The great carbon offset scam
Australia’s largest carbon offset project type is failing, with experts suggesting the scheme should be referred to the National Anti-Corruption Commission.
NEWS
Australia’s largest carbon offset project type is failing, with experts suggesting the scheme should be referred to the National Anti-Corruption Commission. By Andrew Macintosh, Don Butler and Deb Wilkinson.
The great carbon offset scam
Henbury Station, south of Alice Springs, the site of RM Williams Agricultural Holdings’ failed multimillion-dollar project to create the world’s largest carbon farm.
CREDIT: MARIANNA MASSEY / CORBIS VIA GETTY IMAGES
The backbone of Australia’s carbon offset scheme are projects that are claiming to regenerate native forests in uncleared areas, largely by reducing livestock and feral animal numbers. These human-induced regeneration (HIR) projects do not involve any tree planting. Grazing control is supposed to induce regeneration from soil seed stock and suppressed seedlings.
There are now 468 of these projects that stretch over 42 million hectares, an area substantially larger than Japan. To date, the projects have received more than 42 million carbon credits. In recent years, they have accounted for almost 40 per cent of annual credit issuances.
Large polluters covered by Australia’s carbon pricing scheme, known as the safeguard mechanism, are expected to rely heavily on credits from HIR projects to meet their emission reduction obligations. Due to this, the environmental effectiveness of the safeguard mechanism depends, to a significant degree, on the integrity of these projects and whether their credited sequestration is real, additional and permanent.
This week, a research team from the Australian National University, University of New South Wales and the University of Queensland published an article in a Nature journal that casts a dark cloud over the integrity of these projects. Two of the authors of this article are members of the team.
The study looked at 182 HIR projects that are supposedly regenerating native forests across 3.4 million hectares, mostly in dry outback areas in Queensland, NSW and Western Australia. Despite receiving more than 27 million credits over the period of analysis, tree cover in the “credited areas”, where the forests should be regenerating, barely increased. Based on the research, it rose by only 0.8 per cent.
Not only were the changes in tree cover small, but they largely mirrored changes in adjacent comparison areas, outside the projects. This suggests the changes are predominantly attributable to factors other than the project activities, most likely rainfall. In simple terms, the credited sequestration is not real or additional and it is unlikely to be permanent.
The problems with these projects are not complicated. Generally, it is not possible to regenerate native forests in uncleared areas. To regenerate a forest through human intervention, it is usually necessary for the area to have previously supported one, and for the forest to have been lost and prevented from naturally regenerating by some identifiable process. This generally involves clearing with bulldozers and chains, both to clear the primary forest and to get rid of subsequent regrowth. Decades of research has shown that grazing alone does not usually materially reduce tree cover.
Because the credited areas of HIR projects largely have not been cleared, they typically contain substantial numbers of old trees that were there when the projects started. Competition from these old trees for water, nutrients and other resources makes it impossible to add significant numbers of new ones. The projects are doomed to failure, with ups and downs in tree cover mainly being driven by seasonal variability in rainfall.
If the projects were being issued credits based on the amount of carbon sequestered in new regeneration, there would not be a problem. Failing projects wouldn’t get any credits. This, however, is not how the scheme works. Projects are given credits based on the outputs from a model that assumes even-aged forest regeneration is occurring across the entirety of the credited areas, even where nothing is happening on the ground.
The study, and the simplicity of the problems, should spark the government into action. Already more than $300 million in government funding has been provided to HIR projects, with a further $1.2 billion contracted to be spent over the coming years. If carbon credits keep being issued to HIR projects, the fraud will be worth somewhere in the order of $3 billion to $5 billion by 2030. Large polluters’ reliance on credits from these projects will also punch a hole in Australia’s emission reduction target, leaving Australia well short of its ambition to reduce emissions by 43 per cent below 2005 levels by 2030.
Given what is at stake, it is worth inquiring how this occurred.
The outcome of this is a system where hundreds of projects are being granted carbon credits for carbon sequestration that is largely neither real nor additional. It makes a sham of the safeguard mechanism because most covered facilities will meet their emission reduction obligations through carbon reductions that are not actually happening.
The root cause of this scandal is the Clean Energy Regulator, which has bizarrely and unlawfully allowed projects to include uncleared lands that contained substantial numbers of pre-existing mature trees when the projects started in their credited areas.
Initially, the regulator tried to brush away concerns by arguing that “typical” HIR projects are on cleared land. This is untrue. In 153 of the 182 projects in the recent study, 90 per cent or more of the credited areas are mapped as never having been comprehensively cleared. The remaining 287 projects are totally dominated by uncleared lands.
