The Chubb Review: Exploring the recommendations for Australia’s carbon market
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The Chubb Review, an independent review into the Emissions Reduction Fund (ERF) was launched in response to mounting criticism of Australia’s policy for generating carbon credits. The findings of the review confirm the scheme is essentially sound, but there is room for improvement to bolster confidence and secure integrity. The Panel has made several recommendations to that end, including structural changes in the administrative of aspects of the scheme, to improve transparency through data sharing, and support the realisation of social and environmental co-benefits.
As experts working in this area since the inception of the ERF, here we provide our views on eight of the 16 recommendations, and what they may mean for business if they are ultimately adopted by the government.
The Chubb Review: Major outcomes, recommendations and our perspective on what they mean for the market
1. Architecture of the scheme
The Chubb review suggests a separation of functions to ensure the Clean Energy Regulator can avoid future concerns around a perceived conflicts of interest. A government agency should not be both promoter and enforcer. Although in our experience the Regulator has navigated this line carefully and with a pragmatic outlook, this in the long term is not an ideal structural arrangement for maximum integrity. It is envisaged that the Regulator will continue to support education and capacity-building, which we view as a positive takeaway. This role of the Regulator is critical in cascading access to the scheme by individual landholders. It is also a function that helps underpin compliance with the ERF requirements, and therefore, ultimately the achievement of the scheme’s intended environmental outcomes.
Strengthening the independence of the Emissions Reduction Assurance Committee (ERAC), whether under a new name, notably the Carbon Abatement Integrity Committee (CIAC) or not, will also bolster confidence in the scheme by providing assurance and/or avoiding any doubt as to whether approved Methods are aligned with the Offsets Integrity Standards to achieve real and genuine abatement. It will also provide for an opportunity to refine and improve the function and effectiveness of this role and to ensure selected members possess a suitable skillset to oversee the full range of Methods under the ERF. We particularly welcome the recommendation to include at least one First Nations Australian as a member of the CIAC. This holds fantastic opportunity to integrate valuable indigenous knowledge into Methods by design.
2. Transparency: Enhanced data sharing and publication
Increased transparency is a big feature in the recommendations and we welcome any suggestions that go towards improving transparency, including the release of more project-level information. Integrity rests upon transparency and publishing information on projects such as Human Induced Regeneration (HIR) Method, will increase transparency on how they are being implemented, managed and address much of the negative dialogue and perceptions. As we have commented previously in our article Australia’s carbon market under fire, overall we are in alignment with the findings of the Panel that the HIR Method, notwithstanding its innate technical challenges, is sound, and has delivered real and genuine abatement to date.
3. First Nations Peoples and Community involvement
We fully support the enhanced involvement of First Nations Peoples in governance and implementation of the scheme. This includes a strengthened stance on consent at the project level and additional support and incentives to encourage participation (e.g. Carbon Farming Outreach Program). As recognised by the most recent State of the Environment report, we need respectful collaboration with First Nations Peoples and effective and equal partnerships, that draw upon their knowledge and expertise if we are to improve our environmental future. As stated in the review, First Nations Australians have unique expertise in cultural land management practices and if participation can be encouraged, it could make a distinctive contribution to carbon markets, community and environmental outcomes. We also welcome the recognition that community engagement and capacity-building on the ERF is vital; and we believe seeking early engagement with affected communities via a Free, Prior and Informed Consent (FPIC) process, secures better outcomes overall.
The review also attempted to address whether the scheme currently has adequate processes and requirements to manage negative social, economic and environmental impacts, including impacts on agricultural productivity and regional communities, and ensuring consistency with agricultural and other regional objectives. In terms of community and social impacts, it was observed that there is a lack of regional co-ordination and re-investment, and varying levels of community understanding and perception of the scheme’s impacts and integrity. For the latter, this has led to the “locking up the land” perception around many vegetation carbon projects.
The Panel considered that compliance with the scheme as it currently stands, can prevent or mitigate many of the potential adverse impacts that may arise during the implementation of a project, which we think is questionable. Additional recommendations have been provided however, such as varying assurances to protect against potential adverse impacts of ACCU projects. These include: transparency, disclosure and stakeholder engagement provisions along with new governance arrangements, and consideration of new ACCU Scheme Principles that would support the CAIC in avoiding adverse impacts of projects.
The take-away for those seeking to develop carbon projects, is that proactive consideration of the broader implications of an ERF project on the community and region in a social, cultural and economic sense, must form part of the development process. Even if the scheme itself does not stipulate specific requirements in relation to those impacts.
