Nature positive reforms: everything you need to know about Australia's new biodiversity market - Environmental Law

The Albanese Government has now introduced its 'world-first' biodiversity market legislation into Federal Parliament, providing a framework for a voluntary national market intended to deliver improved nature and biodiversity outcomes.

In this Insight we explore the key features (and concerns) of the proposed legislation, and some broader implications for business to consider, including the potential opportunities the new market provides for organisations to successfully pursue a nature positive strategy and meet stakeholder expectations in managing biodiversity loss and risk.

Introduction

The 2021 State of the Environment Report (Report) painted a dire picture of the health of Australia's environment, concluding that Australia's biodiversity is declining and the overall state of Australia's environment is poor and continues to deteriorate (see our Insight on the Report here.).

In response to the release of the Report, the Federal Government published its Nature Positive Plan in December 2022, which included an earlier commitment by the government to establish a nature repair market "to make it easier for businesses and individuals to invest in nature".

In line with that commitment, the Albanese Government has now introduced the Nature Repair Market Bill 2023 (Cth) (Bill) and Nature Repair Market (Consequential Amendments) Bill 2023 (Cth) into Federal Parliament.

In short, the Bill establishes a framework for a nature repair market (Biodiversity Market). This is a voluntary market intended to encourage private sector investment in long-term nature repair, deliver improved biodiversity outcomes for native species, and reward landholders for enhancing and protecting nature and biodiversity. This Bill should be of great interest to all organisations pursuing a nature positive strategy, and who wish to manage their biodiversity risk (for further on this see our Insight on why Australian corporates should act on biodiversity loss here).

Key features of the Bill

The Bill and its Biodiversity Market share many similar features to the previous Federal Government's Agriculture Biodiversity Stewardship Market Bill 2022 (Cth) and the current carbon credits regime under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (Carbon Credits Act).

Key features of the Biodiversity Market under the Bill include:

project proponents will be issued a single biodiversity certificate for registered projects which enhance or protect biodiversity in native species;
projects can take place on Australian land and waters, including Australia's external territories;
for projects to be registered, they must meet various requirements, including compliance with an approved 'methodology determination';
biodiversity certificates can be sold to buyers under commercial contracts, and will include standardised information to enable the market to compare and value projects;
a Biodiversity Markets Register (Biodiversity Register) will be established to track biodiversity projects and provide information on biodiversity certificates;
the Bill is intended to work with the Carbon Credits Act (although the details of this interaction are not yet entirely clear). However, the intention is that Australian Carbon Credit Units (ACCUs) and biodiversity certificates can be generated from the same project area, incentivising project proponents to deliver projects with both carbon and biodiversity benefits; and
the scheme will be primarily administered by the Clear Energy Regulator (CER).

These key features and how integrity concerns are addressed, along with the broader implications of the Bill for business are discussed below.

What are Biodiversity Certificates?

In essence, a biodiversity certificate represents the biodiversity outcome that a registered biodiversity project is designed to achieve. Once a project is registered (discussed further below) and meets the specified requirements, a project proponent can apply to the CER for a biodiversity certificate to be issued for the project.

These certificates are issued by making an entry in the Biodiversity Register account held by the project proponent. Unlike the Carbon Credits Act for which a single registered project generates multiple ACCUs on an ongoing basis, under the Bill, a project will only be awarded one biodiversity certificate.

A biodiversity certificate will not be issued until various requirements are met, including that the project is sufficiently progressed to have resulted in, or be likely to result in, the biodiversity outcome for the project.

Once issued, a biodiversity certificate is the personal property of the project proponent, and may be transferred, allowing biodiversity outcomes to be owned and traded separately from the underlying land. Biodiversity certificates can also be deposited with the CER.

A biodiversity certificate would remain valid for the life of the project (that is, until the end of the project's permanence period), unless otherwise relinquished or cancelled. Details regarding the issuance, ownership, transfer, relinquishment and cancellation of biodiversity certificates would be made publicly available on the Biodiversity Register.

The Bill also makes provision for subsequent rules to create and maintain an online platform to facilitate the trading of biodiversity certificates, and other certificates, units or credits that relate to biodiversity projects.

Demand for biodiversity certificates is intended to primarily come from private investors (discussed further below), however the Bill also permits such certificates to be purchased by the Commonwealth under 'biodiversity conservation contracts'.

Similar to the process for carbon abatement contracts under the Carbon Credits Act, biodiversity conservation contracts can be entered into by the Commonwealth after a 'biodiversity conservation purchasing process' (such as a tender process or reverse auction) has been undertaken in accordance with specified principles. These principles include value for money, the encouragement of competition and the maximisation of the protection or enhancement of biodiversity.

At this stage, no funding for these biodiversity conservation contracts has been announced by the government. However, if private demand fails to generate sufficient demand, these contracts offer a mechanism for the government to step in to promote biodiversity outcomes and kick start the market.

What projects can be registered?

If a biodiversity project meets certain requirements, a person may apply for the project to be registered on the Register.

