An excerpt from Dr Ken Henry's speech at the 2025 Ann Moyal Lecture at the National Library of Australia. 

I consider it to be the most important economic policy opportunity currently available, and by some margin. This is the thing we must fix first. Nothing else comes close.

The policy opportunity is in integrating climate policy and the repair of nature. Meeting our carbon abatement obligations in a manner that also enhances climate resilience, protects threatened species and restores degraded ecosystems.

Obviously, pumping more funds into nature repair, whether sourced from the public or private sectors, makes little sense when governments continue to tolerate, even subsidise, the destruction of nature. Thus, nature-destroying policies and institutional arrangements must be reformed. An obvious place to start would be removing the taxpayer subsidy of the continuing destruction of the native forest estate.

2025 Ann Moyal Lecture: Dr Ken Henry AC

But the major task is to transform the economy so that carbon emissions abatement becomes a driver of nature repair, as an ordinary consequence of business activity, just as capital accumulation due to saving and investment is an ordinary consequence of the operation of the capitalist economic system.

Australia is a signatory to the Paris Agreement on climate change. Pursuant to that agreement, we have committed to reducing greenhouse gas emissions by 43 per cent against 2005 levels by 2030, and to achieving net zero by 2050. At some point this year, whoever forms government after the forthcoming federal election will have to establish an abatement target for 2035 that is considerably more ambitious than the 2030 target. Experts are recommending a target of between 65 per cent and 75 per cent abatement relative to 2005 levels.

The current policy framework for carbon abatement has been designed primarily to support the 2030 target. It has none of the finesse of an economy-wide emissions trading scheme or carbon tax. It is not inconsequential, but it is a long way from where we were more than a decade ago. And a very long way from where we need to get to. It is made up of:

• a renewable energy target scheme designed to encourage the generation of renewable electricity by power stations, households and businesses;
• a so-called safeguard mechanism that applies to all facilities (principally engaged in mining, the extraction of oil and gas, manufacturing, transport and waste management) emitting more than 100,000 tonnes of carbon dioxide equivalent a year, with a cost containment guarantee on the implicit price of carbon;
• a fledgling scheme for the certification and limited government purchase of Australian Cabon Credit Units (ACCUs) generated by projects that avoid the release of greenhouse gas emissions or remove from the atmosphere and sequester carbon;
• the development of sectoral decarbonisation plans, covering electricity and gas, industry, resources, the built environment, transport and agriculture and land; and
• an undertaking to implement the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

The principal reason the 2050 carbon commitment is in net terms is that land, and the vegetation that it supports, provides a natural carbon sink, principally through the processes of photosynthesis. Currently, the Australian landscape sequesters about 90 million tonnes of carbon a year. Everything else, taken together, including agricultural activity, emits about 520 million tonnes a year. So, annual net emissions are presently some 430 million tonnes. The Climate Change Authority projects that by 2050 the total annual emissions of all sectors will have been reduced to about 130 million tonnes, with electricity decarbonising faster and further than other sectors. That is a large reduction in emissions. But it means that 130 million tonnes of carbon will have to be sequestered by the Australian landscape, unless direct air capture or some other technology emerges to do some of the work.

Current emissions projections imply the need for around a ten-fold increase in the volume of land sector ACCUs in the years to 2050. Ten times as many ACCUs as is being generated today. We are not talking business as usual.

You would be aware of recent controversy surrounding the magnitude of carbon abatement achieved by current land based ACCU methods. Obviously, the Australian community must have confidence that ACCUs are of high integrity and that Australia is receiving best value from their generation.

But a ten-fold increase in the volume of land sector ACCUs means that we must go well beyond polishing the bits we have. We need to revisit the structural foundations of the scheme that supports land-based ACCUs. 

There is a view that current policy settings produce least cost abatement, and that further policy development should respect that goal. But least cost abatement rests on the marginal cost of abatement being equalised across all emitting activities, and we are a long way from a climate policy framework that would produce that outcome. If the Australian policy approach pursues least cost abatement and sequestration, then it is only in disconnected bits. It’s a cost minimisation exercise subject to an extraordinary set of constraints, most of which have no rationale beyond the political. In common with just about every other area of policy in Australia today, what we have is a political settlement, not a rational economic outcome.