Opportunities to foster rural and remote entrepreneurship and participation in areas of project development, monitoring and verification and to facilitate regional development goals, such as workforce participation, population retention and growth as well as community cohesion, are all factors to be considered.
4. Proponent-led Method development
A Proponent-led Method Development will have both pros and cons and should be carefully considered and designed. Opening up more opportunity for proponent-led development and/or enhancement of Methods is extremely valuable. It capitalises on industry innovation and insight and allows those closest to the ground in terms of implementing projects to drive improvements in Methods and abatement generation. However, this must be balanced against the imperative of developing those opportunities that promise a wide uptake. Even with a reconstituted ERAC and more funding, resources will not be endless and we must focus energies on those project types that hold the most promise for supporting real and rapid emissions reductions.
Anthesis felt that the most recent change to the timebound co-design method development process led by the Regulator, was a much needed improvement on the previous approach. We therefore strongly support that a Proponent-led method development be accompanied by a transparent, multi-step review process, and clear guidelines for expressions of interest and method development proposals. Further we encourage that the process, as recommended by the Panel, also include opportunities for early and active engagement of the interested and affected parties, as well as the broader industry. We also advocate for bespoke approaches to engagement with First Nations Australians and stakeholders in regional and remote areas. To be collaborative and inclusive, we highly encourage a co-design process that enables individuals and groups to participate. In agreement with the Panel, for an effective process to take place the Proponent-led method development should involve transparent information sharing and progress updates, maintain requirements for scientific evidence to be peer-reviewed and allow suitable timeframes for consultation processes and active engagement.
Image: Anthesis team in the field, onsite on a carbon credit project
5. Scheme level buffer (mandatory ACCU retirement)
This is a more controversial recommendation and lacks detail, with the Chubb Review Panel pointing out that this should be further investigated. This recommendation picks up on some of the emerging Net Zero guidance internationally (UN High Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities and GHG Protocol, ISO Standard) that a percentage of credits generated by any given carbon project should be retired as a bolster to secure real abatement. However, we note that the application of this could have significant and adverse implications for the development of those carbon projects that have the biggest potential to deliver holistic benefits. These types of projects have struggled to get off the ground in the past and may continue to do so if additional costs (in the form of mandatory retirement of credits) are imposed on project owners.
This recommendation also does not appear to give recognition to the discounts already applied to land-sector (sequestration) projects that incur a risk reversal buffer discount of 5% and a permanence discount of 20% (for 25-year permanence periods). This is in addition to the fact that particular projects relying on modelled abatement are inherently designed to be conservative. It is worth investigating this further and current safeguards to ensure conservative crediting and implications for uptake should be carefully weighed in this analysis.
We also note that the Panel recommends reviewing the appropriateness of the scheme’s existing permanence obligations that are intended to address risks to carbon stores and reversal events. As stated, all sequestration projects incur a 5% risk of reversal discount but have the option to select a 25 year or 100-year permanence period. The selection of the permanence period impacts a project’s feasibility differently: a 25 year permanence period invokes a 20% reduction in ACCUs while a 100 year permanence period involves the maintenance and protection of carbon stores approximately 75 years or so beyond what a project can be credited for.
Scheme provision for integrity needs to be weighed against impacts on project viability and participation. The Panel have proposed that the appropriateness of permanence obligations be monitored, reviewed, adjusted and reported on as the scheme evolves. While there are no immediate implications for business arising from this recommendation of the Panel, it does suggest that how organisations think about securing carbon stores for the long term, is a question not for later, but for early project design.
6. Climate Active ACCU mandate
Climate Active is a voluntary Australian Government certification program under which organisations can measure, reduce and then offset their carbon emissions in order to become carbon neutral. Carbon neutrality can be achieved using the offsets of both international and national (ACCU) credits. Climate Active announced in 2022 the accreditation requirements would change to require a minimum of 20 per cent use of ACCUs for offsetting, to come into effect from July 2023 or July 2024 depending on the size of the certification.
The Chubb Review Panel made recommendations to drop the mandatory 20% ACCU requirement for Climate Active carbon neutral certifications. All things considered, a removal of this mandatory requirement would be welcome news for small organisations wishing to make a voluntary commitment. This is because small businesses typically have low emissions, and it is challenging in the current marketplace to purchase ACCUs in small tranches, particularly below 5,000 ACCUs. As the Panel recognised, dropping this requirement would also assist in keeping certification costs reasonable for smaller organisations. However, we question whether a wholesale elimination of the requirement is the most suitable path forward. Particularly for larger organisations that face increasing scrutiny of their net zero targets and strategies, it will be critical to ensure ACCUs are at least part of the mix of on offset portfolio.
