Post COP26 the Australian government has furthered its commitment to being carbon neutral by 2050, where a crucial contributor in this transformation will be the agricultural industry.
With the industry collectively encompassing 55% of Australia’s total land area there is a substantial opportunity for all the industries stakeholders to both inflict environmental change and derive financial benefit. At current, that said financial benefit comes in the form of Australian Carbon Credit Units (ACCU’s)
What are carbon credits?
ACCU’s represent one tonne of carbon dioxide or their greenhouse gas equivalent. In simple terms there are two ways to earn carbon credits; by storing carbon or avoiding its production.
- Sequestration: being the natural process of carbon being converted from the atmosphere into vegetation or stored in soil.
- Abatement: relating to activities that actively reduce or avoid carbon output.
The Clean Energy Regulator (CER) is responsible for crediting and verifying registered projects as part of the Emissions Reduction Fund (ERF), both being government agencies. There are a number of on-farm projects and aspects that need to be considered when selecting a selecting a project.
The carbon market
Until 2012 the carbon market operated under a tax system where select companies had to surrender the value of one ACCU for each tonne of carbon dioxide that was emitted, the price was capped at $23 per ACCU. The Carbon Market now operates under a trading system like the stock market. The CER sets a cap on the total volume of credits available, and the market determines the price through supply and demand. The market is made up of three major consumer segments:
- The ERF: an Australian government fund purchasing ACCU’s with the goal of promoting businesses to reduce emissions.
- The Voluntary Market: consisting of predominately corporations looking to offset their own emissions. With the rise of Environmental, Social, Governance (ESG) reporting this market has grown largely in recent years and is expected to be the growth sector post COP26.
- The Safeguard mechanism, this is referring to companies who are required to purchase ACCU’s to offset their unavoidable emissions, referred to as compliance purchasers. The purpose of this market is to ensure that emissions reductions are not displaced by a rise in emissions elsewhere.
At current ACCU’s can be sold either to the ERF through a contractual agreement or through direct sales to the voluntary market. Under both methods the selected abatement project must follow the methodology of determination issued by the CER, following this methodology ensures that ACCU generation is consistent and genuine. An overview of each process is outlined below:
ERF Contract: Applications for carbon projects are made through the ERF, in a process which is overseen by the CER. Provided applications successfully meet the criteria, participants may then bid for a contract to sell their ACCU’s to the CER. Auctions will then be run to selected bidders according to price, where the CER on behalf of the ERF aims to purchase the lowest cost ACCU’s. Prior to March this year businesses could not exit ERF contracts, now these contracts are able to be exited before completion giving further control over the sale of ACCU’s.
Direct Sales to the Voluntary Market: Instead of direct selling ACCU’s to the CER there is opportunities to directly sell ACCU’s in the voluntary market through a broker. Sales may be to: your existing clients, to other carbon farmers who do not have ACCU’s to fulfill their ERF contract or direct to a major polluter. Sales to the voluntary market present an opportunity receive a higher ACCU price due to the quality of the ACCU and the associated co-benefits.
The CER is currently in the process of developing the Australian Carbon Exchange. The exchange will enable business and individuals alike to trade ACCU’s credited and approved by the ERF. This exchange will allow for trades to occur without the need of a broker, simplifying the voluntary market.
Businesses have the option to either sell the ACCU’s they produce or surrender the carbon credits effectively lower their businesses total emission contribution. It is important to note that this process does not have to begin straight away whereby ACCU’s can be held indefinitely in a businesses ANREU account until the point where they are to be used.
If you are interested in hearing more about the carbon market and its applicability to your operation, please contact your usual Mazars advisor or our specialists Owen Dingle or Angela Winton for a confidential discussion via the form below or on:
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