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Australia to enjoy carbon trading boom despite climate laggard reputation

01 October 2021 Max Tingyao Lin

Carbon trading in Australia is enjoying a boom that could last for years even as the country—one of the world's largest GHG emitters per capita—continues with some of the least ambitious decarbonization targets among developed economies.

With an aim of cutting country-wide GHG emissions by 26-28% compared with 2005 levels by 2030 and no deadline for reaching carbon neutrality, Australia has come under strong diplomatic pressure to set more aggressive goals ahead of the COP26 climate summit in November.

But local experts say more companies in the country are purchasing Australian Carbon Credit Units (ACCUs) in the spot and forward markets due to demand from civil society, overseas trading partners, and potentially more stringent environmental regulations in the future.

"The demand increase comes from both voluntary and compliance buyers, as well as investors and speculators," said Bret Harper, research director at Melbourne-based energy consultancy RepuTex.

"Compliance and speculative buying is the main source of the spot price increases, while investor and voluntary demand is the primary source of long-term contracting interest," he told Net-Zero Business Daily.

The ACCU spot price rose to a new record high of A$26 ($18.89) per metric ton (mt) in recent trading, up 57% from the level seen at the beginning of 2021.

"Because the market is tight and there can be a two-year lag between project registration and ACCU issuance, demand has far outstripped supply this year… All signs are that the ACCU market remains bullish in both the short- and long-term, and we forecast long-term prices to go up," said Harper, who predicted a spot price of A$50/mt by 2030.

Growing market

In Australia, qualified entities can earn ACCUs from the federal Clean Energy Regulator (CER) by operating projects that reduce or avoid GHG emissions. The carbon offsets are generally sold to the government-run Emissions Reduction Fund via auctions, as well as to voluntary or compliance buyers in the secondary market.

With an increasing focus on decarbonization efforts across the globe, Australia's carbon market has enjoyed more liquidity and attracted foreign investors in recent quarters.

According to government figures, ACCU trading volumes in the first half of this year reached 2.7 million units, almost double the 1.4 million units traded during the same period of 2020.

Japan's Mitsubishi and NYK Line recently joined forces to acquire a 40% stake in Australian Integrated Carbon (AIC), an Adelaide-based carbon offset project developer, in a foray into the expanding market. The parties involved did not disclose a price tag for the deal.

"With this capital participation as a foothold, NYK will acquire knowledge of the carbon credit creation business and aim to expand its business in Australia," the shipping group said in a statement 21 September.

AIC, which focuses on primeval forest restoration, is now aiming to develop projects delivering up to 100 million ACCUs following the Japanese investment.

The company is "excited to deploy our environmental and financial expertise to expand our portfolio as nature-based carbon will play a critical role for companies seeking carbon neutrality," Chief Operating Officer Russell Seaman said.

More voluntary buyers

Regardless of government targets, a growing number of companies in Australia and other countries have committed to reducing emissions from their operations there. Jeffery Bye, founder and chief executive of Sydney-based consultancy Demand Manager, said the phenomenon has driven up demand for ACCUs.

"Over the last six months or so, there has been a growing realization in Australia that these ACCUs were comparatively underpriced and represented a relatively cheap mechanism for companies wishing to voluntarily go carbon neutral," Bye said.

"So, this has resulted in a price increase as some large corporations have been buying ACCUs in order to meet voluntary carbon reduction and offset goals," he said.

While international voluntary carbon offsets are priced below $10/mt, Australian firms are often willing to pay premiums for ACCUs to maintain a good image in their home market.

"The perception in Australia, deserved or otherwise, [is] that overseas credits are of lower quality, or a lower value proposition as it is not keeping investment in Australia," Bye said.

Harper said the majority of voluntary buyers place a high value on the co-benefits for Australian society associated with most ACCU projects.

"As such, small buyers often prefer local, photogenic, and/or specific project types. Mid-size voluntary buyers will often layer their offset portfolio with both ACCUs and lower-priced units," he added.

"ACCUs from premium photogenic projects like aboriginal fire management and Australian native forests are highlighted as what a company is doing about climate change, while most of the offset portfolio necessary for their carbon neutral certification comes from cheaper international units," said Harper.

"Large corporate buyers invest in ACCUs because it is seen as the most likely credit to be applicable to any future Australian policy changes that may make them more accountable for their emissions in the future," he added.

