What determines the quality of a carbon credit?
Several factors determine the quality or integrity of a carbon credit. They typically revolve around additionality, permanence, leakage, and verification principles.
Disclaimer
This statement is general in nature and does not apply to any particular situation, transaction or organisation. It is not legal or financial advice. You should seek your own legal or financial advice with particular reference to your own circumstances and requirements. This statement does not provide specific information or advice concerning, among other things, the detailed characteristics of ACCUs, the costs associated with them, their legal status, their taxation treatment and the potential benefits and risks of dealing in them.
The international context
As mentioned above, in the international (and more general) context, several factors determine the quality or integrity of a carbon credit. They typically revolve around the principles of additionality, permanence, leakage, and verification.
Additionality: Additionality refers to whether the project that generates the carbon credits would have happened without the income from those credits. A high-quality carbon credit represents a project that wouldn’t have been viable without carbon finance. If the project would have happened anyway, then the carbon credit is not additional and is therefore considered low-quality.
Permanence: The permanence period is the length of time that the carbon will be stored. For example, carbon sequestered in trees might be released if the trees are cut down or burnt in a wildfire. A high-quality carbon credit has measures to ensure the carbon will be stored for an extended period.
Leakage: Leakage refers to the unintended consequences of a carbon project. For instance, if protecting one forest area leads to deforestation in another area, this is a form of leakage. High-quality carbon credits have measures in place to prevent and account for leakage.
Verification: High-quality carbon credits are independently verified by trusted third parties. Verification ensures that the project achieves the emissions reductions it has claimed.
The Australian context
In Australia, the Australian Carbon Credit Unit (ACCU) scheme is a voluntary scheme established under the Carbon Credits (Carbon Farming Initiative) Act 2011 and the Carbon Credits (Carbon Farming Initiative) Rule 2015. The scheme supports investment in projects to reduce emissions across all sectors of the economy.
An ACCU is a unit issued to a person by the Clean Energy Regulator (Regulator) by making an entry for the unit in an account kept by the person in the electronic Australian National Registry of Emissions Units (Registry). Each ACCU issued represents one tonne of carbon dioxide equivalent (tCO2-e) stored or avoided by a project. An ACCU can only be issued to a person if the person has a Registry account, and a Registry account can only be opened by a person after the Regulator has considered whether they are a ‘fit and proper person’.
In the Australian context, the quality of carbon credits is generally ensured by the Emissions Reduction Fund (ERF). The ERF is a government initiative that purchases carbon credits from approved projects. To be approved, projects must follow a detailed methodology that ensures additionality, permanence (credits issued by the ERF represent carbon abatement that is permanent or stored for at least 25 years), and minimal leakage. The credits must also be independently audited.
Low-quality (generic) carbon credits
Examples of low-quality or generic carbon credits might include those that aren’t independently verified or where there’s uncertainty about additionality, permanence or leakage. For instance, a project that plants trees but has no measures to protect the trees from being cut down in the future could be considered low-quality.
High-quality, premium carbon credits
A high-quality, verified carbon credit in the Australian context must come from a project registered under the ERF. For example, a farmer who changes their land management practices to increase soil carbon sequestration, following the approved methodology and with independent verification, could generate high-quality carbon credits. These projects directly support Australia’s emissions reduction targets and contribute to sustainable farming practices, thus enhancing their value and integrity.
As the market for carbon credits matures, it’s increasingly important for consumers and businesses to understand the quality of the credits they’re purchasing or investing in. A clear understanding helps ensure that investments in carbon credits effectively contribute to greenhouse gas mitigation and support sustainable development.
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