Carbon offsets will be required to achieve net zero targets, and government should set clear policy around the use of offsets and that the offsets used have high integrity, according to the Grattan Institute.
The Grattan Institute has published Towards net zero: Practical policies to offset carbon emissions, the fourth in a series of five reports examining policy actions to help achieve net zero outcomes in Australia.
Grattan Institute acknowledges that offsetting is a "difficult part of the net-zero conversation," because of perceived risks that offsets can used to delay actions to reduce emissions, plus concerns about the integrity and actual abatement of accredited carbon activities.
However, the report states that offsetting "will be required because there will be emissions we cannot eliminate, and some where we will not be willing to pay the price to do so. The only option to deal with these emissions is to deliberately remove carbon dioxide from the atmosphere to offset them."
"If we're going to have a balanced, stable climate in which we can live sustainably, we're going to have a position in which literally every tonne of carbon emissions that we put in is matched by a tonne we pull out of the atmosphere," said Grattan Institute's energy and climate change program director Tony Wood.
The report outlines six recommendations for government policies. In addition to setting strong policies to reduce emissions and articulating the role of offsetting in each policy, government should bolster the integrity of offsetting units.
Australia is in a strong position regarding carbon offsets because of the robust nature of Australian Carbon Credit Units (ACCUs) and their use as part of the Safeguard Mechanism.
The Safeguard Mechanism requires Australia's largest greenhouse gas emitters to keep their net emissions below a baseline emissions limit that corresponds to the National Greenhouse and Energy Reporting scheme (NGERS). Companies must report their emissions under NGERS. The Clean Energy Regulator maintains the Safeguard Mechanism. If emitters do not meet the baseline, they have to offset their activities through the purchase of ACCUs only.
"You have to have a strong register of emissions activities, and you've got to have a strong accreditation process," Wood noted. "The Australian one is as good as any, but government has to make some calls.
"Firstly, are we going to allow offsets from international projects? In the European scheme, they were allowing you to meet up to 10% with international offsets. They're closing that off completely. We need to decide that as well."
Government should also help create a market for ACCUs, but not dominate it, the report recommended.
"The government in our view should step out of being a market participant and should be a market regulator," Wood said. "They should make sure everyone follows the rules, but people can make money out of it."
Government should also support the emergence of negative emissions technologies such as direct air carbon storage and large scale mineralisation - sequestering emissions underground.
Wood noted that carbon capture and storage (CCS) and carbon capture, utilisation and storage (CCUS) can count as offsetting activities.
"I am avoiding sending the CO2 into the atmosphere," Wood said. "If there's no liability on me to capture the CO2, there's no difference between paying me to put the CO2 underground and paying a farmer to change the farming habits to contain the methane emissions from cattle.
"The problem with some CCS technologies is that they don't capture 100% of the CO2. What happens to the 5-10% they can't capture?"
If CCS technology becomes commercial and scalable, governments will have to decide who bears liability for making sure that emissions stay sequestered.
"With CCS, one of the questions that has been discussed internationally and in Australia is what is the liability regime for CO2 that had been sequestered deep underground," Wood said. "The companies might all go out of business, and what happens if we find that the CO2 is leaking out again?"