A “shift in ambition” on biodiversity (Part II)

On 7 December 2023, the Nature Repair Bill 2023 finally passed both houses of federal Parliament in Australia, and on 14 December 2023 the Nature Repair Act 2023 (Cth) (Nature Repair Act) was assented to and became law. The Nature Repair Act introduces a legal framework for a voluntary national “nature repair market” in Australia.

In Part I of our analysis of the Nature Repair Act, we discussed the similarities and differences between the proposed new biodiversity certificates framework under the Nature Repair Act and the existing Australian carbon credits framework. We also compared the proposed new biodiversity certificates framework with a similar scheme in the United Kingdom, the “Biodiversity Net Gain” scheme.

In this Part II, we provide some commentary on opportunities, challenges and issues to consider for landowners and businesses interested in engaging in the new Australian biodiversity certificates market, once it is operational.

 

Interaction with the carbon credits framework

The new biodiversity certificates framework under the Nature Repair Act is intended to be able to be “stacked” together with the Australian carbon credits framework, such that both biodiversity certificates and carbon credits will be able to be generated from the same project area.

To some this seems antithetical to the “additionality” concept that is inherent to both frameworks that a proponent could “benefit twice” from the same activity, in terms of receiving both a carbon credit and a biodiversity certificate for the same activity. How might this work? The Minister’s Second Reading speech gave some indication. Under the existing carbon credits framework, a proponent can be incentivised to simply plant trees without regard to the diversity of tree species being planted, or whether those tree species are in fact well suited to the specific environment in which they are planted. The biodiversity certificate framework might incentivise that proponent, rather than planting a monoculture of trees in some unsuitable locations, to plant a wide variety of tree species across the best possible locations. Biodiversity gains that are “additional” to those that would have been made had a monoculture of one particular species been planted in the relevant locations might entitle the proponent to a biodiversity certificate in addition to the entitlement that the proponent will have to carbon credits for carbon sequestered.

The detail of exactly how this “stacking” will occur without contravening the principle of “additionality” will be set out in subordinate regulations, rules and instruments (such as methods) yet to be made. The Queensland Land Restoration Fund provides an example of an existing scheme whereby carbon and biodiversity outcomes are stacked in this kind of way. Another (non-statutory) scheme allowing for this is the Accounting for Nature framework.

 

Interaction with Commonwealth and State offsets schemes

The Government’s original proposal to allow use of biodiversity certificates for offsetting purposes was a key reason for the delay in the passage of the Nature Repair Act through Parliament, with the Greens and crossbench opposed to the idea. As noted in our Part 1 article, a deal was eventually done on this point, with the Government agreeing to include express provision in the Nature Repair Act prohibiting the use of biodiversity certificates for any “environmental offsetting purpose”, that is, for the purpose of meeting an environmental offsetting requirement (however described) under a law of the Commonwealth, a State or a Territory.

As such, biodiversity certificates will not be able to be used by the holder for compliance purposes, to offset development impacts, and to, for example, satisfy an environmental offset condition on a Commonwealth or State approval. In this way, it seems that the new Commonwealth nature repair market and the Commonwealth and State offsets schemes will not link with each other, at least for the time being.

Notably, carbon credits can be used for an offsetting purpose and indeed the “compliance market” for carbon credits (in which buyers acquire carbon credits for regulatory purposes, to offset carbon emissions and to comply with actual or anticipated emissions liabilities, including under the revamped Safeguard Mechanism) has underpinned recent growth in the Australian carbon market. The prohibition on the use of biodiversity certificates for offsetting purposes will likely hinder growth in the Australian nature repair market at least initially – more on this below.

In the meantime, there may be some ongoing discussion and perhaps controversy around the potential future use of biodiversity certificates for offsetting purposes, as the Government completes its review of the Commonwealth environmental legislation, and in particular looks to strengthen the federal “offsets hierarchy’ via a new National Environmental Standard for offsets. In this respect, in November and December 2023 the Government provided some details around a proposed new draft National Environmental Standard under which environmental offsets would be rebranded as “restoration actions” and “restoration contributions” and refocussed on overall net positive outcomes for the environment. As the offset framework is revised, refocussed and further developed it will be interesting to see if discussions around the use of biodiversity certificates for offsetting purposes are revived, and the prohibition in the legislation perhaps eventually removed.

 

Market liquidity

Liquidity in any market depends on there being many ready and willing market participants (i.e. sellers and buyers). In the case of the proposed nature repair market, there is likely to be some initial challenges with market liquidity:

• On the supply side, the number of ready and willing biodiversity certificate sellers is likely to be fairly limited initially – somewhere around 1000-1500 participants was an early Government estimation, and that was before the constraint on the use of biodiversity certificates for offsetting purposes was introduced into the legislation. First movers in the market are likely to be landowners offering a “stack” of carbon and biodiversity outcomes. Supply of certificates will be constrained by two principal factors – first, the ability for landowners who do want to monetise biodiversity projects on their land to choose from a myriad of alternative schemes that will co-exist and thereby compete with the nature repair market (including for example the Queensland Land Restoration Fund); and second, the fact that there will be only one certificate issued for each registered project. On this latter point, the Government has indicated that (at least under some methods) biodiversity outcomes may be described in units, which will then be reported. It seems possible therefore that for certain types of projects, multiple “biodiversity units” may be associated with a single project, and a buyer might agree to pay a proponent for offtake of discrete “biodiversity units” achieved as part of a project, based on project reports. While that buyer will not be entitled to exclusive legal title over the associated biodiversity certificate under the Nature Repair Act as it stands, it will be possible for the buyer to acquire an equitable interest in the associated certificate. This partial “beneficial ownership” may be sufficient for some buyer’s purposes, though it may require some innovative corporate arrangements.