The other line the Clean Energy Regulator and the Department of Climate Change, Energy, the Environment and Water have tried to run is that the HIR “method” – a legislative instrument that governs the operation of the projects – does not prohibit the inclusion of uncleared lands with pre-existing mature trees in credited areas. This argument is without merit.
The HIR method contains three key eligibility requirements that are intended to ensure credited areas are comprised exclusively of previously cleared land that did not contain pre-existing mature trees when the projects started.
The first of these is that, by law, the credited areas must consist only of land on which the “project activity” is being undertaken. Under the method, the project activity is defined as “inducing the establishment of a native forest from in situ seed, lignotubers or root stock (coppice) sources by undertaking one or more human-assisted regeneration activity”. Generally, it is not possible to induce the establishment of native forest from in situ seed, lignotubers or root stock in areas that already contain pre-existing mature trees.
The second is that, by law, credited areas must consist only of land that first exhibited regeneration at or around the same time. By definition, areas containing pre-existing mature trees cannot first exhibit regeneration the same time as areas that contain young regrowth. Areas with both young and old trees will contain a multi-aged forest, not even-aged forest regeneration.
The third requirement is that, by law, the credited areas must have been prevented from achieving forest cover over the preceding 10 years by relevant “suppressors” – predominantly clearing and grazing by livestock or feral animals. If there are mature trees on site, they cannot have been suppressed by clearing. Equally, grazing by livestock and ferals does not suppress mature trees, meaning areas containing mature trees do not meet this suppression requirement.
These statutory provisions leave little doubt that the credited areas of HIR projects should not include uncleared lands containing pre-existing mature trees. As the Explanatory Statement to the method, an official document that is intended to guide its interpretation, states: “The Determination applies to projects in which land has been cleared of native vegetation and where regrowth has been suppressed for at least 10 years.” Elsewhere, the Explanatory Statement says: “The activity must occur on areas of cleared land on which regrowth has been regularly suppressed but has the potential to grow if suppression activities ceased, or on cleared areas that abut existing vegetation.”
There are other factors that support the conclusion that only cleared land without mature trees is legally entitled to be included in the credited areas. Chief among these is the fact the model used to estimate sequestration assumes the credited areas start with no pre-existing mature trees on them. The use of the model to estimate sequestration in uncleared areas that contain significant numbers of pre-existing mature trees is illogical and will necessarily give rise to a material risk of over-crediting.
The way in which the HIR method was developed is also telling.
The offset scheme’s first method, made in June 2012, was for establishing forests through environmental plantings – that is, setting seed or seedlings to grow trees. For all relevant purposes, the original versions of the environmental plantings and HIR methods are twins, with the only material difference being that the environmental plantings method involves planting trees, while the HIR method is supposed to involve inducing regeneration from soil seed stock, lignotubers and root stock. The key provisions of both methods are very similar and are based on similar principles, and both methods rely on the same model to estimate sequestration.
The environmental plantings method requires eligible land to have been previously cleared and for land supporting pre-existing mature trees to be excluded from credited areas. From the moment the environmental plantings method was first made, the Clean Energy Regulator has consistently required proponents to exclude land containing pre-existing mature trees from credited areas on the wholly sensible premise that it is not possible to create new forest by planting seedlings beneath mature trees.
The HIR method was made after the environmental plantings method and was based on it. We know this not only from the structure of the method, but also because the then parliamentary secretary for climate change, Mark Dreyfus, publicly said it was at the time.
From January 2013, when the HIR was first made, until May 2014, it was administered in a manner consistent with the environmental plantings method. During that time, only one HIR project was registered – a roughly 7900-hectare project with a 3400-hectare credited area on predominantly cleared land on the Eyre Peninsula in South Australia.
At this time, there was no suggestion the credited areas of HIR projects could include uncleared lands with pre-existing mature trees. Indeed, the regulator’s own website stated the HIR method “applies to projects where land has been cleared of native vegetation and where regrowth has been suppressed for at least 10 years”.
Then came a significant change. In May 2014, when there were concerns about a lack of projects for Emissions Reduction Fund auctions, the regulator began accepting registrations for HIR projects in uncleared rangeland areas. Not surprisingly, the description of the HIR method on the regulator’s website was replaced with more accommodating text.
This switch by the regulator is hard to explain. It is made more intriguing by the fact that, at the time the department was preparing the HIR method it was also handling a separate proposal for a method designed for use in uncleared rangeland areas. Known as the rangeland restoration method, it was intended to cover projects involving the management of grazing pressure and fire to facilitate sequestration in vegetation and soils.
