Could Australia really cut our greenhouse gas emissions by 19% for only a billion dollars by buying cheap international carbon credits? Or is it too good to be true?

As Climate Change Review author Ross Garnaut pointed out last Friday and Bernie Fraser’s reinvigorated Climate Change Authority (CCA) — recently saved by Clive Palmer — pointed out in this report yesterday, Australia could be missing out on the bargain of a lifetime.

To recap: the government plans to create an Emissions Reduction Fund to spend more than $2.6 billion to buy 421 million tonnes worth of domestic emission reductions, cumulative to 2020, to reach our target of a 5% cut in carbon emissions as compared to business as usual, which works out at a minimum $6 per tonne of CO2 avoided.

Yet this week on the international carbon market, verified abatement can be bought for as little EUR17c a tonne (AUD25c). So the CCA conservatively estimates that for under $500 million we could lift our emissions reduction target to a 19% cut in emissions — the level it deems to represent our fair share of the global effort — buying the required extra 427 million tonnes worth of carbon credits for $1.15 a tonne. Using the same assumptions, the CCA calculated for Crikey, if we ditched the Emissions Reduction Fund completely, we could still hit the 19% reduction target by buying almost 850 million tonnes of abatement overseas for $1.34 a tonne, or just $1.1 billion.

Sale of the century? Or get what we pay for?

There are two main reasons why such cheap carbon credits are available overseas. The first is to do with timing: there is a one-off, “use it or lose it” opportunity to buy excess credits from the first commitment period of the Kyoto Protocol, which ran from 2008-12. That opportunity expires in mid-2015, when there will be a final “true-up” to determine whether countries did what they said they would do. After that, some may be carried over, but the vast bulk of the excess credits will be cancelled. Until that happens, the price of carbon credits will be artificially low.

Secondly, the carbon market is likely to remain fundamentally oversupplied through the uncertain, second commitment period of the Kyoto Protocol, from 2013-2020, because a) schemes such as the United Nations’ Clean Development Mechanism (CDM) have been more successful than expected in generating carbon credits (albeit many of low quality); and b) governments have been slower than expected in creating demand for credits — i.e. by establishing big new national emissions trading schemes — or, like Australia and the European Union, have placed limits on how much abatement can be bought offshore. California’s emissions trading scheme simply won’t allow CDM credits.

It is not hard to see why. The potential for rorting is enormous. The CCA report gives examples of controversial CDM projects that have been used to generate carbon credits of dubious environmental integrity, which it recommends Australia avoids: “temporary” credits from forestry schemes; credits from destruction of industrial gasses, so lucrative that they created a perverse incentive to continue manufacturing them; credits from environmentally destructive dams; credits from new coal-fired power plants that are supposedly cleaner than they might otherwise have been. All fundamentally dodgy.

But even those examples the CCA cites favourably ring alarm bells. Here’s just a few:

  • The Kuyasa program in a low-income housing development in Cape Town, South Africa, would reduce emissions by 6580 tonnes per annum by installing ceiling insulation, solar water heaters and energy-efficient lighting through retrofitting 2300 existing homes. What could go wrong?
  • The India Cements waste heat recovery project in Andhra Pradesh would reduced emissions from the cement plant by 7766 tonnes per annum, converting hot flue gasses to electricity, with CDM funding lifting the internal rate of return from 11% to 15%. A nice little earner — would it have been economic anyway?
  • A German-funded, 80MW-stage of the Zafarana wind farm in Egypt, the biggest in Africa, developed by the state-owned New and Renewable Energy Authority, was conservatively reckoned to save 171,500 tonnes a year. It is hard to find updates online. Egypt still has a 20% by 2020 renewable energy target but, given everything going on there, what’s the chance this project ran on time and budget?

The list goes on: 20,000 biogas digesters in Nepalese homes; a 70kw run-of-river micro hydro turbine in Bhutan; the Zhonglianshan coal mine methane capture project in China. Remote locations in developing or unstable countries, small licks of abatement, an underfunded UN bureaucracy reliant on third-party certifiers to ensure accountability … no matter how worthy the projects or how honest the proponents, it is very hard to see how the stupendous emissions of the industrialised world can be offset by schemes like these.

You can almost hear the shock jocks banging on at the thought of Australian taxpayer dollars funding this type of project. Prime Minister Tony Abbott is sceptical,  once describing the purchase of international credits as ”money that shouldn’t be going offshore into dodgy carbon farms in Equatorial Guinea and Kazakhstan”.

The Greens are also wary of reliance on offshore carbon credits — so that’s at least one thing Abbott and leader Christine Milne could agree on. Milne’s office did not respond to Garnaut’s call but referred Crikey to the Carbon Market Watch website, which has called for CDM reform, and to a persuasive 2008 Stanford University critique that found that “at root, the CDM and other offset schemes are unable to determine reliably whether credits are issued for activities that would have happened anyway while also keeping transaction costs under control and assuring investor certainty”.

For all these reasons in 2012 The Economist called the CDM a “complete disaster in the making“. Climate lawyer Martijn Wilder, head of Baker & McKenzie’s global environment markets practice and a director of the Clean Energy Finance Corporation, says the CDM is fundamental to the Kyoto Protocol and on the whole the projects are credible, with a lot of “low-hanging fruit” in terms of cheap abatement in the developing world. But developing nations may want to count CDM emissions reductions towards their own emissions reduction targets in the second commitment period — raising the spectre of double counting. Australia needs to strike a balance between domestic and offshore abatement, and should be “very careful” buying credits left over from the first commitment period of Kyoto, in the hope that they can be carried over. “Legally, there is no guarantee that they can be counted in the future,” Wilder warned.

But with Australia hurtling over a climate policy cliff — no cap on emissions, no carbon price, possibly no Direct Action program either, and only the Renewable Energy Target to save us — we may have to take some tough choices. Lobby groups like the Business Council and AIG favour buying offshore credits: it would be a form of insurance to deal with our international climate obligations this decade so cheaply. In the words of Bloomberg New Energy Finance Australia chief Kobad Bhavnagri, it is a “no brainer”.