• On the demand side, the number of ready and willing biodiversity certificate buyers will be heavily dependent on the regulatory incentives (of both the “carrot” and “stick” variety), encouraging or mandating business engagement in the framework. It might have been expected that the demand for biodiversity certificates might have been high, to the extent that the use of biodiversity certificates for offsetting purposes was possible. However, this is not possible and so a “compliance” market for biodiversity certificates will not exist, at least initially. As it is, the demand for certificates will rely on the “voluntary” market, being businesses that are seeking to purchase certificates to meet voluntary biodiversity/environmental commitments (including ESG capital), and also NGOs seeking to purchase certificates for philanthropic reasons. Whether such “voluntary” sources of demand will – in and of themselves – be sufficient to support broad take-up of the framework, and ultimately help to achieve the Government’s goal to protect 30% of Australia’s land and seas by 2030, seems unlikely. The success of the framework at least in the initial years will therefore most likely be reliant on some Government support via Government purchases under the proposed tender/reverse auction framework – as was the case for the establishment of the carbon credits framework under the CFI Act. Funding has previously been allocated in the federal budget to help establish the nature repair market, but it is unclear if that included funding for Government purchases of certificates. The Government will be hoping that the voluntary market develops faster for biodiversity than it did for carbon. In this respect it is notable that the Government is actively supporting the Taskforce on Nature-related Financial Disclosures (TNFD), which has developed a global risk management and disclosure framework for corporates and financial institutions to report and act on evolving nature-related risks and opportunities. The TNFD provides a framework for growing corporate demand for projects that improve biodiversity and has just recently been established.

 

Integrity and transparency

Over the last 12 months there has been much criticism in the Australian carbon credits market regarding the perceived lack of integrity around certain carbon credit methods, particularly those involving regrowth of vegetation. The Government has been proactive in response to this criticism, commissioning a review (the Chubb Review of Australian Carbon Credit Units) and commencing to implement many of the Chubb Review recommendations.

The consequences of this continuing public debate on carbon credits integrity are evident in the Nature Repair Act, with a host of enhanced integrity and transparency measures put in place for biodiversity certificates. This includes the enshrining of detailed Biodiversity Integrity Standards, stringent record-keeping, project monitoring and reporting obligations on proponents, significant auditing and enforcement powers granted to the Clean Energy Regulator (CER), emphasis on transparency of project data and publication of project outcomes, and so on.

These safeguards are important but also in tension with the need to “simplify and standardise” biodiversity outcomes to allow for market trading. If there is to be a functioning market, there will need to be a balance struck between providing the integrity assurances that the Government and buyers understandably require, whilst also ensuring that measuring, reporting and verification of biodiversity impacts is practical and not so burdensome on the proponent as to discourage project development. Ultimately, buyers may need to do more due diligence for biodiversity certificate transactions than they would usually do, even for carbon credit purchases. Buyers will also need to become comfortable with accepting some of the risks involved in investing in natural capital, including the risk of future environmental integrity issues, not to mention the so-called “risk of reversal” via natural disaster.

 

Greenwashing

The Government, via the corporate regulators ASIC and the ACCC, has recently been cracking down on “greenwashing” by Australian businesses. It is possible that this will contribute to reluctance on the part of business to participate in the new biodiversity certificates framework, lest a biodiversity investment claim that has been made cannot ultimately be backed up. This might occur because the underlying project does not deliver the biodiversity benefits the business hoped (and perhaps stated) it would, or because the business itself does not fully understand the biodiversity benefit achieved and inadvertently makes incorrect claims in that respect.

The Government is alive to this risk, and in December 2023 the ACCC released revised guidance on environmental claims for businesses and consumers. It is also possible that further specific guidance on claims in relation to biodiversity certificates will be released. While it will always be the case that a business which misrepresents or makes false or misleading claims about their contribution to nature repair may be liable under Australian consumer law, this Government guidance clarifies to some extent what a business can say about its biodiversity investment that will not trigger liability.

 

Government and private sector capabilities

As noted above, under the Nature Repair Act, primary responsibility for administration of the new market will rest with the CER. The Nature Repair Act also refers to audit reports (necessary to accompany each project application) being undertaken by registered greenhouse and energy auditors appointed under the National Greenhouse and Energy Reporting Act 2007 (NGER).

While the CER is experienced in supervising and administering environmental markets (having run the carbon market for many years), and NGER auditors are experienced in making emissions and carbon sequestration assessments, to our understanding, the CER and many registered NGER auditors do not currently have the capability (let alone the capacity) to perform similar roles in the biodiversity space. Significant re-skilling, up-skilling, cross-agency delegations (e.g. between the CER and the Department of Climate Change, Energy, Environment and Water) and hiring in the public and private sector will be required to fill roles and get the nature repair market up and running. This comes at a time when the CER and auditors (as well as many other market participants and stakeholders) are already under pressure as a result of the focus on integrity and transparency issues under the carbon credits framework. As in so many other sectors – including, for example, renewable energy generation and transmission – obtaining sufficient human capital is going to be a big challenge for the nature repair sector to address.

 

Looking ahead

The Australian Government has sent a clear signal to the private sector that it is committed to accelerating Australia’s investment in and protection of its biodiversity.

While some of the detail in relation to the operation of the Nature Repair Act is yet to be articulated, it is already clear that there will be a number of opportunities (as well as challenges) for landowners and businesses looking to engage in the new Australian biodiversity certificates market, once the market is operational. The Government has indicated that the new nature repair market will begin operation in the second half of 2024.

Should you wish to learn more about the Nature Repair Act and what opportunities and challenges it presents for your business, please reach out to one of the authors.