Compliance with methodology determinations

Similar to the Carbon Credits Act, the main requirement under the Bill for projects to be registered is compliance with an approved 'methodology determination' or method, which sets out the requirements for undertaking certain biodiversity projects.

These requirements will include details on how activities must be carried out, conditions relating to the measurement and assessment of the protection or enhancement of biodiversity, and when a biodiversity certificate in relation to the project can be issued. Importantly, these methodology determinations will also specify the timeframes attaching to the project, including the project's activity period (which is the period of active management to achieve the projected biodiversity outcome) and the project's permanence period (which is essentially the time period in which biodiversity outcomes must be maintained, and is usually either 25 or 100 years).

The framework is intended to cater for a wide range of project types, such as enhancing remnant vegetation and creating habitat for specific species.

Fit and proper person test

For a project to be registered, it must also be carried out by one or more project proponents who are fit and proper persons. This test generally considers a person's past compliance with the law, whether the person is insolvent or under external administration, and other matters the CER considers relevant.

There can also be multiple project proponents for a registered project, which can include individuals, corporations, trusts, conservation groups, Aboriginal persons and Torres Strait Islanders and landholders (including farmers).

Eligible interests and consents

Project proponents must hold certain interests and/or rights regarding the subject land, which include ownership or lease interests, or obtaining the consent of the owner of the land, or other specified parties, to carry out a project (if required).

If a project area includes an exclusive possession native title area (that is, an area where an entry on the National Native Title Register specifies that native title exists in relation to the area, and where native title confers a right of exclusive possession over the area), then the project proponent must be the registered native title body corporate for the native title area unless consent from the registered native title body corporate has been obtained. Otherwise, if a project area contains a native title area (which does not provide for exclusive possession), the registered native title body corporate must also consent to the project.

Other requirements

The Bill also allows for legislative rules to specify projects which cannot be registered, known as 'excluded biodiversity projects'. This would include projects that have a risk of a material adverse impact on the availability of water, other biodiversity, environmental matters, employment, land access for agricultural production or the local community or Aboriginal persons or Torres Strait Islander community.

Post registration

Once a project is registered, the Bill provides that such project may be recorded on the title of the subject land in the relevant state or territory.

What are some concerns regarding the Bill?

A number of concerns with the Bill have been raised during the public consultation undertaken on the exposure Draft of the Bill, the most common and significant of which are outlined below.

Integrity concerns

Integrity concerns continue to dominate discussion of environmental markets generally, particularly whether environmental credits accurately represent claimed environmental outcomes. For that reason, it is unsurprising that the Bill attempts to address integrity concerns in several ways, including through:

its publically available Register, which will provide details on projects and biodiversity certificates, and is intended to provide oversight and transparency;
its compliance and enforcement regime, which includes:
- placing record-keeping, project monitoring and measuring, reporting and notification requirements on project proponents, and empowering the CER to gather information, audit projects, require third party audits and enter into alternative assurance agreements with project proponents;
- a number of civil penalty provisions for non-compliance and also adopts certain monitoring and investigation powers and enforcement provisions under the Regulatory Powers (Standard Provisions) Act 2014 (Cth); and
- cancellation of biodiversity projects and relinquishment of biodiversity certificates in response to specified non-compliances, and the declaration of biodiversity maintenance declarations over land where there has been non-compliance or likely non-compliance with a notice by the CER to relinquish a biodiversity certificate. Biodiversity maintenance declarations can specify activities that cannot be undertaken on the subject land;
a requirement that the Minister for the Environment cannot make or vary a methodology determination unless both the Minister and yet to-be established and partially independent Nature Repair Market Committee (Committee
prescribed 'biodiversity assessment instruments' which set requirements that methodology determinations must comply with relating to the measurement or assessment of biodiversity and the protection or enhancement of biodiversity. Again, these instruments are made by the Minister and can only be made or varied if the Committee has consulted publically and is satisfied that the instrument is an appropriate means of achieving consistency of methodology determinations and would assist in ensuring that methodology determinations comply with the biodiversity integrity standards. However, unlike with methodology determinations, there is no requirement that the Minister must be so satisfied; and
the biodiversity integrity standards include that a biodiversity project must be designed to result in the enhancement or protection of biodiversity in native species that would be unlikely to occur if the project was not carried out (similar to an additionality requirement). It will be interesting to see how methodology determinations implement this requirement, particularly in the context of projects under the Carbon Credits Act and multiple biodiversity projects potentially being undertaken on the same area of land. In this regard, the intent of the legislation appears to be that projects could deliver both carbon and biodiversity outcomes, and therefore deliver both ACCUs and a biodiversity certificate.

The Committee will also have various additional functions including undertaking periodic reviews of methodology determinations and biodiversity assessment instruments and advising the Minister about the prioritisation of such determinations and instruments.

However, despite these safeguards, there are still integrity concerns, including that the CER will be regulator of the scheme given some of the governance issues that were found relating to the CER in the recent Independent Review of Australian Carbon Credit Units.

