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International carbon credits and banking are off the table for now but the government’s draft Safeguard Mechanism Credits Bill leaves the door open to both.

The draft bill, which was opened up for consultation on Monday, sets the scene for so-called grey credits to be issued to big emitters that produce fewer emissions than the average.

Still up in the air is whether they’ll be able to bank any credits granted in the first two years of the reform’s life, and the government is leaving open space to one day include international offsets.

But it’s the tightening of the rules that has had big emitters buying up credits in the existing carbon market over the last quarter.

Big emitters will no longer be able to generate Australian Carbon Credit Units (ACCUs) from direct or Scope 1 emissions unless they have an existing offsets project.

Instead they’ll be able to receive the new Safeguard Mechanism Credits (SMCs) but only if the reduction is below the new baseline, a move the government says is to make the scheme begin lowering emissions rather than compensate for business as usual.

That baseline number will be decided via regulation rather than legislated, however.

Minister for Climate Change and Energy Chris Bowen says the SMCs will create a new financial incentive for Safeguard emitters – big polluters that emit more than 100,000 tonnes of CO2 equivalent a year – to make the changes they need to reach net zero emissions by 2050. He says it will also help Australian industry remain competitive in a rapidly decarbonising global economy.

Critics say these credits will undermine Australia’s attempts to reach its 43 per cent emissions reduction target by rewarding big emitters that still aren’t clean.

Climate Council head of advocacy Dr Jennifer Rayner says on their own, the new credits won’t get the big job done of driving down emissions from Australia’s biggest polluters. Instead, real baselines that force change are needed.

“These baselines must decline on a rapid trajectory towards net zero, with minimal use of offsets to ensure the reforms prioritise genuine emissions reduction,” she told RenewEconomy.

“The reformed Safeguard Mechanism must prioritise genuine emissions reduction – not cheap offsets on paper. Together with much tighter baselines that reduce over time, the move to introduce Safeguard Mechanism Credits for entities that genuinely cut emissions below their baselines is a positive step to incentivise major polluters to invest in real technology change.

“Prioritising the creation of Safeguard Mechanism Credits over ACCUs will also help ensure that any emissions reduction achieved by major polluters is genuine and only counted once.”

Around 215 facilities in Australia produce more than 100,000 tonnes of greenhouse gases a year. These are subject to the Safeguard Mechanism and accounted for 28 per cent of Australia’s total emissions in 2020-21.

And in a bid to wedge his opponents, Bowen said the opposition should support the bill given they’d already pitched the idea of baseline credits while in government, but “they just never got around to actually doing it”.

Bowen wants to rush the amendment through from November in order to allow the rule changes to be in place by 1 July next year.

The new credits are part of a raft of wider reforms to the Safeguard Mechanism which will impose higher caps and reduced targets on high emitters, as the government tries to fix overlaps from declining Safeguard Mechanism baselines and create opportunities to make more Australian Carbon Credit Units (ACCUs).

“Tradeable Safeguard Mechanism Credits will enable the lowest-cost abatement to occur for facilities under the Safeguard Mechanism,” Bowen said in a statement.

“It’s vital the reforms underway are efficient for Australian industry.

“Feedback on the consultation paper we released in August highlighted the importance of these credits to help facilities meet their obligations, and of appropriate compliance and implementation arrangements for the credits.”

The draft bill did not create any surprises, according to market advisory firm RepuTex.

“Today’s announcement actions the necessary changes to existing legislation to allow for the creation of Safeguard Mechanism Credits (SMCs), such as rules for ownership and transfer, and the surrendering of SMCs by covered facilities. Additional breadcrumbs around the use of international offsets and the creation of SMCs by facilities outside the Safeguard Mechanism fit with current expectations. We expect pressure to continue to build for SMCs to have a high level of integrity, similar to the Chubb Review, ensuring that new credits represent one tonne of emissions (or 1 tonne reduced) and create a robust price environment,” the organisation noted to RenewEconomy.

With the integrity of domestic credits currently under a cloud of suspicion, big emitters won’t be allowed to use international credits to offset their local emissions.

In a speech in Sydney today Bowen said carbon markets were years away from delivering certainty over integrity.

“We know there is a lot of interest in the use of international credits, but equally there is a need to ensure that any such units, if they are included in the future, are of the highest integrity,” he said.

“Even strong advocates of the use of international credits recognise that we are several years off being able to assert that these requirements can be met.

“My position, and the government’s position, remains as I have previously indicated: any move to provide access to international credits for this purpose would need to be accompanied by strict requirements to ensure real abatement that can be counted in Australia’s 43 per cent emissions reduction target.”

Major polluters are clamouring for access to international offsets because they are so much cheaper than Australian equivalents and they should be cut from the abatement options entirely, Rayner says.

“Some can be purchased for as little as $2 each. They are so much cheaper because they are completely dodgy and do not lead to genuine emissions abatement,” she said.

“The government should permanently rule out access to international credits because while ever the government leaves the door open to this, companies won’t be incentivised to make the investments in real technology change that can genuinely cut their emissions.”

The reforms come on the back of allegations that Australia’s existing carbon credits do not deliver the promised carbon abatement.

Former chief scientist and former vice-chancellor of the Australian National University, Ian Chubb, is leading a review into the regime and, in an interview with The Australian newspaper, said today carbon offsets can’t be used as a way for big emitters to keep polluting at business as usual.

The review, launched in July on the back of allegations of serious and unresolved flaws in the methodologies used to issue ACCUs, is linked to the Safeguard Mechanism reforms because the government is relying on the integrity of these offsets to meet its 43 per cent emissions reduction target by 2030.

Chubb says his goal is to provide recommendations to improve the reliability and trustability of Australian credits, that could also simplify the system to make it more use-friendly.

In March the former chair of the Emissions Reduction Assurance Committee, professor Andrew Macintosh, claimed flawed methodologies meant all emissions reductions methods had serious integrity issues and said the federal government’s Emissions Reduction Fund (ERF) amounted to “environmental and taxpayer fraud”.

The claims were dismissed by the Clean Energy Regulator, which administers the scheme, but the new government launched an independent review in July, chaired by former chief scientist and former vice-chancellor of the Australian National University, Ian Chubb.

The Chubb review is set to return its findings in December.

Since the allegations were made more evidence has emerged to indicate problems are widespread across the Australian market.

The Audit Office of New South Wales found that the state’s biodiversity offsets scheme not only failed on “almost every measure”, while Cleanaway Waste Management and Veolia which profit from the carbon credit industry as it operates now are arguing for changes to tighten up lax rules.

The dual risk of tightened standards emerging from the Chubb review combined with higher compliance rules for high emitters are translating into rising demand.

The September quarter saw both voluntary buyers, which are attracted to higher value Human Induced Regeneration (HIR) credits, and compliance buyers like those covered by the Safeguard Mechanism, buying up larger quantities of credits.

While prices fell over the September quarter across the board despite the rise in volumes traded, market advisory service Reputex says prices are on an up-trend, driven by the entrance of big buyers like the major banks into the domestic carbon market.

Rachel Williamson is a science and business journalist, who focuses on climate change-related health and environmental issues.

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