This meant there were two carbon method proposals running parallel at the same time. The key difference was between cleared and uncleared land.
There was the HIR method, which was supposed to cover projects involving stopping clearing and reducing grazing pressure to induce the regeneration of even-aged native forests on cleared lands. Then there was the rangeland restoration method, which was supposed to cover projects involving reducing grazing pressure from livestock and feral animals, and managing fire, to sequester carbon in vegetation and soils on uncleared lands.
The rangeland restoration method was not something that could have escaped the attention of the regulator or the department. It attracted considerable public interest because it was linked to the notorious proposal to create the world’s largest carbon farm at Henbury Station, 230km south of Alice Springs.
In 2011, Henbury Station was purchased by RM Williams Agricultural Holdings for $13 million, with a $9.1 million grant from the Australian government. The plan was to destock the property on the premise this would trigger regeneration of native vegetation and thereby sequester additional carbon in the landscape. The rangeland restoration method was the vehicle that would allow money to be made from this sequestration, through the sale of carbon credits.
While the two methods were running parallel in the process, they met very different ends.
The HIR method was endorsed by the Domestic Offsets Integrity Committee in late 2012 and made by Mark Dreyfus in January 2013.
The rangeland restoration method was sent back to the proponent by the Domestic Offsets Integrity Committee in 2012 and again in 2013 and never even put out for public consultation, presumably because there was insufficient scientific evidence to support the notion that controlling grazing pressure in uncleared areas was likely to permanently increase carbon storage in woody vegetation and soils with sufficient certainty and conservatism.
The demise of the rangeland restoration method was a major factor in the collapse of the Henbury Station project. As the receivers said, “without the methodology, Henbury wasn’t generating any cash flow”. RM Williams Agricultural Holdings went into receivership in mid-2013 and Henbury was sold for $8.5 million, significantly below the 2011 purchase price.
Wind the clock forward a decade and there are now HIR projects next door to Henbury Station that are slated to get carbon credits for supposedly regenerating native forests in uncleared areas by reducing grazing pressure – precisely the thing that had failed to get approval through the rangeland restoration method in 2012 and 2013.
The sequence of events here suggests that, from May 2014, the regulator, with the knowledge of the department, allowed HIR projects to be registered in uncleared rangeland areas and for HIR projects to include in their credited areas uncleared lands with substantial numbers of pre-existing mature trees. It did so knowing, or at least it should have known, that it was unlawful and that no method covering these projects had ever been endorsed by the Domestic Offsets Integrity Committee or Emissions Reduction Assurance Committee.
The outcome of this is a system where hundreds of projects are being granted carbon credits for carbon sequestration that is largely neither real nor additional. It makes a sham of the safeguard mechanism because most covered facilities will meet their emission reduction obligations through carbon reductions that are not actually happening.
If history is a guide, the Australian government will not shut down the HIR scandal. The regulator and the department will continue to try to deflect attention and wait out the media cycle.
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There are strong forces working to keep HIR crediting going. For one, it suits the interests of large polluters. The seemingly endless supply of credits from low integrity HIR projects suppresses credit prices, which keeps fossil fuel projects profitable. If the government steps in, credit prices will rise substantially, risking another round of the “carbon pricing wars” with the Coalition.
An added factor is there are now powerful groups that have a financial stake in HIR projects and they have shown a willingness to use their influence to ensure there is no change to the status quo. These include fossil fuel companies and large investment houses.
Several of Australia’s largest environment and climate groups, and some of the more notable sustainable investment organisations, now also have links to HIR projects. There is also a cadre of conservationists who lobby others to turn a blind eye on the basis that HIR projects provide benefits for biodiversity, even if they don’t sequester much additional carbon.
The forces working to keep HIR credits flowing mean the only way this ends is through a properly independent and thorough inquiry, done at arms-length to the regulator and department.
This did not happen with the Independent Review of Australian Carbon Credit Units in 2022. The review was staffed by people from the regulator and department and it did not analyse the performance of a single project.
On paper, the ideal body to conduct a re-review is the Climate Change Authority, whose statutory functions include reviewing the operation of the carbon offset scheme. However, its members include representatives of both the major buyers of credits from HIR projects and the major sellers. The staff are also drawn directly from the department and regulator.
There are other agencies that could do the job, including the National Audit Office and National Anti-Corruption Commission. To date, despite this being among Australia’s largest government-orchestrated frauds, there has been no interest.