Environmental market measures

Budget Review 2022–23 Index

Tessa Satherley

The 2022–23 Budget includes two significant measures for Australian environmental markets: a change to the rules governing fixed-delivery carbon abatement contracts to allow these to be traded privately; and new tax rules for farm income derived from carbon abatement and biodiversity projects.

Controversy has dogged the introduction of these measures despite support from some stakeholders. The surprise announcement of the first measure precipitated a crash in Australian carbon credit prices. The announcement of the second measure was overshadowed by a former regulator’s accusation—days later—that most Australian carbon abatement projects do not reduce emissions. The carbon credit scheme was also referred to the Australian National Audit Office (ANAO).

Changes to Australian carbon credit trading rules

Overview of the policy measure

Under the Emissions Reduction Fund (ERF), the Australian Government purchases carbon abatement contracts (carbon credits) from the private sector, quantified by Australian Carbon Credit Units (ACCUs) (see the Clean Energy Regulator’s (CER’s) ‘Understanding carbon abatement contracts’ webpage).

In early 2022, before the Government’s policy announcement, ACCU prices were surging. ACCU spot prices had tripled in the year leading up to the announcement and reached an all-time peak of $57.10 per tonne of CO2 abatement in late January 2022. By contrast, many abatement project proponents had previously locked in commitments at a lower historical average price of about $12 per tonne.

On 4 March 2022, the Minister for Industry, Energy and Emissions Reduction (the Minister) announced changes to trading rules for carbon credits purchased under the ERF. Under the changes, project proponents that had committed to fixed-delivery abatement contracts with the Government at lower prices can now pay a modest break fee and resell those contracts on the private market at a profit. At the time of the announcement, media speculated the policy could deliver a windfall to farmers with existing fixed-delivery abatement contracts of up to $2.58 billion.

Market and stakeholder response

While Budget measures: budget paper no. 2: 2022–23 (p. 125) said the policy’s intent was ‘to support market confidence’, and the Minister had foreshadowed an ‘orderly’ transition, the 4 March announcement triggered a collapse in the market value of ACCUs, with investors anticipating a glut of millions of ACCUs re-entering trade. The 3 March ACCU price of $47.10 fell by $18 over 3 days—a 38% drop—and has not significantly recovered since.

The policy has received a mixed reception, particularly since the ACCU price collapse. Carbon farmers quoted in the Land said that, while the market shock was painful, an eventual correction between the low fixed-delivery contract price and the high free market price was inevitable. By contrast, an opinion piece in the Australian criticised the move as showing ‘complete contempt for the market’. Market analysts Reputex warned that it could take 2 to 3 years for prices to recover.

The measure’s expected impact on emissions reduction is ambiguous. The Government has claimed the change will allow the ERF to deliver a higher volume of abatement contracts as the proceeds will be available for reinvestment, thus improving progress towards net zero. However, the Daily Telegraph and the Guardian have warned that the price crash means many previously viable carbon abatement projects will no longer go ahead, while the Australia Institute and Saturday Paper have emphasised how the price crash benefits companies with high CO2 emissions, by making it cheaper to purchase offsets.

Implications for the Budget outcome and emissions reduction spending

Budget paper no. 2: 2022–23 (p. 125) states that the fiscal implications are not for publication due to commercial sensitivities; and while the Budget strategy and outlook: budget paper no. 1: 2022–23 (p. 90) projects an overall $2.0 billion increase in non-taxation receipts, including from break fees collected under these new rules, the share attributable to this policy measure is not stated. The Australian Financial Review had speculated the measure could, optimistically, be worth up to $2.68 billion to the Commonwealth but the Government’s own budgeted estimate is not known.

With regard to the impact on ERF spending, the Government’s 4 March 2022 announcement stated:

Any funds received under this process will be reinvested in the ERF or new emissions reduction initiatives. Any committed ERF funding released back to the Clean Energy Regulator will also remain available to support new ERF projects.

Similarly, officials explained during a 31 March 2022 Estimates hearing:

if a [carbon abatement] contract is terminated or the sale of the units [that is, ACCUs] is agreed to happen under a different mechanism, all of that funding returns to the Emissions Reduction Fund to be available for another contract at a different time, and so the funding over the decade moves around a little bit in terms of each year. It might be up or down, depending on exactly what’s happening under the contracts, but all of the funding remains available to the Emissions Reduction Fund. (p. 7)

The Guardian, by contrast, claimed that the revenue windfall from the break fees ‘has not been redirected into other climate programs’, with the budget papers projecting an overall decline in annual ‘climate spending’ of about 35% over the forward estimates, from $2.0 billion in each of 2021–22 and 2022–23 to $1.3 billion in 2025–26 (Budget paper no. 1: 2022–23, p. 198).

The climate spending estimate includes spending on the CER (which administers the ERF) as well as the Clean Energy Finance Corporation (CEFC) and Australian Renewable Energy Agency (ARENA), reported on a headline cash balance basis. It is challenging to interpret this aggregate figure. As explained by the Joint Committee of Public Accounts and Audit in its March 2022 report into alternative financing mechanisms, ‘there is less information available about the fiscal impact of a policy when it is implemented using alternative financing mechanisms’ such as loans and equity injections, routinely used by the CEFC, or guarantees, ‘as the majority of the costs associated with these mechanisms are not fully captured’ in aggregates such as ‘the fiscal, underlying cash, net operating or headline cash balances’ (p. 10). Further, the figure does not capture all expenditure towards emissions reduction; as such, officials characterised the apparent reduction in climate spending as ‘more of a technical issue … not an actual decline in funding by any stretch’ during the 31 March 2022 Estimates hearing (p. 7).

