What carbon offset strategy best suits your business?

The voluntary carbon markets present a range of opportunities for business to execute its decarbonisation strategy. Under Australia’s predominant carbon market, the Australian Carbon Credit Unit (ACCU) Scheme administered by the Clean Energy Regulator, more than 13 million ACCUs were transacted in the first quarter of 2023. This is over half the number transacted in 2022, and more than the total transacted in 2020 and 2021 combined.[1]

Source: Clean Energy Regulator, Quarterly Carbon Market Report March 2023

There are also opportunities abroad under other registries and schemes. Navigating the myriad of options requires a strategic lens. Have you found the right opportunity for your business? Reach out to our team if we can help.

Firstly, what do we mean by carbon offsets, credits or units…

There are various terms for the tradeable instrument in a particular carbon market. Conceptually, whether the instrument is called a 'carbon offset', 'carbon unit' or 'carbon credits', it generally represents an emission reduction of one tonne of carbon dioxide equivalent. The carbon unit is typically issued by an entity that holds the registry of units.  The establishing rules that governs the units also govern their value, transferability and effect.

Carbon units can be used for a variety of purposes such as:

• meeting statutory obligations
• meeting criteria associated with being certified as 'carbon neutral'
• offering a carbon neutral product or service, and
• achieving voluntary sustainability targets it has promised to its stakeholders.

The carbon unit is 'used' when it is surrendered, relinquished or cancelled under its establishing rules – or in other words, taken out of circulation from the market.

There are three main ways to get involved.

Taking them in turn…

1. Build your own project

Remove, reduce or avoid?  Which type of project is right for you? What are others doing?

Carbon units (and the projects that generate them) either:

1. avoid carbon from being released into the atmosphere, or
2. remove and store carbon.

If you are considering the options to operate a project, you will need to decide which type of decarbonising project suits your business. This decision may be driven by judgments of:

• project integrity
• opportunity cost
• additionality
• adjacencies to existing business, and
• investment timeframes.

The types of projects that can earn carbon units are determined by the establishing rules or methodologies of the scheme that generates the carbon units. Some examples on which we have advised our clients include reforestration, carbon capture and storage solutions and soil organic carbon sequestration.

2. Enter an arrangement with a project operator

Another option is to assume the role of offtaker for someone else’s carbon farming project

This typically takes the form of a long-term forward contract for the transfer of carbon units.  The package of contractual rights and obligations under the contract is key to determining the level of control and risk assumed by each contract counterparty.   

3. Trade in the carbon market

Then there are spot, forward and option opportunities in the secondary market… 

For entities that want to build a supply of carbon units, it is possible to engage in bilateral spot, forward or option transactions in the secondary market. There is well-established trading documentation for use in these transactions. This includes documentation which uses the ISDA Master Agreement framework (such as the 2022 ISDA Verified Carbon Credit Transactions Definitions and the AFMA Environmental Products Addendum) and the AFMA Contract for Spot Purchase/Sale of Environmental Products. There are also various market venues (exchange or platforms and other infrastructure) available to support trading.

In Australia, the Clean Energy Regulator has announced a carbon exchange that is designed to accelerate carbon abatement. This carbon exchange will operate in a similar way to a securities exchange but in the purchase, clearing and settlement of carbon units. 

What next?

Australia’s carbon market has grown in size and sophistication in recent years. ACCUs transacted, and the number of transactions, have dramatically risen since the start of 2022 in particular. Now is the time to understand the market – and get involved.