Speculation that carbon credits could be Australia’s next big sunrise industry is far from new, yet despite this hype, too few companies understand how they might be impacted over time.

While participating in the voluntary Australian Carbon Credit Unit (ACCU) Scheme, companies can produce carbon credits through projects that either reduce emissions or sequester carbon (see below) and can end up selling them to those who need them under the Australian Safeguard Mechanism.

Additionally, a farmer can undertake an ACCU Scheme project such as a tree-planting project to produce ACCUs that can then be sold (via a broker like South Pole) to businesses wanting to make climate-related claims with these [carbon] credits.

Tightening compliance

For example, there is now a compliance aspect that directly affects Australia’s biggest emitters. As a case in point, companies that emit 100,000-plus tonnes of carbon dioxide equivalent (CO2e) annually, are required to stay below an emissions baseline or purchase carbon credits to avoid paying a pecuniary penalty.

What the Australian Safeguard Mechanism does by default is heighten the environment for future carbon trading, with demand for ACCUs increasing the closer we get to 2030. It is important to understand that the baseline will keep declining on a trajectory that keeps Australia in line with achieving a 45% reduction on 2005 emissions by 2030.

The $64,000 question is that if any business you are buying or valuing has to buy ACCUs, do they want to be in a position where they’re price-takers as we get closer to 2030?

We have a lot of people coming to us, especially those subject to the Australian Safeguard Mechanism who are nervous about how much they might have to pay for credits, especially on the voluntary market, closer to 2030.

By that stage, they might not be able to get credits or are only able to obtain them at a remarkably high price.

One approach to de-risk the lead-up to 2030 is for companies to undertake a forward purchase agreement that is funding, for example, a tree planting project that will issue ACCUs in the coming years.

For example, we are currently working with a farmer who wants to revegetate but doesn’t have the money, so we’ve put them in touch with an investor who wants a forward purchase agreement of those credits.

Science-Based Targets Initiative

Separate to the Australian Safeguard Mechanism, there is also a lot of talk around being ‘carbon neutral’ or ‘climate neutral’. This is where a company undertakes a carbon account under a standard, such as Climate Active, and purchases an equal amount of carbon credits to offset its environmental impact for a given year.

However, given the misuse of the claims around being carbon neutral, people are starting to move away from using this term.

South Pole globally has been part of a movement to talk about funding climate action instead.

South Pole is part of a global movement that’s refocusing on long-term goals and the Science Based Targets initiative (SBTi). Aligning with climate science, the SBTi focuses on a net zero strategy into the future, where companies make a pledge and implement strategies to reach net zero by 2050 at the latest.

When we talk about aligning with climate science, we mean limiting the global temperature rise to 1.5 degrees Celsius.

Under the SBTi, this means getting companies to reduce their emissions by 90% (by decarbonising their operations) rather than just buying carbon credits. The SBTi recognises that it is not, in most situations, possible to have absolutely no emissions, so enables the use of carbon credits to offset the remaining 10%.

The SBTi also recognises and encourages Beyond Value Chain Mitigation (BVCM), which encourages companies to purchase carbon credits in the short term. This way, they are having an immediate climate impact by financing real projects currently being implemented on the ground, during the time it takes them to transition to lower emissions operations.

The road to climate leadership

Step one in getting to net zero under the SBTi is to measure the carbon footprint and risks to a business in line with stated targets (such as the 1.5 degrees C warming scenario).

Start with the low-hanging fruit, and within buildings that means installing things like LED lights, triple-glazed windows and renewable energy.

Given that decarbonisation tends to take time, the strategy allows companies to purchase carbon credits from outside their value chain (BVCM) to reduce their overall amount of pollution.

That could mean funding projects that are already having a positive impact on the environment by purchasing carbon credits from outside a company’s supply chain.

Some questions answered

What is a carbon credit? It’s equivalent to 1 tonne of CO2 that’s either removed from the atmosphere through sequestration, via activities like tree growing or preventing it from being emitted into the atmosphere.

How can companies receive carbon credits? The Clean Energy Regulator, which is a branch of government, administers the ACCU Scheme which has methodologies to incentivise businesses and individuals to adopt new technologies or practices – either by avoidance or sequestration – that produce ACCUs.

What kind of projects are eligible under carbon markets? These can include household emission avoidance projects, renewable energy (like wind farms) and nature-based solutions, forestry, planting trees, preventing further deforestation, and grazing management practices to improve soil carbon – which is a sequestration method.

What is required for an activity to qualify as a carbon project? You have to prove (with statutory declarations/, photos, and other evidence) that the activities are genuinely taking place, which means they need to be measurable against a credible baseline. ACCU Scheme projects require at least three audits over a project period.

What exactly does carbon neutral mean? Carbon neutral is where a company purchases an equal amount of carbon to compensate for its emissions on an annual basis.