Australia needs tighter emissions targets, specialized carbon credits: CMI

Australia needs to introduce tighter emissions targets and specialized credits in its compliance carbon market to create more incentives for emission-intensive industrial facilities to decarbonize, according to the Carbon Market Institute June 30.

The CMI -- a trade body of carbon credit buyers and sellers -- and RepuTex, an advisory firm, listed recommendations in a report ahead of government plans to overhaul the domestic carbon market.

The new Australian government has pledged to cut emissions by 43% by 2030 from the level in 2005, up from the 26%-28% committed by the previous government.

It also plans to revamp governance of carbon market mechanisms to restore investor confidence after accusations of fraud and widespread criticism in recent months.

CMI has previously said the new government, which is perceived to have a stronger stance on climate issues, must reform the compliance emission trading scheme called the Safeguard Mechanism that was launched in July 2016.

"We expect a government consultation paper to be released shortly, and as such, the research aims to provide industry stakeholders with a critical understanding of current market trends, while helping to inform how policy could ultimately be shaped," CMI CEO John Connor said.

The Safeguard Mechanism covers industrial facilities with direct greenhouse gas emissions over 100,000 mtCO2e/year. As of 2021, it covered 212 facilities across the metals, mining, oil and gas extraction, manufacturing, and waste sectors, CMI said.

Under the current scheme, the amount of free emission quotas given to a facility is determined by its annual production volume, multiplied by an 'intensity benchmark' or the maximum emissions allowed per unit of output.

However, the current intensity benchmarks are set in a loose, flexible manner and not stringent enough to meet emissions goals. There is a reference intensity benchmark for each industry, and companies can also propose their own site-specific benchmarks for individual facilities.

The CMI said that since 2017 there has been a surplus of free emission quotas every year, ranging from 35 million-45 million mtCO2e.

As such, the industrial sectors do not have strong motivation to decarbonize, and emissions under the scheme have increased by about 4% from 2017 to 2021, instead of decreasing.

The CMI said, by 2024, the industrial sector will surpass the power generation sector and become Australia's most emission-intensive sector, driven by liquefied natural gas or LNG production.

Without any reform, the emissions covered under this compliance scheme will jump further to 140 million mtCO2e, from 137 million mtCO2e in 2021.

Clear trajectory

The CMI said Australia must set a clear trajectory for total emission reductions under its carbon scheme, in order to realize net zero by 2050.

Under the current system design, if a company has industrial facilities that emit beyond free quotas, it needs to buy domestically certified Australian Carbon Credit Units to offset surplus emissions.

If an Australian company not covered by the compliance scheme seeks to offset emissions on a voluntary basis, it also purchases the same type of credits, namely ACCUs.

The study suggested that a specialized carbon credit called Safeguard Mechanism Credits be introduced, solely for trading between companies covered in the compliance emission trading scheme, similar to other Asia Pacific compliance markets like China and South Korea.

Under such circumstances, the more environmentally friendly industrial facilities will be able to sell their SMCs to the emission-intensive counterparts, which can create greater push for industrial decarbonization.

CMI called for creating clear market rules to protect the oversupply and abuse of SMCs, as well as protecting the existing ACCU market from being disrupted by the new carbon product.

CMI said over 111 million ACCUs have now been issued, up from 1.8 million in 2012-2013, adding that 126 million more ACCUs will be delivered by 2030.

According to Australia investment company Jarden, the ACCU spot market price was A$35.25/mtCO2e ($24/mtCO2e) as of June 30.