An independent government body has outlined five areas where New South Wales’ controversial state biodiversity market scheme could improve in a report published Tuesday.

The state’s Independent Pricing and Regulatory Tribunal (IPART) published its annual report on the market, finding several key challenges affecting fundamental aspects of the scheme, such as pricing, transaction costs, and barriers to entry.

“The key role of the biodiversity credits market is to connect biodiversity credit buyers and sellers to trade credits at a price that reflects the efficient cost of offsetting biodiversity,” IPART member Sandra Gamble said.

“However, the annual report has found the biodiversity credits market is not performing well and requires several changes.”

The report’s chief concern was the ability for development proponents to simply pay into the state’s Biodiversity Conservation Fund to meet their offset obligations, saying this prevented the market from developing and establishing efficient prices to reflect the supply and demand for different credits.

It said the government should phase out the option to pay into the fund, arguing that while it may ease access to entry, it is undermining the ability of the market to operate effectively.

It comes as the state government has committed to improve the scheme, after an independent review earlier this year came to scathing conclusions about its function, saying it was failing to meet its intended objectives and in many cases was exacerbating nature loss.

New South Wales was one of the first local governments in the world to establish a market based on biodiversity offsetting obligations, a controversial policy as critics say the mechanism allows for harm to be done to nature and companies to just pay their way out of it.

Much of the scepticism about the emerging global voluntary biodiversity market is rooted in concerns that in practice that too will simply be used as an offsetting mechanism despite early movers insisting that this should not be allowed.

In New South Wales, IPART was engaged to independently monitor the market and recommend changes to promote competition and address market failure and inefficiency over a three-year period as part of the review process.

The report said there was evidence that proponents being able to continue to pay into the fund has “allowed development to occur at the expense of establishing a well-functioning credits market and realising biodiversity outcomes”.

Other key areas where the report said the market was “not operating well” included:

• High up-front costs and long credit generation times create a lag between credit demand and supply
• Market participants lack accurate and timely information
• High transaction costs and market complexity discourage participation
• Stakeholders lack confidence in market oversight and governance, which hinders their participation

The report noted that these problems were interconnected and reflect the “uniqueness and complexity of the market”.

It also highlighted that there aren’t any global examples of best practice that NSW could learn from, given that it is one of the first schemes in the world to use a market-based mechanism for valuing biodiversity conservation.

It urged the government to allow the market to function as thus, saying the price of offsets needs to cover the costs of conserving biodiversity and identifying and generating credits.

This includes the cost of establishing and managing biodiversity stewardship agreements, transaction costs, opportunity costs, and a return of risk borne by the credit supplier.

“Creating and selling credits is a voluntary activity, so credits will not be provided in sufficient quantities if government interventions to keep the price of credits is too low,” it said.

Other recommendations the report made to the government included introducing interim measures to reduce development proponents’ reliance on the fund.

The Biodiversity Conservation Trust should also develop a strategy to reduce the backlog of unacquitted credits in the fund that considers the potential impact of its actions on competition and prices in the market, it said.

“The Biodiversity Conservation Fund has played an important role ensuring essential development was not delayed where no credits existed in a complex and newly established market,” Gamble said.

By Mark Tilly – mark@carbon-pulse.com

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