Concessional taxation of farm revenue from carbon credits and biodiversity certificates

Overview of the policy measure

The receipts measure

Budget paper no. 2: 2022–23 (p. 26) presents the receipts measure ‘Primary Producers – increasing concessional tax treatment for carbon abatement and biodiversity stewardship income’, setting the taxation of farm income derived from carbon abatement from the Government’s proposed new biodiversity certificates (see below) on par with the taxation of income from primary production. As explained in a joint ministerial press release on 21 March 2022:

Under the new tax regime, farmers will treat revenue from the sale of ACCUs as primary production income, providing access to income tax averaging arrangements and the Farm Management Deposit scheme. Revenue from ACCUs will be recognised in the year of sale to support cash flow. The treatment of biodiversity certificates will be aligned with the new tax regime for ACCUs.

A related payment measure

At the time of writing, implementation of a biodiversity certificate market is still subject to the passage of legislation. On 9 February 2022, the Government introduced the Agriculture Biodiversity Stewardship Market Bill 2022, which proposed creating a new form of personal property called a ‘biodiversity certificate’ and a new market trading platform for the certificates, to be administered by the CER (see this recent Bills Digest). At the time of writing this Bill was still before Parliament.

Budget paper no. 2: 2022–23 (p. 125) mentions additional funding for the development of ‘a Biodiversity Stewardship Trading Platform to support farmers to undertake biodiversity activities ahead of the introduction of a voluntary biodiversity stewardship market’ as part of the Energy and Emissions Reduction payment measure, though it does not provide a specific sum.

Budget impact

The Budget anticipates $100.0 million in foregone revenue under the concessional taxation measure (Budget paper no. 2: 2022–23, p. 26). The respective shares due to ACCUs versus biodiversity certificates are not stated.

The forecast revenue impact—and conversely the expected benefit to farmers—is uncertain, and not just because of recent volatility in the ACCU price. If implemented, biodiversity certificates will create a new market for environmental services. There is no historical price data with which to estimate the value of farmers’ future biodiversity revenues. Further, as it appears each biodiversity certificate will be unique—rather than capturing a standard ‘amount of biodiversity’ per certificate—it will be up to market participants, or the Australian Government as a buyer of last resort, to determine a value for them. Some market aspects are discussed in the Bills Digest (p. 29).

Budget paper no. 2: 2022–23 is silent on new funding to implement the biodiversity certificates and trading platform. However, the Portfolio Budget Statements (PBS) 2022–23 for the Department of Agriculture, Water and the Environment (p. 33) include the measure Energy and Emissions Reduction – Expanding the National Biodiversity Stewardship Trading Platform, under which it appears the Government has redirected about $12.6 million for platform development budgeted for 2021–22 to other purposes, and committed $38.1 million over the forward estimates (implying a $25.5 million net commitment, after subtracting the $12.6 million reduction for 2021–22). This builds on past agricultural stewardship measures, worth approximately $55.4 million in the 2021–22 Budget (p. 53), of which $9.8 million was to implement the biodiversity certification scheme and trading platform, with a further top‑up under the Voluntary Biodiversity Stewardship Market measure in the 2021–22 MYEFO (p. 209), worth $13.2 million.

Stakeholder response

The ABC reported that the concessional taxation of farm revenue from carbon abatement and biodiversity was one of the Budget measures secured by the Nationals in exchange for their support for a target of net zero emissions by 2050. The National Farmers Federation (NFF) praised the initiative and said it was consistent with the NFF’s vision of the future of agriculture as ‘a dynamic farm system’, based on both ‘traditional commodities like food and fibre’ as well as ‘carbon sequestration, biodiversity and other natural capital systems’. By contrast, Renew Economy argued the benefit to farmers would be ‘dwarfed’ by lost revenue due to the ACCU price crash.

Criticism of the ERF’s integrity

Other commentary on these measures has focused on the backdrop of criticism of Australian carbon contracts’ integrity by Australian National University Professor Andrew Macintosh, former Chair of the Emissions Reduction Assurance Committee.

In widely publicised comments, Professor Macintosh claimed 70–80% of ACCUs were ‘devoid of integrity’ and did not actually reduce emissions—predominantly ACCUs for ‘avoided deforestation’, native forest regeneration in certain locations and the combustion of methane from landfill waste:

People are getting ACCUs for not clearing forests that were never going to be cleared; they are getting credits for growing trees that are already there; they are getting credits for growing forests in places that will never sustain permanent forests; and they are getting credits for operating electricity generators at large landfills that would have operated anyway.

The Minister has rejected the claims as ‘completely unfounded’, while the CER has stated ‘The ERF is a robust offsets scheme with a high degree of integrity’. Industry association the Carbon Market Institute has also rejected the claims as ‘sensational’.

By contrast, the Australian Greens have referred the matter to the ANAO, whose Draft 2022–23 Annual Audit Work Program now includes an investigation into ‘Contracting and integrity in the Emissions Reduction Fund’. The Australian Financial Review has also quoted new Australian Competition and Consumer Commission chair Gina Cass-Gottlieb as saying ‘The commission is committed, as one of our key priorities this year, to investigate and take action in relation to greenwashing’, including sham carbon offsets.

Carbon project investors and ACCU traders can be expected to closely monitor future reviews of the ERF or projects it funds. Significant adverse findings may undermine investor appetite for ACCUs and further reduce the market price. In turn, this would change the expected financial impacts on both the Government and farmers from these budget measures.



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