More drama in Australia’s carbon credit system, described as “failure on a global scale”
Whistleblowing is tough business, and so is developing a carbon market built upon science that’s constantly getting better, says Guy Dickinson, founder of Betacarbon
While the rest of the carbon world was caught up with debates about whether Verra’s REDD+ offsets were “worthless”, and the drama involving South Pole’s Project Kariba, Australia’s carbon credit system was facing a crisis of its own.
Carbon offsets produced under Australian government standards are known as ACCUs, or Australian Carbon Credit Units. Unlike carbon credits issued in the voluntary carbon market, ACCUs are classified as financial products. Buyers therefore can turn to the government for aid in the event that, for example, a forest fire burns down a carbon project, rendering their ACCU meaningless.
ACCUs can only be traded in Australia and are used as part of the Safeguard Mechanism, which is the government’s policy for reducing emissions in Australia’s largest most polluting facilities.
(The Safeguard Mechanism works like a more pro-market variant of the European Union’s emissions trading system — it’s a bit complicated so I won’t delve into it, but do click on the link to read up if you’re interested.)
In March 2022, Professor Andrew Macintosh, the former head of the Emissions Reduction Assurance Committee (ERAC), which approves ACCUs, described the government’s forest regeneration scheme (known as Human Induced Regeneration, or HIR) as a “fraud”.
HIR projects are the most popular project type in Australia, accounting for almost 30% of ACCU issuances. As of 30 June 2023, HIR projects were the world’s fifth largest nature-based offset type by credit issuances, and the largest when projects involving avoided emissions are excluded.
Shortly after this podcast was recorded, Professor Macintosh and a group of researchers released a paper on 26 March showing that HIR projects had limited regeneration in areas issuing ACCUs, and compared to baseline areas outside the crediting zone, HIR projects were non-additional.
“Australia’s carbon credits system a failure on global scale, study finds,” was the headline The Guardian picked for its coverage of the paper.
I chatted with Guy Dickinson, founder of Betacarbon, to get the lowdown on the Aussie carbon market, the future of ACCUs and HIR projects, and upcoming regulatory developments.
Betacarbon issues the BCAU, a cryptocurrency that’s notionally backed by ACCUs 1:1. Dickinson also runs Clima, a carbon advisory firm for Australian companies looking to tap on carbon offsets, and Gondwana Carbon, a carbon credit developer.
Prior to Betacarbon he spent 16 years at HSBC and ran the bank’s markets business in Australia and New Zealand.
This post showcases the highlights of our conversation. The transcript has been edited for flow and clarity. Listen to the full podcast on Spotify or Apple Podcasts.
Han: Are there any carbon projects in the VCM that are originating from Australia at the moment?
Dickinson: Yes, there are. They’re definitely not as popular because the price point of the Australian carbon market is higher. Compliance markets and forced offsetting (through the Safeguard Mechanism) creates a higher price point.
When I first started this journey at the end of 2022, that was the highest of the carbon market. We saw nature-based credits in voluntary markets trading at US$15; that was AU$23, AU$24 at the time. They’ve now gone all the way down to US$3 or US$4.
The credits that have been created in Australia under voluntary standards are trying to align themselves to something similar to what can be demonstrated in the Australian carbon markets.
So a reforestation project in the VCM probably trades just underneath where a reforestation project trades in the ACCU market.
There is a reason for that because under the Emissions Reduction Fund (ERF, the government body that oversees ACCUs) scheme, if there was a big fire and you’ve bought an ACCU in the secondary market, you don’t have to worry about it not being a tonne of carbon because the government’s gonna go after the person who owns that project.
Whereas under the voluntary scheme, there’s no one to go after.
One of the things we’ve just launched at Clima is voluntary carbon credits wrapped in an insurance policy to help drive that convexity towards all the things you’re worried about when you buy a carbon credit. Those trees could be destroyed due to human neglect, human error, force majeure, weather, and so on.
When you buy those credits now the insurance policy moves with you.
Han: Is the market more favourable towards ACCUs or the VCM?
Dickinson: I’m gonna broaden it a bit outside Australia because there’s not that many Verified Carbon Unit (VCU) projects in Australia. I’ll represent what I see from my customers. If I had a choice as a corporate to spend AU$40 on an Australian carbon credit or $37 on a VCU that was in the same method, I’d get an ACCU all day long.
As the buyer, you’d be crazy not to, right? But if I can deliver that VCU to you with an insurance policy for $39.90, would you do it? Well, you’re starting to get in the realm of saying, I’d still probably take the ACCU, but if you can deliver it insured for $38.50, maybe.
