Governance of carbon capital
And the downfalls of industry policy
Is it a problem when big fossil fuel companies grow and trade carbon credits?
There’s been plenty of noise in the press the past 10 days - and a little bit of signal if you look hard enough.
The Age ran this headline last week:
Large fossil fuel companies are making multimillion-dollar investments in carbon companies and offset projects, raising concerns among industry insiders and experts that the sector is funding lowest-cost and lower-quality emission offsets, rather than tackling climate change as was intended.
There’s a few claims here worth unpacking.
Firstly, it’s not surprising that Australia’s biggest GHG polluters have an interest in carbon projects. The Safeguard legislation means that the largest 219 polluting facilities must reduce their emissions by 4.9% each year. If they can’t, they must buy ACCUs to top up the difference, or compensate another firm that has reduced by more than 4.9% (through buying their Safeguard credits).
This market mechanism means all large GHG emitters are scrambling to secure long-term ACCU supply - at the lowest cost. One of the best ways to ensure a robust and cost effective supply chain is vertical integration.
Recent deals by subsidiaries of fossil fuel companies show a strong preference towards controlling project development in-house rather than relying on ACCUs available on the secondary market.
Secondly, the fact that ACCU transactions are largely based on price is the sign of a functioning market between buyers and sellers. Strict quality standards for ACCU methodologies and verification are already in place. We know that low quality emission offsets are a risk to Australia meeting net zero commitments, as well as our international credibility.
The secondary market recognises this risk, with a significant premium being paid for more recent ACCU projects developed with tangible co-benefits.
Thirdly, criticisms around the sector focusing too much on offsets, ‘rather than tackling climate change as was intended’ are largely justified.
The Australian Academy of Science observation that ‘over the decade of the ERF’s operation, the scheme has become less of a climate policy instrument and more of an industry policy mechanism’ is reflective of the messy legislative journey the offset market has been on.
Commonwealth government interventions to allow sellers to exit their fixed delivery contracts for the government led to more supply on the secondary market crashing prices.
This, alongside the government’s ‘cost containment’ policy that caps ACCU prices at $70 for Safeguard facilities, means there are significant concessions to allow our biggest polluters to meet their Safeguard targets.
In short, the Commonwealth is left with two options. Design a carbon market with clear rules and integrity standards, then let market forces determine price. Or, continually ‘manage’ the market through industry policy to make the transition more palatable for our biggest GHG polluters.
