Budget Review 2022–23 Index
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
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
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
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
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
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
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
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
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
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
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
Digest). At the time of writing this Bill was still before Parliament.
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
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).
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.
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.
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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