But that insurance policy only covers it for a period of time as well [whereas ACCUs are covered for the lifetime of the product].
There are different reasons to think about that in an Australian context. But generally, if we’re talking about a corporate in Australia that has a choice of an ACCU or an international voluntary carbon unit, we’re talking about the price of $5 versus $35. So they do gravitate towards price a lot of the time.
When they are not required to buy an ACCU, 95% of the time they don’t. When they are required to buy an ACCU, depending on the type of customer, they will try to align their sustainable development goals around nature or female activation or education or all the good stuff that’s out there.
They will look for units in Australia which can cover that off and they trade at a different price to the standard price of carbon. I think that’s something that’s highly misunderstood is that the price of carbon in Australia could be anywhere from $35 to $70 on any given day.
It’s expensive to plant a tree in the ground and keep it alive [in Australia]. It’s less expensive in the third world, land is more fertile, the labour’s cheaper, access to the land is cheaper.
Han: Tell me about the drama started by Professor Andrew Macintosh
Dickinson: We have a lot of methods that don’t work all over the country, And HIR is one of those methods that the government allowed to work all over the country.
A lot of regrowth and carbon storage comes from rainfall. If you don’t have rain and water, the stuff does not grow. If it does not grow, it probably does not capture carbon in the biomass or in the trunks. And there was a view that a lot of these projects were being propagated on land, which looked more like the moon than somewhere that would capture carbon.
Having said that, if you model some of the better projects, they’re also probably taking more carbon out than they’re being credited for.
I think the whistle blowing was one of those occasions where it probably needed to come to bear for us to just take a step back and say, actually, is this the right thing to do going forward?
People had made economic decisions based on what they were allowed to do. So you can’t just pull people away from that. So what we’ve ended up with is a situation where a lot of the methods have been grandfathered. Avoided deforestation in Australia, HIR, and the environmental plantings method will soon also be sunsetted.
They have a certain period that they’re allowed to exist before they need to go and undergo a revalidation period. And the market has really struggled for the last couple of years to find the replacements for these methods.
Andrew did a great job of highlighting the bad; there’s still some work to highlight the good. I think what we’ll end up with in the next 12 to 18 months is a far more cautious Emissions Reduction Assurance Committee (ERAC).
I think there’s going to be fewer projects approved going forward. And for those projects which are solid, they will be rewarded very well over the next couple of years as the price of carbon becomes perhaps more aligned to the true cost of abatement.
[Additional question after podcast recording] Han: Any thoughts about the latest paper by Professor Macintosh that demonstrates that the HIR scheme has been a failure?
Dickinson: It’s a well written piece. The model is most definitely not perfect and hence the government is moving towards a model-driven measure approach under the proposed Integrated Farm and Land Management (IFLM) method
This will more than likely see a decreased output of ACCUs.
I would like to see the regulator adjust issuances accordingly if projects have not met outcomes. But at a minimum there should be some adjustments made if outcomes are obviously not met due to lax registration and pre-feasibility declarations, that simply imply there was little need to actively manage changes to the property to create the woody cover.
There is a need for greater capacity at the regulator and this is being addressed partially in the federal budget.
While Australia has a scheme and is using policy and regulatory pressures to attempt to deliver change, without a carbon price closer to $75–100 there is no reason to expect genuine reductions as the stick is simply not big enough.
Han: What you’ve described so far is a fairly benign and natural process of how innovations mature. But Professor Macintosh seems to be insinuating that there’s some kind of conspiracy against him, perpetuated by beneficiaries of the carbon market. Is there any truth to what he’s saying?
Dickinson: I tell you what I can say, whistleblowing isn’t a great experience for anyone. You are signing up for 10 years of excruciating scrutiny. And that is because you are asking for wholesale change against a whole bunch of people who have an interest or have done work to get it to that point.
That doesn’t mean their interests are evil. But they also might say that you can’t shut down the economy at the expense of satiating Andrew. And I’m not saying that Andrew is not 100% valid in some of the stuff he says. But like everything, he’s probably hyper focused on what he wants to be hyper focused on. And he knows his stuff.
But there is also the other end of the extreme, which I think is really important to highlight that the HIR market is a part of the market. It’s not all of it. This market has 15 years to run, it’s only really in its infancy.
So the vested interests are many. But they aren’t organic, they are organizations that don’t have a heart and soul.
Han: There’s a saying that I learned from a professor very long ago: organizations exist to perpetuate themselves, which maybe goes to what you’re saying. Organizations don’t like change.
Dickinson: Correct. They really don’t.
Han: Any thoughts about what’s going to happen this year? Any major milestones or any new reports that are going to come out?