There are a number of very good reasons to rely on ACCUs: the use of ACCUs addresses arguments around geographic proximity to emissions-source; and ACCUs with co-benefits may also help to demonstrate how organisations are responding to nature-based impacts of their operations. Finally, and this consideration applies to organisations of all sizes, where international credits are used, organisations should carefully vet the credits they are seeking to rely on for the social and environmental impacts. They also need to take into account the emissions reductions associated with international projects can be a cause for concern due to complexity in land tenure, project methods and legislation involved.
7. High Risk Project Types
High risk projects to the scheme were identified as: Human-induced regeneration (HIR), Avoided Deforestation (AD), Landfill Gas and carbon capture (LGCC) and storage (CCS) methods.
Anthesis has significant experience in audit and advisory of HIR projects and to a lesser extent Avoided Deforestation (audit only). The HIR is a model-based method that requires the removal of suppression agent(s) to enable the carbon estimation area to regrow back to a native forest. This project type has been under scrutiny recently, predominantly due to: i) a perceived lack of casual link between the nominated HIR activity and the forest regeneration, and ii) a claim that the areas would likely regrow back to forest based on a rainfall event alone.
Whilst the Panel did not review individual projects, their review findings concluded that there were sufficient provisions in the HIR Method to meet the integrity standards, such as: a) a provision of evidence of suppression agents and justification as to why forest has not been maintained, in conjunction with b) 5-yearly regeneration and forest attainment gateway checks to demonstrate forest regeneration once the HIR activities have commenced (suppression agents removed).
Notwithstanding this, the Panel did suggest that improvements should be made in the interpretation of the method. They emphasised the requirement for the provision of justification of the causal relationship between the nominated eligible HIR activity(ies) and the dominant suppression mechanism(s) and how these have been addressed by the HIR activity over the crediting period. Project proponents should heed this guidance of the Panel in both project design (i.e. when selecting project activities aimed at responding to the relevant suppression agents) and implementation, providing the Regulator and auditors with the best possible evidence to assess that causal nexus.
In addition to data transparency and sharing of HIR projects, it has also been considered that integrity risks or concerns could be mitigated by adopting a direct measurement approach instead of or in conjunction with, FullCAM modelling. It is likely that the up-and-coming Integrated Farm Management (IFM) Method has the potential to address some of these issues and opportunities.
In regard to Avoided Deforestation (AD), the Panel has recommended that there should be no new project registrations allowed under the Avoided Deforestation method. This is not a surprising response as the Avoided Deforestation method is specifically aimed at preventing planned land clearing which has been well addressed by state regulations for some time now. We agree that consideration should be given to developing new methods that incentivise the maintenance of native vegetation that has the potential to become a forest, as well as maintaining existing forests at risk of land-use conversion.
8. Industry regulation: Carbon Market Institute Code of Conduct
The Carbon Market Institute (CMI) has developed a voluntary Carbon Industry Code of Conduct (the Code) aimed to provide best practice guidance for carbon service providers, agents, and project proponents to enhance market confidence and consumer protection and improve the integrity of the ACCU scheme. Currently the Code has 32 signatories (covering 75% of ACCU scheme projects) and being voluntary, means that signatories perform a self-assessment audit each year that is reviewed by CMI Code Administrator. Any non-compliance of the Code is addressed by the Code Administrator in an open and transparent manner and signatories are only penalised when very extreme breaches occur. The main penalty is the publicity of the breach and the loss of confidence and market potential it may invoke. The Panel recommends in the review to mandate performance standards, such as the Code of Conduct. This no doubt would provide a level of assurance that projects are implemented with the highest possible standards. In addition, a blueprint for appropriate performance standards already exists.
Anthesis also believe, however, that the benefits of government-regulated accreditation compared with industry self-regulation should be carefully considered before any decision is made in this regard. There are administrative, impacts on competition and other considerations that might weigh against formal regulation, in an environment where industry is already stepping up to regulate itself in a transparent manner, that enables participants to readily identify reputable project partners.
The Chubb Review – final thoughts
On the whole, the recommendations from the Chubb Review, provide an actionable and pragmatic pathway for the future of the ERF. At the end of the day the ERF is a critical cornerstone of Australia’s response to the climate crisis and is worth preserving – and improving. The proposals made by the Panel will support alignment of the ERF with our evolving understanding of integrity requirements internationally. For business, the recommendations are an indication that current best practice steps may in the future evolve into legislated requirements. This must provide added impetus for designing projects in alignment with those best practice standards to achieve genuine and real abatement as well as positive socio-cultural and environmental benefits.
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