Organisations with a significant carbon footprint must understand their short, medium and long-term commercial exposure. We discuss the evolving ACCU demand and supply dynamics and their likely impact on future ACCU prices.
There are various, intricate currents of activity playing out in the Australian carbon market.
The market is responding to the revised Safeguard Mechanism legislation, ongoing local and global framework reforms, evolving buyer preferences and the rise in voluntary demand.
Understanding this landscape is critical for anyone with a carbon exposure and, therefore, commercial interest.
Those with the biggest exposure are often Safeguard Mechanism participants. Many are focused on compliance at the lowest possible cost.
But even compliance buying preferences are often driven by other factors such as managing reputational risk and alignment with brand values – criteria that traditionally drives voluntary purchasing decisions.
These sometimes-conflicting forces pose a challenge for market participants in understanding their short-, medium- and long-term commercial positions.
So even organisations with a primary concern for low-cost abatement must factor in the complex supply and demand dynamics when determining a reference carbon price and setting their strategies.
It’s no surprise then that one of our most popular articles in 2023 was ‘Many markets in one: Valuing risk, opportunity and co-benefits in the ACCU market’. It has kicked-off new conversations and fresh thinking among many market participants.
In this follow-on article we discuss the evolving trends in the Australian carbon market and what this means for future market valuation. The article draws on exclusive insights as presented in the CORE Markets ACCU Market Forecast Report -Q2 2024.
Keep reading as we cover:
The Australian carbon market is unique among other high-profile compliance schemes around the world.
Due to its compliance origins, it is homogenous by design. Meaning its tradable units – predominantly Australian Carbon Credit Units (ACCUs) – are fundamentally the same in terms of benefits delivered (one tonne of CO2-e abated) and therefore interchangeable.
However, the unique scheme design also enables project-based valuations. As such, this compliance market also has many characteristics of the heterogenous voluntary carbon market.
This duality presents a spectrum of ACCU valuations, influenced by project characteristics, method types, and associated co-benefits.
In other words, there is not one but many ACCU price points.
Engaging with the market, therefore, requires a strategic approach.
And those focused purely on compliance must equally understand these market dynamics and how they may impact future ACCU supply, ACCU prices and therefore their commercial position.
The chart below illustrates the multi-faceted nature of the market as expressed through the various price curves for some key ACCU methodologies. Source: CORE Markets carbon analytics platform
The CORE Markets analysis indicates that ACCU demand across all sources will increase by nearly 52% between FY25-FY35, peaking in FY32 and holding relatively steady.
Safeguard Mechanism entities will be the largest driver of ACCU demand, at least in the short term. But even within the Safeguard category there are different buyer segments, objectives and preferences that must be understood and considered.
Below we discuss the key sources of ACCU demand and explore the likely shifts in buyer preferences.
The Safeguard Mechanism requires entities emitting >100kt CO2e in Scope 1 emissions to reduce their net emissions in line with continuously reducing baselines (~4.9% per year to 2030).
Entities covered under the Safeguard Mechanism can rely either on direct abatements or ACCUs to achieve the year-on-year reduction targets.
We adopted a sectoral based approach and categorised available liable entities under following sectors: Mining, Oil & Gas, Manufacturing, and Transport. For each of these sectors, we then considered available decarbonisation options, including onsite renewables, electrified mobility, electrifying process heat and use of green fuels (e.g. hydrogen).
Based on technology and fuel cost evolution and long-term physical abatement potential, we calculated Marginal Abatement Costs (MAC) of each physical measure over the forecast period (FY25 to FY35). Comparing the MAC against the projected ACCU price, we established the commercial viability and attractiveness of implementing physical decarbonisation compared to offsetting.
Our analysis indicates that in the short-term, up to FY28, most Safeguard entities will continue to rely heavily on ACCUs. In the medium to long-term, however, most will prioritise physical decarbonisation options as they become more commercially viable and technologically ready.
Therefore, we expect that ACCU demand from Safeguard entities will grow steadily, peaking at ~20M units in FY28, before declining through the implementation of physical abatement measures.
Organisations not captured by emissions reduction legislation are increasingly taking voluntary action. The pressure to decarbonise comes from internal and external stakeholders such as staff, customer, the broader community and investors.
Many are also recognising that compliance regulation is likely to filter down to smaller emitters over time and are preparing in advance.
While Scope 2 emissions can be managed with relative ease (either through on-site renewables or power purchase agreements), options for reducing Scope 1 and 3 can often be challenging and capital intensive.
Driven by the lack of commercially available options, many corporates may need to rely on high-quality carbon credits to offset their Scope 1 and 3 emissions in the short to medium term.
Our team’s analysis indicates that voluntary demand will increase steadily, even when compliance demand declines, making up a progressively greater share of the overall ACCU demand volume.
Voluntary buyers are likely to be highly selective when making their ACCU purchase and are more likely to pay a premium for methods or specific projects that align with their brand values.
