I have been asked by several peers to provide a summary of the key legal and accounting issues behind my assertions that Australia’s accredited renewable electricity products and carbon offsets lack legitimacy and integrity. This might come as a surprise to some but it is pretty easy to back up. Over many years, government departments, assurance organisations and authorities have not been able to provide a credibly dispel concerns raised and typically dismiss them as out of scope or not a current priority.
Greenhouse accounting overview and the greenhouse gas protocol
Greenhouse and renewable electricity accounting is often seen as complicated rules and policy that are too complex for most consumers to understand, yet if renewable electricity and offsets were solid objects that could be traded in blocks, then the accounting issues would be apparent for all to see.
The Greenhouse Gas Protocol is a globally accepted set of standards for accounting for greenhouse gas emissions and describes key types of emissions as outlined below:
- Scope 1 emissions – direct emissions from burning fossil fuels or releasing other harmful gasses
- Scope 2 emissions – indirect emissions associated with using energy where the emissions occur in another location, including imported electricity, heat and steam
- Scope 3 emissions – other indirect emissions in the life cycle of products and services
Accounting for electricity and renewable electricity
Accounting for electricity and renewable electricity specifically refers to Scope 2 emissions.
There are different ways to account for scope 2 emissions and it is up to governments to determine how they will be accounted for in their jurisdictions. However, the GHG Protocol does provide guidance on how to establish accounting that ensures quality and integrity for two broad alternative approaches.
- The location based method is where emissions from all generation sources are pooled and are allocated across all customers in a jurisdiction in proportion to their electricity consumption from the grid. This is done through a pooled emissions factor that applies to that market jurisdiction. It means that regardless of any decision made by a customer, all electricity emissions are allocated at the same rate per kWh. Under such a framework choices like GreenPower do not work
- The Market Based Method enables customer choices for renewable electricity so that individual households and businesses can buy accredited renewable electricity, claim renewable electricity use and claim zero electricity related emissions. However, there is a logical requirement that when this is done, those renewables claimed uniquely in contracts need to be removed from the pooled emission factors in a jurisdiction to prevent dilution and double counting. This requirement is achieved by establishing a Residual Mix Factor (RMF) that should apply to all consumers not buying renewable electricity. Those not buying renewables will report higher emissions compared to the location based method, whilst those buying the accredited renewable electricity have exclusive assess and rights to claim renewables use and zero emissions.
The Greenhouse Gas Protocol scope 2 guidance released in 2015, provides specific methods and quality criteria to ensure that market based renewable claims can have integrity and are indeed unique.
The core accounting issue with Australia’s end user renewable claims
In Australia, however, there has not been a clear government decision to adopt market based accounting or location based accounting, but rather both are used at the same time without any legislative support for consumer claims. This results in systemic double counting, where renewables are allocated across all consumers and claimed by those buying accredited renewables as well.
Specifically:
- The legislated National Greenhouse and Energy Reporting Determination uses the location based approach and applies it to about 415 of the largest greenhouse polluting or electricity consuming corporations
- The non-legislated National Greenhouse Accounts (NGA) Factors also apply the location based approach to the broader market and these are used to determine the default electricity emissions printed on customer bills and in carbon calculators across Australia.
Between the NGER Determination and NGA Factors the vast majority of renewable electricity is fully allocated and no further claims can occur without double counting. However, Australia has normalised double counting:
- GreenPower applies a market based approach to guide consumers to claim zero Scope 2 emissions
- The Climate Active – Carbon Neutral Accreditation Scheme allows either the market based method or the location based method to be used by their participants to claim carbon neutrality. Climate Active has prepared a RMF but this does not apply across all consumers in the market not buying renewable electricity so double counting is not prevented. The method of producing the RMF also does not remove voluntary renewables and behind the meter renewables from diluting the RMF
- The Corporate Emissions Reporting Transparency (CERT) scheme currently being trialled for NGER reporting organisations, allows a choice for the Location Based Method or the Market Based Method to be used
- The Hydrogen Guarantee of Origin Scheme currently being trialled, allows the Market Based Method to be used to make claims relating to the origin and greenhouse intensity of the hydrogen. Only the market based method is use for the Guarantee of Origin Scheme but those producers making NGER Reports still report using the location based approach
- The NABERs scheme covering buildings allows the market based approach
There is a variety of less formal methods to make claims which span across concepts, typically exploiting loopholes. These include:
- Power Purchase Agreements without Large Scale Certificates (LGCs) to make market based renewable claims
- Producing and consuming renewables on site, claiming zero scope 2 emissions and potentially use, whilst selling LGCs to third parties
- Claiming the state renewables generation as the percentage of renewable electricity purchased
- Claiming that time of day consumption aligns with renewable electricity generation and therefore represents use of renewables
All methods, whether in a mandatory or voluntary scheme context, are used by organisations and consumers to make reputational, product and service based claims or to lead to a belief that renewable electricity has been purchased.