Even so, economic rationalists have quite a bit to work with. We have a bipartisan commitment to net zero by 2050. And we have bipartisan acceptance of ACCUs as the principal instrument for delivering carbon abatement in a politically safe manner. We know from experience to date that that ACCUs that also repair nature, like biodiverse plantings, have a higher probability of securing real carbon abatement. And we have good reason to believe that Australia has comparative advantage in generating land-based carbon offsets. 

Because we know a bit of economic theory, we know also that policies will be most effective if carbon credits are tradeable in well-functioning markets that generate price signals to support required investments in direct abatement. Importantly, these price signals provide confidence to stakeholders in impacted industries and regions that the transition to net zero is manageable. 

Most importantly, though, the parlous state of the natural environment, and the foundational role played by natural capital in human development, makes a strong case for carbon credits being generated in a manner that contributes to nature repair at scale, lifting this burden from the shoulders of future generations of Australians.

The Australian Carbon and Biodiversity Foundation (ACBF), which I chair, has been working with others on the design of a ‘nature positive ACCUs’ scheme that does just that. Under this scheme, any land based ACCU project that does not contribute directly to nature repair through regeneration of priority habitat and ecosystems pays a royalty, in the form of the surrender of a proportion of ACCUs generated, into a nature repair public fund. 

The scheme also proposes a limited export opportunity. In practice, this would be achieved by mandating a ‘domestic reserve’ on land based ACCU projects.

The public fund would be charged with investing in cost effective high priority nature repair. For example, the fund could conduct biodiversity tenders, bridging the cost gap between monocultural plantings and those that deliver priority ecosystem restoration.

This is substantially different from current land based ACCUs, which deliver carbon sequestration with little or no nature benefits, either through monoculture plantations or through regeneration of habitat in low priority locations, typically in regions with low land values and high levels of remnant native vegetation.  Moreover, the regeneration of priority habitat and ecosystems ensures a high probability of carbon sequestration.

Land sector ACCUs are a community-created resource in the form of a right to generate and sell carbon credits under legislation. The proposed royalty provides a return to the community in the form of enhanced condition of Australia’s natural assets, ecosystems and landscapes.

Analysis commissioned by the ACBF finds that the ‘nature positive ACCUs’ scheme could deliver significant restoration of high priority habitat, reversing past damage and materially reducing extinction risks for Australia’s endangered flora and fauna. It would deliver spending on nature repair of the magnitude recommended by the Wentworth Group (about $7 billion a year for 30 years), to which I referred earlier.

Moreover, the scheme could lift farm profitability, on average, by about 10 per cent, and contribute to farm income diversification. It would bring forward sufficient land based ACCUs to support Australia’s net zero transition, with surplus credits available for export after 2035. It could be implemented in such a way as to allow government to manage the pace of change for regional communities. Very importantly, it would avoid any new on-budget government spending.  It does not ask future generations to pay for the repair of natural capital.

The analysis we have commissioned finds that Australia can supply more credits than required for the net zero transition at domestic prices within the Government’s cost containment level. It seems likely that, at some point, the international price for carbon credits will exceed Australia’s cost containment cap. This would provide a strong incentive for export. And enabling access to export markets would also improve ACCU market function and price stability for investors, enhancing investor confidence. 

A domestic reserve ensures that the domestic price of ACCUs falls below the international price. Modelling confirms that it can limit, even eliminate, pass through of the royalty to domestic purchasers of ACCUs, across a wide range of scenarios.

Implementing a Nature Positive ACCUs scheme would put Australia back at the vanguard of international efforts to deal with climate change in an economically rational manner. Importantly, it would secure the dual goals of net zero emissions and nature repair, at no cost to taxpayers. That’s quite something.

Before developing this world-leading scheme, however, there is a smaller, first step available to us right now. And that is to cease the continuing, uncommercial, degradation of the native forest estate. Ending native forest logging, managing the forests for carbon, biodiversity enhancement and bushfire resilience would generate a new revenue stream from ACCUs created under the proposed Improved Native Forest Management (INFM) carbon method.

For example, other analysis commissioned by ACBF estimates that ending native forest logging in NSW would generate between $1 billion and $2.7 billion in revenue from carbon credit sales over the next 15 years. That compares with the $29 million dollar loss incurred by the Forestry Corporation of NSW last financial year in logging those same forests. 

If the NSW Government chose to reinvest that revenue in on-ground management, to restore environmental condition, manage fire risks and protect endangered species, that would support around 1,700 forestry jobs across regional NSW.