What is driving Australia’s carbon price?

image_pdfDownload PDF

It has been a turbulent year for Australia’s carbon market with two government reviews, changes to compliance regulations under the Safeguard Mechanism and intense scrutiny of a number of Australian Carbon Credit Unit (ACCU) methodologies resulting in a bumpy ride for investors.  

 

Over the past 12 months, VAI data shows the generic Australian Carbon Credit Unit (ACCU) price leaping from AU$27 last August to a high of AU$39 in April this year before sell off around the end of the financial year driving it down to AU$24 followed by a sharp rebound. With the price now back above AU$30, this article looks at the various factors that can influence the generic ACCU price. 

 

“From the implementation of the Safeguard Mechanism reforms, the pausing of human induced regeneration (HIR) crediting and the revoking of the avoided deforestation methodology to general economic uncertainty, there have been a range of factors impacting Australia’s carbon price,” says Viridios AI’s Chief Market Intelligence Officer, Bertrand Le Nézet.

Policy settings and Issuances

With the adoption of the Safeguard Mechanism reforms and 16 recommendations of the Chubb Review on the table, policy change is having a clear impact on ACCU prices.

 

Following an extensive consultation process, when the Federal Government gained agreement on its policy settings, the ACCU price responded favourably. VAI data shows that after the Senate passed the Safeguard Mechanism reforms earlier this year, the generic ACCU price reached a high of AU$39. This represents a 44% increase from a low of AU$27 when the Chubb Review consultation process started in August last year. 

 

However, with the market still weighing up the impact of 4.9 per cent annual decline in baselines for the nation’s 220 biggest emitting facilities, issuance changes and a range of integrity measures being priced in, the ACCU price was once again heading south this month. 

 

A key factor behind the price decline was the Clean Energy Regulator’s decision to end its HIR ACCU crediting pause in line with the implementation of the Chubb Review recommendations, which resulted in the backlog of HIR credits hitting the market without the necessary demand to maintain the carbon price. Record issuance of 1,639,000 ACCUs for the month of June saw the HIR methodology contribute 47% of the total at 766,000. With the additional ACCUs hitting the market, VAI data shows the generic ACCU price dropped to a 12 month low of AU$24 in July. 

 

With the impact of the various policy changes now factored in, VAI data shows the ACCU price has one again climbed above $30 this month.  

 

“Investors need stable policy settings to confidently deploy capital and engage with the market. The movement of the ACCU price over the past year clearly shows the effect policy change can have,” Le Nézet says. 

Market Forces

With the Australian economy continuing to adjust to the post-Covid environment, we’re seeing a degree of volatility across financial markets, and the carbon market is no exception. 

 

Following 12 interest rate rises since May last year, inflation yet to return to the RBA’s 2-3% target band and stronger than expected jobs numbers, financial markets are displaying a degree of caution. This can be clearly seen with short term bond yields which are pointing to the prospect of a recession. 

 

Under the recent reforms, the Government has set an ACCU price ceiling of $75 per tonne of CO2e which will increase with CPI plus 2% each year. They also have more than 100 million ACCUs under contract to be delivered by 2030, effectively allowing them to set the price. 

 

“Although broader economic factors can impact the ACCU market, it is an alternative, government backed, asset class that offers market participants a diversification opportunity,” says Le Nézet.

Indigenous Co-benefits

We continue to see strong voluntary demand and a significant price premium for projects that integrate Indigenous knowledge, opportunities and empowerment into the generation of climate benefits.

VAI data shows that over the past 12 months Savanna Fire Management Australian Carbon Credit Units (ACCUs) with Indigenous Co-benefits traded at a significant premium to generic ACCUs. 

 

“Much like the voluntary carbon market, ACCUs that deliver verified Indigenous co-benefits can command a significant price premium with our data showing buyers are willing to pay up to 86% more for these types of carbon credits,” says Le Nézet.

Methodologies

VAI data shows that the methodology an ACCU is developed under can have a significant impact on its price.  

Of the 30 ACCU methodologies, Forestry, Restoration and Afforestation ACCUs have delivered a consistent premium over generic ACCUs over the past 12 months. This clearly shows the additional value the market places on sequestration activities that store carbon in vegetation or soil with a permanence obligation up to 100 years.

 

VAI data also shows that Savanna Fire Management ACCUs have delivered a premium this year. While Human Induced Regeneration (HIR) ACCUs have tracked closer to the generic over the past six months, the premium widened recently to around $6. 

 

The widening of the premium is likely to be a combination of the implementation of Chubb Review recommendations, increasing preference for the removal credits and the sunsetting of the HIR methodology, which will limit supply from the new HIR projects.

 

“Our data shows the market tends to place a higher value on methodologies that remove carbon from the atmosphere, demonstrate permanence and deliver Indigenous co-benefits,” says Le Nézet.

Regional Factors

As compliance markets continue to evolve around the world, we’re starting to see clear regional correlations with industry data showing that Australia is highly correlated to other major carbon markets in the Asia-Pacific such as New Zealand and Korea.

 

Much like the ACCU market, the emissions trading schemes that underpin both Korea’s Allowance Units (KAE) and New Zealand’s Units (NZU) are undergoing significant reforms. Korea has announced plans to lower its emissions reduction targets and expand targets for energy transition and international credits. While in New Zealand the government has launched a review to determine future emissions reductions and removals.    

 

Excluding the bumpy transition this year as Australia’s carbon market reforms came into force, in general, ACCUs have been much less volatile than European Union Allowances (EUAs). We saw a clear example of this in the first quarter last year, with industry data showing EUAs fell with the market pricing in the impact of the war in Ukraine, while ACCUs rose. Conversely, EUAs rose in 2023 while ACCUs have fallen sharply.

Looking Ahead

After responding to sustained scrutiny of some ACCU methodologies and adopting significant improvements to legislative frameworks that underpin the scheme, Australia’s compliance market is now better placed to support our biggest emitters as they transition to a low carbon economy. 

 

General market conditions, methodology changes and regional influences, also need to be considered. However, we anticipate that the ramp-up towards the new Safeguard Mechanism requirements in 2025, along with various market integrity measures and increased market transparency, should continue to have a stabilising effect on the ACCU market.

image_pdfDownload PDF