To date, the Clean Energy Regulator (CER) has committed ~2.3 billion to purchase ~192 million ACCUs.
Only around 25% has been delivered to date.
Project developers can contract with the Commonwealth directly through Carbon Abatement Contracts (CAC) and the price is set through Emissions Reduction Fund (ERF) auctions.
While the auction process provides a price floor, selling ACCUs on the spot market often delivers better value for the seller.
This, coupled with the initiation of fixed transitional and optional delivery contracts, indicates that Commonwealth demand is likely to remain steady.
Historically the demand from state and territory government has been low compared to other demand sources.
While this is demand is expected to increase, it will remain low in relation to the other categories.
State and territories may require ACCUs to meet government commitments or policies. Examples include offsetting emissions associated with desalination plants or with operating vehicle fleets.
The bulk of the government demand is expected to be for generic and lowest cost ACCU units, with some state-based exceptions.
The bulk of the market activity today is centred around two ACCU types:
The CORE Markets in-market and analysts teams expect buying preferences to shift from Generic and HIR ACCUs across voluntary market participants, and a portion of demand for some Safeguard participants. While most Safeguard Mechanism entities may continue to choose the lower price options such as Generic or HIR ACCUs, some are expected to source ACCUs of higher perceived quality and/or with co-benefits.
The biggest shift, however, is likely to be the among the growing voluntary demand. Voluntary buyers are already more selective with the units purchased and expected to become even more so, choosing units that closely align with brand values and stakeholder expectations.
Additionally, as some ACCU methodologies are under review or revoked, even those with a compliance-only focus will have to shift to newer nature-based carbon credits.
As such, we expect demand to grow for emerging ACCU methods such as Environmental Plantings and Soil Carbon. We expect these two methods to represent the majority of the voluntary demand and ~35% of Safeguard demand by 2035.
We note that, as the market continues to evolve, new methods are expected, such as the Integrated Farm and Land Management (IFLM) method and the updated Environmental Plantings method. We will incorporate their potential impact in our ongoing analysis.
To understand the supply side of the ACCU market, existing supply levels and future supply projections must be considered.
Existing and projected supply levels consider all Carbon Abatement Contracts and all projects registered under the ERF as well as existing and expected ACCU holdings by market participants.
Overlaying expected demand preferences is also an important consideration.
Analysis by the CORE Markets team indicates that existing supply will cater for most of the ACCU demand up to and including FY 27, with >150M new ACCU issuances required between FY28-FY35.
The current supply mix is dominated by Generic HIR, and Landfill Gas ACCUs, which collectively make up ~75% of the forecasted holdings in 2025..
Moving forward, demand preferences are expected to drive an increase in supply of ACCUs from Soil Carbon, Environmental Plantings and Savanna Fire Management methodologies.
The higher cost of generating these ACCUs will contribute, at least in part, to an increase in the cost of new issuances.
It’s important to remember however that, for most market participants, it will not be the one (generic or average) ACCU price that’s important, but the price for their ACCU unit of choice.
ACCU holdings by market participant have a significant impact on the supply dynamics, and therefore the forecasted price of ACCUs.
Based on the latest Quarterly Carbon Market Report (Q4 2023) by the Clean Energy Regulator and our own analysis, we estimate that ~ 40 million ACCUs will held by market participants in FY25.
Generic, Landfill Gas and HIR ACCUs account for ~75% of the forecasted FY25 holdings. With ACCUs generated by Environmental Plantings, Soil Carbon and Savanna Fire Management accounting for the remaining 25%.
We believe that supply from existing projects and holdings can meet the forecasted demand up to FY27, however > 150 million additional (new supply) units will be required to meet forecasted demand out to 2035.
Shifting supply preferences rom Generics, HIR and Land Fill Gas to ACCUs with greater co-benefits (Soil Carbon, Environmental Plantings and Savanna Fire Management) will drive additional projects of these methods.
This shift in demand preferences will impact the price elasticity of each ACCU type differently, as we have accounted for in our price forecasts by method type.
It’s critical for organisations with a significant carbon footprint to understand their short-, medium- and long-term commercial exposure.
This is particularly true for Safeguard Mechanism participants who will be the main drivers of the ACCU market’s development in the upcoming decade.
There are several forecast models available today, these are captured in a DCCEEW report which lists a central ACCU price forecast estimate of $60 by 2030. This is below the government’s cost containment measure price of $75 which is set to rise over time.
The challenge of this model and most others available today is that it they consider one single ACCU price, in a ‘many markets in one’ scenario.
To help market participants better model their commercial position, the CORE Markets team has developed a unique method specific ACCU price forecast.
We believe demand preferences will vary by users, the costs of developing new ACCUs will vary by methodology and that this will be reflected in the market for the foreseeable future.
The CORE Markets ACCU price forecast is created using insights from our in-market team, data from our carbon analytics platform and the knowledge of our decarbonisation experts. The model was tested and refined with the help of an expert market working group.
The many facets of ACCU price dynamics – a guide for anyone with a carbon exposure
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