Australian miners and energy producers have also faced pressure to cut emissions, with major multinational commodity traders seeking to decarbonize their supply chains.

The Minerals Council of Australia, a trade body representing mining giants BHP Billiton and Rio Tinto amongst others, has stated that the industry aims to achieve net-zero emissions by 2050.

BHP has promised to reduce its operational GHG emissions by at least 30% before fiscal year 2030 from 2020 levels, but admitted carbon offsets will be used as required.

Government under scrutiny

Through the "Safeguard Mechanism," Canberra has set baseline emission levels for Australia companies with Scope 1 emissions of more than 100,000 mt of CO2-equivalent.

The big emitters, which include utilities and LNG producers, need to acquire ACCUs to offset their excess emissions. But critics said the government has been too willing to raise the baselines and that the scheme has limited decarbonization effects.

The policy tool won't be used to cut down emissions aggressively unless the ruling Liberal-National Party coalition loses power in the next House election, due to be held next September or earlier, Harper suggested.

"We don't expect big emitters under the Safeguard Mechanism to face lower baselines under the current government," he said. "While the Australian government is expected to eventually bend to pressure to commit to net zero by 2050, we don't think this will translate into high emitters facing a lower baseline policy."

However, Harper added that a Labor-Green coalition with a pro-climate approach would likely toughen up the baselines in accordance with emissions reduction goals, potentially resulting in more demand for ACCUs.

All Australian states and territories have vowed to achieved carbon neutrality by 2050. At the federal level, the Liberals are leaning toward to the target while some National Party leaders remain net-zero opponents, according to media reports.

Future developments

Looking forward, Canberra is introducing several measures to further enhance Australia's carbon market.

While trading has been taking place on an over-the-counter basis, the CER has announced plans to launch an online carbon exchange in 2023 to reduce transaction costs.

The government will also begin issuing ACCUs to carbon capture and storage (CCS) projects, which could mitigate the economic pain for Australian energy producers during the energy transition.

On 30 September, the Department of Industry, Science, Energy and Resources announced a new funding program to provide A$250 million for commercial-scale CCS projects and hubs across the country. This is on top of the A$50 million handed out to six companies in June.

Other paths to qualifying for ACCUs include capturing and destroying fugitive methane emissions in coal mines, energy efficiency upgrades at commercial facilities, and reductions in transportation emissions intensity.

The government has, however, faced criticism over the "avoided deforestation" projects that account for over 20% of the total supply of ACCUs.

Landowners can apply to receive the carbon credits by promising not to remove the forests on their lands, if they hold clearing permits issued before July 2010.

In a research report, think-tank Australia Institute (AI) and environmentalist group Australian Conservation Foundation (ACF) concluded that the method has "significant integrity issues" and should be immediately revoked.

The central argument of the joint report is that those projects do not have climate benefits because in most cases most landowners would not clear their forests anyway.

By comparing historical removal rates and the number of 15-year cleaning permits issued in New South Wales between 2005 and 2010, researchers argued that the land-clearing capacity is far below what landowners need should they choose to remove their forests.

"It is clear that the avoided forestation's assumption that the areas would be cleared in the counterfactual is not plausible," the report said.

The method is under review by the Emissions Reduction Assurance Committee, an independent statutory body. But the CER and some market participants said the researchers ignored the fact that nearly all project owners commit to halting deforestation for 100 years, even though they are receiving ACCUs over a 15-year period—the same length of time as their clearing permits.

By assuming the impact is limited to only 15 years instead of the typical 100-year commitment, the CER suggested that the AI and the ACF are underestimating the positive impact on emissions of the program.

John Connor, chief executive of the Carbon Market Institute, formed by buyers and sellers of carbon credits, said the report could be counter-productive for decarbonization.

"We share a frustration with the report's authors at Australia's lack of urgency in industrial decarbonization efforts, but errors in this report undermine community confidence in nature-based climate solutions," Connor said.

"There is a suggestion that these properties weren't going to be cleared; unfortunately, every year more land is cleared, and it's a mug's game to say what will happen over the next 100 years," he added.

Posted 01 October 2021 by Max Tingyao Lin, Principal Journalist, Climate & Sustainability, IHS Markit

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