EnergyAustralia settlement puts offset claims under legal scrutiny

Parents for Climate – represented by Equity Generation Lawyers – argued that the company misled its 400,000 customers because “offsets do not prevent or undo the harms caused by burning fossil fuels” that were the basis of the electricity and gas products. Specifically, they argued that offsetting greenhouse gas emissions (GHGs) with an avoidance credit does not remove or reduce GHGs from the atmosphere and, therefore, benefit the environment. This is because avoidance credits involve the reduction in GHGs that would otherwise be released into the atmosphere, e.g. deploying renewable energy to replace fossil fuels.

Furthermore, Parents for Climate argued that short-lived removal credits, which involve taking existing CO2 from the atmosphere and storing it for a limited period, may temporarily reduce the amount of GHGs but still involve increased risk of carbon being released into the atmosphere in the future. This means these credits are adding to the amount of carbon in the active carbon cycle and thereby contributing to further climate change.

A landmark statement for corporate climate accountability

In a stunning outcome, EnergyAustralia acknowledged Parents for Climate’s key factual argument: that offsets do not prevent or undo the harms caused by burning fossil fuels for a customer’s energy use. Even with carbon offsetting, the emissions released from burning fossil fuels for a customer’s energy use still contribute to climate change.

The company also stated that “EnergyAustralia has now shifted its focus to direct emissions reductions”. A huge pivot for a company with 99 per cent avoidance credits in its offset portfolio.

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This is a significant outcome for corporate climate accountability and immediately shines the spotlight on all other Australian companies using “carbon-neutral” marketing, as well as those making net zero claims to investors that rely on offsetting.

A billion-dollar industry

A majority of large, listed companies are buying and claiming offsets to meet some (and often a substantial component) of their climate commitments. This is reflected in the market for Australian carbon credit units (ACCUs), which grew to $1.1 billion in the 2024 financial year.

Buyers of ACCUs often use them to make representations about how carbon removals are helping their organisation to deliver their net zero goals. Scientists and academics have been highlighting the risks associated with ACCUs, demonstrating that they are not, in fact, removing the GHGs from the atmosphere as promised. The recent settlement is a clear acknowledgment by EnergyAustralia that they agree with these risks and accept the science of offsets. This ultimately puts all other companies – that continue to rely on offsets and ignore the science – on notice.

Many companies point to the government’s role in regulating the market and the methodologies behind ACCUs or operating the Climate Active scheme, which promotes carbon-neutral products. However, the EnergyAustralia case and settlement demonstrate that the government isn’t able to completely de-risk participation in the offset market.

Who’s at risk?

Directors must be doing their due diligence to manage the escalating risk of these assets. Companies are now aware that offsets don’t undo the harms caused by burning fossil fuels and need to be extremely careful with how they continue to claim or market their use.

With a mounting body of evidence that offsets do not undo the harms caused by burning fossil fuels, companies now find themselves in one of two positions.

They can agree with EnergyAustralia and subsequently drop carbon-neutral claims, shift away from reliance on offsets and take steps to directly reduce their emissions – following the lead of other companies that have done so, such as Telstra, Lendlease, and Fortescue.

Or, a riskier strategy – continue business as usual – purchasing a product that comes saddled with increasing legal and reputational risks. In this route, companies risk facing similar legal action, reputation damage or being left with stranded assets if the value and social license of certain offsets collapse as integrity concerns mount.

In the Parents for Climate case, the action sought a declaration of a breach of the Australian Consumer Law and an injunction to prevent the carbon-neutral representations from continuing. However, future cases are likely to involve the risk of damages. For example, purchasers of carbon credits could seek redress and refunds for the purchase of offsets with their flights or gas going forward.

There is also a risk to those companies selling carbon credits. Notably, Fortescue’s chief climate scientist, Dr Shanta Barley, recently suggested that companies themselves may begin to explore the legal implications of being required to buy products that “aren’t doing what they say on the tin”. Companies can be required to buy carbon credits in compliance markets such as Australia’s Safeguard Mechanism or the Carbon Offsetting and Reduction Scheme for International Aviation.

And there are further tests for the credibility of offsets being heard. Greenpeace is currently taking action in the Federal Court against Woodside’s net zero targets for claiming to be science-based and Paris-aligned, while being based substantially on offsets.

These myriad escalating risks mean that the safest solution for companies is to move on from carbon-neutral claims and reduce their exposure to offsets in favour of direct emissions reductions.

Claire Snyder is the director at Climate Integrity, and Kirsty Ruddock is a lawyer at Environmental Defenders Office.