FEATURE: One year later, Australia's international carbon scheme still a work in progress

It has been more than a year since Australia launched the A$104 million ($70.9 million) Indo-Pacific Carbon Offsets Scheme to help neighboring countries generate credits for a fast-growing Australian carbon market, but ongoing domestic policy reforms and a shift in focus to capacity building have slowed the momentum.

The Indo-Pacific Carbon Offsets Scheme (IPCOS) was launched by Australia in November 2021 during the COP26 UN Climate Change Conference to help enhance the capacity of partner countries in the Indo-Pacific region to participate under Article 6 of the Paris Agreement, and for the generation and trade of high-integrity carbon credits.

As part of the scheme, Australia signed agreements with pacific island countries Fiji and Papua New Guinea in November 2021 to help Australia's private sector meet its emissions reduction targets by enabling investment in carbon projects in these countries.

The price of Australian Carbon Credit Units (ACCUs) has trended higher than the global voluntary market carbon credits, raising the possibility of higher returns for member countries. The price of a generic ACCU was at around A$32/mtCO2e, according to market sources. Platts, part of S&P Global Commodity Insights, assessed the price of nature-based avoidance carbon credits at $12.35/mtCO2e on Dec. 1.

Slow momentum

However, with another climate conference wrapping up in Egypt, the momentum has slowed following the initial agreements. Papua New Guinea's decision to place an interim ban on exports of carbon credits has created further uncertainty.

"The IPCOS program direction has shifted from the previous government's focus on credit generation for a voluntary market in addition to supporting partner countries in building capacity for international cooperation, to one primarily focused on capacity building at this stage," said Mei Zi Tan, manager, international research and projects at Carbon Market Institute, an Australian carbon industry association.

This change in direction has delayed the progress on draft guidelines for use of such credits, Tan told S&P Global, adding that ongoing reforms to the country's compliance emissions trading scheme, Safeguard Mechanism(opens in a new tab), as well as a review of Australian Carbon Credit Units (ACCUs) has also slowed action on the scheme.

"How carbon offsets generated under IPCOS are used in Australia in the future may be subject to government consideration following the finalization of policy reviews and reforms, including the Climate Change Authority's Review of International Offsets, ACCU review and the Safeguard Mechanism reforms," a spokesperson from Australia's Department of Climate Change, Energy, the Environment and Water (DCCEEW) told S&P Global.

Australia's Climate Change Authority, an independent body tasked with advising the government on climate change policy, published a report in August on the criteria for acceptance of international carbon credits under IPCOS within Australia.

The report recommended that the IPCOS design should align with Article 6 of the Paris Agreement by applying robust accounting to ensure the avoidance of double counting.

It also recommended that the projects should endeavor to deliver non-carbon co-benefits to partner countries, thus contributing to sustainable development goals alongside emissions reductions.

The government is due to respond to the CCA's report by February 2023 and has recognized the importance of high integrity of carbon credits.

"IPCOS is not participating in a race to purchase cheap abatement. It is a 10-year, demand-driven program to build the region's capacity to participate in high-integrity international markets and help partners meet their Nationally Determined Contributions," DCCEEW spokesperson said in a statement.

IPCOS is currently more pitched at general capacity building around markets for Small Island Developing States, Daniel Lund, special adviser on climate action to the Fijian government, said.

The slow progress comes amid heightened bilateral activity between other Asia-Pacific countries such as South Korea, Japan and Singapore. Papua New Guinea in November became the 25th country to participate in Japan's cross-border carbon trading scheme, Joint Crediting Mechanism(opens in a new tab).

2023 outlook

While the scheme did not add any new members during 2022, market experts and the government have said that negotiations were ongoing, with the entry of more partners and progress in the framing of guidelines expected during 2023.

"Vietnam has been added to the IPCOS list, aside from Indonesia," a market source told S&P Global based on interaction with government officials.

"To our understanding, several countries have expressed interest in partnering with Australia and the negotiations are ongoing. Work is continuing with announced partners in PNG and Fiji where separately CMI is, with DFAT support, assisting Fiji with the preparation of a Carbon Market Roadmap," Tan said.

While there has been no progress on IPCOS for some time, activity is expected in the next six months, said Anil Bhatta, managing director at Carbon & Clean Energy Solutions, an environmental consultancy.

He expected to see IPCOS projects on the ground in PNG and Fiji before any other country.

"In the coming months, there will be more capacity-building work, and the IPCOS design should be finalized," Bhatta added.