There are concerns that giving the CER's additional functions in an area in which they do not have specific expertise, before these broader governance issues have been addressed, is risky. One of the viable alternatives often put forward to address this concern is the promised independent Environmental Protection Agency, once established.

Market demand, including demands from offsets

The other major concern is that the Bill contemplates that biodiversity projects can also be undertaken under the Bill to satisfy offsetting requirements to compensate for the impacts of development on biodiversity.

By allowing biodiversity projects under the Bill to meet offsetting requirements, it arguably undermines the purpose of the market as being a nature positive initiative which focuses on contribution beyond compliance.

The concern is that rather than market demand being driven by nature positive investment, demand is instead driven by a biodiversity offset market, which is essentially demand driven by nature destruction elsewhere. Instead, some argue that the regulation of offsets by the Commonwealth should be considered as part of the ongoing reform of the Environment Protection and Biodiversity Conservation Act 1999 (Cth), or otherwise the use of offsetting under the Bill should be limited with appropriate safeguards (including ensuring in-perpetuity offsets).

A related concern is that the market, without other initiatives and regulation, could promote a business-as-usual approach, permitting companies to simply purchase biodiversity certificates as offsets, rather than look for more meaningful ways to reduce their operation's impacts on biodiversity.

Specifically, a biodiversity market should not provide an easy avenue for organisations to 'offset' all of their harmful biodiversity impacts but rather should be an avenue to address those harms to biodiversity which simply cannot be avoided (as is commonplace in the use of carbon offsets).

There is also concern that demand for such a market has been over exaggerated, with most of the current global biodiversity market being based on compliance, rather than nature positive actions.

Specifically, the argument is that in order for the market to be successful, organisations will either have to acquire biodiversity certificates:

for legal compliance (i.e. to meet offset requirements imposed by statutory approvals, and the concerns of the market being driven by offset demand is already outlined above): or
for their ESG strategies, their move to nature positive outcomes and to meet stakeholder expectations, as has been the case with organisations voluntarily moving to net zero.

Currently, however, there is no legal requirement for such certificates, and while the push for nature positive outcomes is growing, it is still only just picking up momentum. This momentum will inevitably be driven further in Australia by the move towards mandatory disclosure of nature related financial risk by corporations and financial institutions, but it may be some time before the full potential of this framework is realised.

In the meantime however, some argue that to kick start the market and ensure biodiversity outcomes, government funding to participate in the market (at least initially) is required. The imposition of mandatory requirements under statutory approvals to acquire certificates (as distinct from other types of offsets) may also be required to truly activate the market.

Another related concern is that the Federal Government is relying too heavily on the private sector to voluntarily take action to address biodiversity risk and loss via participation in the Biodiversity Market, when what is really required is stronger environmental laws requiring this.

What's next?

It will likely be some time before the Bill becomes law, and amendments are also likely to be made as the Bill is further considered by Parliament and to secure the support of the crossbench. The Bill has been referred to the Senate Environment and Communications Legislation Committee, with a report due on 1 August 2023. Biodiversity loss will likely weigh heavily on the Committee's mind, with its report on 'Australia's faunal extinction crisis' due on 28 June 2023.

Otherwise, many details of the scheme will not be fully known until subsequent legislative instruments are made by the Minister, including the methodology determinations and rules to support the administration of the scheme. Nonetheless, the bones of the scheme, and the Government's intention, is clear, and have a number of broader implications for business to consider.

Broader implications

While there is some debate as to the extent of demand from the private sector for nature repair products (as outlined above), it is nevertheless likely that the Bill will make it far easier for business to meet ESG objectives, compensate for their impacts on nature and take proactive steps to manage the risks that biodiversity loss and nature dependencies have on their business. This ease of access to purchase biodiversity outcomes, along with increasing regulatory focus regarding nature and biodiversity, will only likely increase stakeholder expectations to address biodiversity loss, as it becomes harder and harder for business to justify inaction.

To prepare for the Bill becoming law, business should:

consider whether participation in the Biodiversity Market might align with organisational ESG strategies and provide opportunities to meet stakeholder expectations to move towards nature positive outcomes and manage risk;
consider options to participate in the Biodiversity Market (e.g. as either a project proponent undertaking an project or an end purchaser of Biodiversity Certificates), including whether the Biodiversity Market might affect an organisation's strategy and involvement in carbon markets and approaches to offsets; and
pro-actively seek specialist advice to manage risks associated with participating in the Biodiversity Market (as outlined above).

While organisations who participate early in the Biodiversity Market will send a message to their stakeholders that they take the transition to nature positive seriously and are proactive in managing their biodiversity risk, it is likely that others may wait until the market matures further before investing.

It is also critical to stay informed of, and prepare for, further domestic and international developments in biodiversity regulation and risk (see our Insight on recent biodiversity developments here).

In this regard, the Bill is only one component of the Federal Government's environmental reform agenda and businesses which can quickly and strategically adapt will be well placed to take advantage of this rapidly changing regulatory landscape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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Australia: Nature positive reforms: everything you need to know about Australia's new biodiversity market