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.

Whether you’re a property owner, a business owner or aspiring to be either, it is likely that the carbon markets will impact you in some way in the future. Getting up to speed now in order to understand the opportunities and risks is a smart business move.

Generating credits

Through participating in the voluntary Australian Carbon Credit Unit (ACCU) Scheme, landowners or companies can generate carbon credits through projects that either reduce emissions or sequester carbon. For example, a farmer could undertake a tree-planting project and receive ACCUs equivalent to the amount of carbon sequestered.

They can end up using these carbon credits as part of their own climate action strategy or selling them via a partner like South Pole. Generating and selling carbon credits can provide an attractive additional revenue stream for property owners.

One market for ACCUs is companies that need them under the Australian Safeguard Mechanism to meet compliance obligations.

Many companies also voluntarily purchase ACCUs in order to offset their emissions or make other climate-related claims.

Landowners have many options for generating carbon credits from their property, from tree planting to livestock management (Image credit: South Pole)

Tightening compliance

Pressure is increasing on companies to reduce emissions.

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

It is important to understand that the baseline will keep declining on a trajectory that keeps Australia in line with achieving a 43% reduction below 2005 emissions by 2030.

As well as pushing companies to reduce emissions, the Australian Safeguard Mechanism heightens the environment for future carbon trading, with demand for ACCUs increasing the closer we get to 2030.

Price-takers

Even those companies not impacted by the scheme will face the challenges of rising prices (pass-through costs) and supply constraints.

The big 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?

Many companies, especially those subject to the Australian Safeguard Mechanism, are nervous about how much they might have to pay for credits, especially on the voluntary market, closer to 2030.

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

South Pole specialises in helping companies set up this type of partnership.

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

Carbon neutral or net zero?

While compliance is a big driver of corporate climate action, there is a growing number of companies taking voluntary action in order to future-proof their businesses.

While tackling longer-term decarbonisation activities to get to net zero, many companies choose to offset their emissions by purchasing carbon credits today (either international credits or ACCUs).

By measuring their greenhouse gas footprint and offsetting an equivalent amount of emissions, companies can claim to be ‘carbon neutral’, with the option to strengthen this through a certification scheme such as the Australian Government’s Climate Active standard.

Recently the term ‘carbon neutral’ has faced scrutiny for being misleading to consumers.

The activity of measuring and offsetting emissions is highly valuable but claiming ‘neutrality’ can imply that a product or company had no environmental impact and lead to greenwashing accusations – so many industry leaders are moving away from the term.

South Pole has been driving a movement to talk about ‘funding climate action’ instead, to highlight the valuable role that carbon credits have to play in reducing global emissions.

In addition to funding climate action, companies should set net zero emissions targets and start working to decarbonise.

Science Based Targets

One of the leading frameworks for science-based target setting is the Science Based Targets initiative (SBTi).

Aligning with climate science (limiting the global temperature rise to 1.5 degrees Celsius), the SBTi focuses on a net zero strategy into the future, where companies make a pledge and commit to targets, and implement strategies to reach net zero by 2050 at the latest.

Under the SBTi, companies must reduce emissions by at least 90% through their long-term science-based targets – this has to be achieved by decarbonising their operations rather than 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 neutralise the remaining 10%.

SBTi also has dedicated guidance for companies in land-intensive sectors such as agriculture, which requires at least 72% decarbonisation by 2050, in addition to allowing the use of carbon removals in operations/supply chain.

The SBTi also 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.

So even as the world moves towards net zero, there is still a major role for carbon markets and Australian businesses will continue needing to secure future supply of carbon credits.

Preparing now and understanding how this will impact your current or future business activities will put you on the front foot for the climate journey ahead.

Some questions answered

What is a carbon credit? It’s a verified emission reduction equivalent to 1 tonne of CO2 generated by either removing greenhouse gas from the atmosphere through sequestration (via activities like tree planting) or preventing it from being emitted into the atmosphere (via activities like renewable energy or forest protection).

How can companies generate carbon credits? An emission reduction project must adhere to the requirements of a standard such as Verra or Gold Standard globally, or the ACCU Scheme here in Australia. 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 certification standards? These can include technology projects like renewable energy, waste management or sustainable cookstoves and nature-based solutions, such as 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? The certification standards bodies have rigorous criteria that projects must meet. For example, the emission reductions must be real and verifiable – those running the project 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 conducted by an external third party over a project period.

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

What does net zero mean? In straightforward terms, it means a world in which greenhouse gases have been reduced to a minimum – and residual emissions removed from the atmosphere. It is a long-term goal for the world and for companies, with current best practice advising that net zero must be reached by 2050 or earlier for the world to avoid the worst impacts of climate change and limit warming to 1.5°C above pre-industrial levels.

Featured image: Switching to renewable electricity is a crucial way for organisations to reduce their greenhouse emissions (credit: Pexels)