Original published in The Australian on March 5th, 2024.

After a challenging few years for carbon markets, we are now clearly into a new phase that will see some major readjustments in how companies use and choose carbon credits, and it will lead to much-needed growth in finance for climate solutions.

These important changes are taking place because Net Zero has rightly become central to all carbon policy, with companies needing to manage their use of carbon credits in that context, rather than simply as a tool for neutrality offsetting.

Two major international reports, both released last week, provide clear signals of this shift in thinking, and should be regarded as must-reads for corporate Australia.

One of these is landmark new guidance from the Science-Based Targets Initiative (SBTi), which was issued last Thursday with introductory comments by experts including Lord Nicholas Stern – a strong advocate of high-integrity carbon markets.

It recommends that as a complement to companies avoiding and reducing on-site emissions and those with within their value or supply chains, they should also invest in climate solutions beyond their business, referred to as beyond value chain mitigation.

Importantly, it isn’t proposing that companies go this extra mile in 2050, or whenever they reach Net Zero, or get close to it. Instead, it urges them to do so now, and for one very good reason.

There is a huge gap between current mitigation commitments and what’s necessary to limit temperature rise to 1.5 degrees, and large amounts of private finance will be essential to fill that gap.

The other new international guidance – which will influence the type of credits that businesses choose to buy – has come from Oxford University, which has just updated its globally influential principles on carbon offsetting, first released in 2020.

The revised principles call for “a major course correction” in carbon markets.

Oxford recommends a much greater focus on buying high-integrity credits from activities that remove carbon from the atmosphere and store it long-term – either geologically, or in vegetation, or in products.

This doesn’t mean that we should all stop using any credits from activities that avoid or reduce the release of emissions – for example credits associated with activities that prevent land clearing.

The principles acknowledge that these have an important role in the short to medium term, which is just as well, given the unacceptably high land-clearing rates in Australia and in many developing, forested countries.

However, they also point out that we can only have a global Net Zero economy if all residual emissions are eventually matched only by credits from carbon removal projects.

To set course for this shift, the principles state that companies should immediately start to increase their purchases of removals credits. The EU has just integrated carbon removals in their net zero plans, and we hope to see similar plans in development here, guided by a national carbon market strategy.

Well-designed carbon markets and pricing are important to achieve Net Zero, driving energy and industrial decarbonisation and supplementing a transition away from fossil fuels and reductions in the consumption of energy and materials.

With the right governance frameworks and integrity standards in place, investment in carbon credits can also provide regional, Indigenous and environmental benefits and strengthen the social licence for the Net Zero transition.

Consumers want credible action on climate change but, for example, not all want to give up travel until flights rely entirely on sustainable aviation fuels. Having access to high-integrity carbon credits helps address that dilemma.

Many carbon-intensive companies and their financiers want ambitious action too, but many will only support it if they have access to market flexibility that help them manage the risks and uncertainties of the Net Zero transition, particularly until clean technologies become widely commercially viable.

To help guide our own members on this path, the Carbon Market Institute is introducing a new membership policy that requires large corporate full members to share transition plans from mid-2025. Companies still on the journey will still be able to join member discussions but without an influence on governance.

The transition plans must address five broad themes and demonstrate engagement with emerging best practice, such as the International Standard Organisation’s Net Zero Guidelines. The themes include emissions reporting; strategy and target setting; prioritising decarbonisation and the use of high integrity credits; consistent implementation actions, and; governance and regular review.

These themes will be central to corporate disclosure requirements being integrated into international accounting standards and being made mandatory in many countries – including Australia.

As we navigate this crucial next phase and accelerate action toward economy-wide net zero emissions, companies, countries, and industry groups need to urgently align policies with investments. Progress is being made, but there’s plenty more work to do.

John Connor, CEO, the Carbon Market Institute

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