Across market and location based methods, Australia’s accredited renewable electricity is systemically double counted as a minimum.
[The flaws in the system] mean pricing unfairness with those not paying for renewable electricity receive a free ride benefit, whilst those paying for renewable electricity are not assured through legislation that they are receiving what they have paid for.
This also means pricing unfairness as those not paying for renewable electricity receive a free ride benefit, whilst those paying for renewable electricity are not assured through legislation that they are receiving what they have paid for.
Renewable electricity for most ordinary small businesses and households are charged as a premium product when they should now be cheaper to buy as fossil fuelled electricity is now more expensive to produce.
Just consider how it would be seen if renewable electricity was a car, and a consumer has paid a premium price for their new car for it to be zero emissions, only to find out when asking for the keys to claim their ownership and exclusive use, they are told it has been driven down the road as a taxi for all.
But don’t Large Scale Certificates (LGCs) underpin claims?
LGCs are used to infer legitimacy and credibility of accredited renewable products, but they were not created or reformed for this purpose.
The Renewable Energy (Electricity) Act 2000 describes how LGCs are created under Section 18, and the form and content of LGCs under Section 25, but it is important to note that these sections do not include any suggestion that the key attributes of “renewables use” or “zero scope 2 emissions” are incorporated into the LGCs for trading and end use claims.
Without such an inclusion in a legislated accounting framework, LGCs fail to assure integrity or prevent double counting.
What about small scale household systems and Small Tradable Certificates (STCs)?
The National Greenhouse and Energy Reporting Technical guidelines describe that state (location based) grid factors are calculated from: “combustion emissions from electricity consumed from the grid in each state” divided by the “total electricity sent out consumed from the grid”.
As the vast majority of household small scale systems are producing and consuming the bulk of their solar electricity behind the meter (both an instant basis and a net consumption basis), this should have precluded the zero emissions from these renewables being allocated across all customers. An adjustment should have been made but that did not happen.
Using STC data from the Clean Energy Regulator, the Department of Industry, Science, Energy and Resources (DISER), has allocated all small scale renewables to the grid, as well as these being naturally claimed by households.
All of Australia’s voluntary renewables appear to be double counted.
Australian carbon offsets
Australian Carbon Credit Units share a very similar problem to that of renewable electricity in that there is no legislated market based accounting trading and claims framework to underpin offset emission claims made by end users.
Emissions reductions take place in the Scope 1 space but if third parties are seeking to make a market based claim then this needs to take place in the indirect emissions space (Scope 3). For this reason, I argue that carbon offsets should exist as negative scope 3 emissions.
The core accounting issue with Australian Carbon Credit Units
Australia has no legislated market based accounting framework to guide scope 3 emissions or emissions reduction trading and claims.
The creators of ACCUs are able to keep claiming emissions reductions from offset activities whilst selling ACCUs to third parties who also make emissions reduction claims. When the government says it purchases abatement through emissions Reduction Fund auctions, it is actually buying certificates, not abatement because these certificates do not incorporate the abatement.
Division 2 of the Carbon Farming Initiative Act (2011) describes multiple aspects relating to the issue of Australian Carbon Credit Units, but nowhere in this Act, does it describe the attribute of abatement, nor how abatement can be traded or claimed. Australian Carbon Offsets (ACCUs) do not legally contain the carbon offset that they are traded for in voluntary markets.
Just as legislated market based accounting is required to support end user renewable claims, legislated market based accounting is also required to guide Australia’s carbon offset markets and end user claims.
There needs to be debit and credit rules that apply to all markets. I have suggested solutions in my Submission on the Corporate Emissions Reduction Transparency Report (2nd round consultation) to align with the GHG Protocol Scope 2 Guidance for market based renewable electricity and to establish market based accounting for carbon offsets.
Without credible and legislated rules, Australian Clean Energy Markets will continue to operate in uncertainty and be challenged on their integrity.