Dickinson: There’s still some issues around some of the new methods. They are still struggling to validate them through the usual ERAC process. I think the market was hoping that they would come to bear earlier than they have.
IFLM is about stacking credits on a single property. It’s actually very complex. If I’m gonna plant trees on the farm and I’m gonna do soil carbon or something else, all of a sudden you’re like, well, which bit of carbon connects to that? It’s complex and we don’t have all the answers.
Australia’s path to its decarbonization is bearing the load pretty heavily in renewable energy. I think that’s fine. You have to do it, which has meant some of the resources that could possibly be put into carbon haven’t been to date.
I think you’ll start to see more heat and light from the policy makers to make the [carbon] market work. The problem is it’s a very small market. It’s not commercially viable. So while you’re investing hundreds of millions of dollars in hydrogen, perhaps you should invest $20 million in the carbon market.
So you can create a futures market from it. You can start to create other types of hybrid markets and create more demand for those units and start to build more good from that. So it’s been a bit haphazard, I think, from all the parties.
And it’s to be expected. You’ve got different governments coming in prioritizing different modes of decarbonization. You’ve got the liberals talking about small nukes. You’ve got labour talking about renewable energy. You’ve got the New South Wales government saying we want offshore wind farms.
It’s ad hoc, it’s not Singapore style. I’ve lived there and I understand. You get stuff done for 10 years, you have a plan, and you follow through with it. We have three year terms, it’s really hard to move forward on that basis.
But I think, funnily enough, the carbon market is probably as close as we’ll get to a policy which covers most of the major parties. It’s just how much they are going to turn the switch on or off depending on who’s in power.
Han: You’re only tokenizing ACCUs now. But are there any plans to tokenize any other types of carbon credits?
Dickinson: I think there’s definitely other environmental markets that will play very well to this. Tokenization can create certain smart contracts which can be tailored to different units such as biodiversity, which is really about maintenance. It’s not about making money.
One of the things that’s misunderstood in the carbon markets is there’s two main players. There’s an emitter and there’s a supplier. Just because there’s a market doesn’t mean that it’s going to go to $3,000. I’m not saying it won’t, but it doesn’t mean it’s going to.
Biodiversity is a very similar thing in that it has an intrinsic value. But is the value that it remains or is the value that you own it? And I don’t think we’ve really got to that point yet.
I think tokenization in time, I don’t think it’s ready yet, allows us to create frameworks where people can commit to a maintenance program of biodiversity and the token would allow them to filter the money to the groups when it’s required for that maintenance.
I don’t think biodiversity is an asset class in the secondary market that has an opportunity to make a lot of money. I really don’t. I think it’s an opportunity to do good and that often doesn’t come with huge capital gains.
Han: What about any other carbon projects outside of Australia?
Dickinson: Oh, absolutely. I think at the moment there’s been a few issues around Verra and Gold Standard having their own rules around tokenization and crypto with Toucan protocol, etc. We built our token to always be backed by live credit.
What they did was create a bridging mechanism, which was a bit lazy and forgot that a retired credit is retired in the name of the person that retired it. It’s not retired on behalf of someone else.
That was a fundamental flaw. That’s not to say they didn’t have billions of dollars running through their protocol at the time. However, people have been left with almost nothing because they effectively retired the value the moment they retired those credits. Plus an 80% drop in the underlying price of carbon whereas Australian markets have gone sideways.
Han: So basically you’re taking a wait and see method for anything else outside of ACCUs.
Dickinson: I think so. Look, I think there’s a whole lot of different schemes that will pop up. Ultimately, if you’re going to tokenize something, it needs to have a reason to tokenize it. To tokenize it just because, doesn’t make a lot of sense. We’ve seen people tokenize gold. It didn’t mean gold went berserk.
I think the Australian carbon market did need a problem to solve. It was access, it was transparency, and the token provided both of those avenues.We also believe that more customers on the business side are looking for carbon solutions in their reward points.
It’s very hard for a bank to say they’re sustainable and then give me Qantas reward flights. It’s actually the complete opposite and they’re starting to realize that. So that’s where the token starts to make more sense because I’m removing supply from the market by owning this token. It has a value, it can move around.
Now, all we need to create the opening of that spigot is to say, okay, crypto regulation in Australia is clear. This is what you can do with it, this is what you can’t do with it. And so we are effectively in a waiting period in Australia as it relates to Australian digital assets.
I don’t think we have too long to wait, probably longer than most of the market expects. But we’re starting to get some clarity under the Labour government as well, and I think it will move towards a policy which is sensible, but also not designed to make people rich quick.
