Restrictive access to biodiversity credits is hampering ability to grow the market, says a state-based watchdog which has recommended removing barriers to trade and "establish interim measures to manage the change while the market develops".
Independent Pricing and Regulatory Tribunal (IPART) tribunal member Sandra Gamble said a well-functioning biodiversity credits market was important to ensure "economic development takes place in a way that conserves our unique natural environment".
"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," Ms Gamble said.
However, the watchdog's annual Biodiversity Credits Market Monitoring Report, released on Tuesday has found the biodiversity credits market is not performing well and requires several changes.
"The report found several key challenges affecting fundamental aspects of the market such as pricing, transaction costs and barriers to entry," Ms Gamble said.
"In particular, the report found that allowing developers who pay into the Biodiversity Conservation Fund to meet their offset obligations prevented the market from developing and establishing efficient prices to reflect the supply and demand for different credits.
"Government interventions to reduce entry costs and make the market more directly accessible for landholders to buy and sell credits themselves are better ways to ensure an efficient market."
The option for development proponents to pay into the Biodiversity Conservation Fund to meet their offset obligation, instead of buying credits in the market actually depresses the market in an artificial way.
An IPART spokesperson explained further saying: " The option to pay into the Biodiversity Conservation Fund is a fundamental obstacle to the market developing.
"It prevents the market from establishing efficient prices that match credit supply and demand, because most trade does not occur through the market. The Fund's prices set a price ceiling and if this is too low, landholders won't consider it worthwhile to generate credits on their land and sell them.
"It increases the Biodiversity Conservation Trust's dominance in the market. The current estimated value of the credits the Trust would need to purchase in the market to acquit its obligations is double the value of all transactions in the market in 2022-23 ($105 million)."
As a result IPART recommends government phases out the Biodiversity Conservation Fund pay-in option and establish interim measures to manage the change while the market develops.
"We have also made other recommendations to improve information, reduce trading complexity and increase confidence in the market. However, while these changes may improve the experiences of market participants, they won't fix the fundamental problems inhibiting a well-functioning market," IPART said.
"Previous reviews of the broader Biodiversity Offsets Scheme have identified similar problems. Our recommendations take these into account and our review examines in detail how the biodiversity credits market can work better."
NSW is one of the first jurisdictions globally to introduce a market-based mechanism for valuing biodiversity conservation.
"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. We've learnt a lot and IPART has recommended necessary changes." The spokesperson said.
"The option to pay into the fund prevents the market from developing, leading to a lack of trading activity and market clearing prices being established. In 2022-23, only one in five development proponents purchased biodiversity credits in the market, with the remaining four making payments into the Biodiversity Conservation Fund.
"It also ensures credit supply to proponents, even where biodiversity loss cannot be offset. This allows developments to proceed without credits first being sourced, including in areas of high biodiversity value or where scarce biodiversity types exist, which is counter to the Biodiversity Offset Scheme's objectives."
Meanwhile changes that will ease the financial burden on landholders opting into a biodiversity stewardship agreement are ongoing, with the waiving of biodiversity Stewardship Agreement applications fees until June 2024 and offering pay-later site assessments which are repaid when credits are sold.
"Landholders do face high upfront costs to enter and begin trading in the market. It can cost $30,000 to $70,000 and in some cases, up to $100,000 for a Biodiversity Stewardship Site Assessment Report to establish a stewardship site," the spokesperson said.
"This cost is largely driven by the complex nature of the Biodiversity Assessment Method, and the specific expertise and ecological integrity it requires. It is also influenced by how many accredited assessors operate in the market and the demand for their services.
"The Credits Supply Taskforce's work program has been tackling this issue by conducting feasibility studies or desktop reviews to indicate the potential of in-demand credits for sites, which could avoid a more expensive assessment if in-demand credits are not present."
Meanwhile, Minister for Climate Change and the Environment Penny Sharpe said: "This report points to the challenges of the Biodiversity Offsets Scheme which we are working to reform.
"The NSW Government is committed to fixing the scheme, including the biodiversity credits market that underpins it.
"The Government will feed in IPART's findings and recommendations to the response to the Henry Review."
Greens MP and spokesperson for the environment Sue Higginson responded to the IPART recommendation by saying: "This report shows again that the way we are managing biodiversity in the face of increasing development pressures in NSW is not working.
"The Biodiversity Conservation Fund allows developers to trade on extinction, allowing them to pay into the fund while they destroy precious biodiversity that cannot be offset anywhere else.
"It is a welcomed recommendation that the fund be scrapped but it must be done in concert with a stricter application of the integrity rules.
"If we are to have an offset system that works, there must be no variations to the rules, offsets must be like for like, threatened species and ecological communities must not be tradeable and all offsets must be protected in perpetuity and the principle of additionality must apply."