precious Band-Aids that buy us time by locking away carbon temporarily. But having Band-Aids is not a licence to create new wounds. Using Band-Aids this way would make no sense because it does not improve the patient’s overall condition.
Simply put, carbon credits must lock away carbon but not get in the way of direct decarbonisation.
Some, who are ideologically opposed to carbon markets, say this can’t be done, and that carbon markets always get in the way of direct decarbonisation. But reality isn’t black and white; it’s grey, and the two can absolutely work together. A clear example of symbiosis is seen in Australia’s manufacturing sector.
Carbon markets buffer struggling manufacturing facilities from the full brunt of the decarbonisation challenge and, most importantly, by doing so, buttress their creditworthiness. This, in turn, supports credit flow from external lenders towards upgrades that improve operational efficiency and reduce emissions. The value of ACCUs held on manufacturers’ inventories can also be monetised on balance sheets through borrowing base facilities that again support financing of near-term direct decarbonisation projects. This effective symbiosis, where carbon markets are leveraged to support financing of direct decarbonisation projects, simply isn’t acknowledged by carbon market detractors.
Steering carbon markets towards ethical use cases
Next year’s scheduled review of the Safeguard Mechanism coincides with Australia’s strengthened commitment to the Paris Agreement through the G20 joint statement over the weekend, and its presidency of next year’s COP negotiations in Türkiye. It’s an opportunity for Australia to redirect carbon markets towards new demand sources as we decarbonise our economy. The implosion of the federal opposition also affords the government precious breathing space to contemplate new demand signals so that we don’t pull the rug out from under an already struggling ACCU market.
It would be a mistake to deprive our struggling and hard-to-abate manufacturing sector of access to ACCUs for the reasons outlined above. We should also encourage an expansion of the Mechanism into new sectors, such as agriculture, which could drive investments in productivity-enhancing practices that also build natural capital and sequester carbon. Successful symbiosis between direct decarbonisation and carbon markets could also be forged in the construction, cement production, and chemicals industries, amongst others, where facilities often fall below current liability thresholds.
Going forward, Australia’s Carbon market must maintain a razor-sharp focus on the quality of credits issued to the market while the Safeguard Mechanism pivots into other sectors and caps facility ACCU allocations to prioritise direct decarbonisation.
We should also tone down dull and clichéd criticism of carbon markets, which serves only to stall investment in vital nature repair projects and shun key industries. But we must take valid criticism seriously.
That’s because carbon credits are an effective first aid response, but only if we put a stop to the self-inflicted wounds.
