Carbon accounting and trading

By Shaun Suitor, Natural Capital Manager, Sustainable Timber Tasmania

Forests play an important role in the global carbon balance. As both carbon sources and sinks, they have the potential to form an important component in efforts to combat global climate change. Accounting for the carbon within forest ecosystems and changes in carbon stocks resulting from human activities is a necessary first step towards the better representation of forests in climate change policy at regional, national and global scales.

Carbon accounting

Carbon or greenhouse gas (GHG) accounting refers to processes used to measure how much carbon dioxide equivalents an entity (country, state, corporation, and individual) are emitting and sequestering.

Examples of products based on forms of carbon accounting may be found in national inventories, corporate environmental report and carbon footprint calculators.

Of the most relevance to the forest industry are national inventories. For example, the Australian Government produces the annual National Inventory Report. This inventory reports on Australia’s progress towards its Paris Agreement commitments to reduce its GHG emissions by 26 to 28% below 2005 levels by 2030.

Nested within the National Inventory Report is the land use, land use change and forestry (LULUCF) sector. In addition to the energy, industrial processes and product use, and agriculture sector, LULUCF is where the contribution of the forest sector is primarily captured.

Various international organisations have produced guidance materials for carbon accounting including the International Organisation for Standardisation. There are also various methods and models to measure and estimate carbon accounts. The most common in the Australian forestry sector is the CSIRO developed Full Carbon Accounting Model (FullCam).

Once an entity, such as a country, has committed a GHG reduction target; has developed an accounting, monitoring and reporting framework; a mechanism needs to be put in place to achieve these commitments. This generally comes in the form of carbon trading schemes.

Carbon trading

Concern about climate change has led governments around the world to introduce regulation to reduce greenhouse gas emissions. Numerous measures have been introduced such as:

  • support for research and development of low emissions technologies;
  • rebates or subsidies to encourage the adoption of low emissions technologies;
  • education and behaviour change programs.

Increasingly, approaches that put a price on carbon are being pursued. Carbon pricing is generally considered necessary in order to achieve the deep cuts in emissions being advocated by many experts and stakeholders.

Carbon pricing can be in the form of a carbon tax or carbon trading, or some combination of the two.

Carbon taxes are administratively simple and provide certainty in terms of cost. However, they are environmentally uncertain. In that is can be difficult to estimate what level of tax is required to achieve a particular emission reduction. Thus may result in higher economic costs for the same level of emissions reduction compared to carbon trading.

Carbon trading results in a lower overall cost, as it allows flexibility about where the reductions are achieved. Firms that are able to reduce emissions more cheaply are able to reduce more and sell the emission reductions that they do not need to other firms with a higher cost of abatement. Where emissions reductions from sectors outside the scheme are allowed to be traded, costs may be reduced further.

As opposed to a carbon tax, or a pure emissions trading scheme, to meet Australia’s GHG emissions reduction commitments, the Australian Government has opted for a mixed model. Whereby the Government has set up the Emissions Reduction Fund (ERF) fund to buy either avoided emissions or sequestered carbon (Australian carbon credit Units) from the Australian carbon marketplace.

There are many jurisdictional or country carbon trading schemes and non-jurisdictional or “voluntary” trading schemes around the world which forestry entities can participate in. However, the main one relevant to the forestry sector in Australia is the ERF. We will explore this in more detail in a future article.

Have a question, or a carbon-related topic you’d like covered? Or are you an expert in this field? Please get in touch– we’d love to hear from you.