Predominantly compliance-based and homogenous by design, the Australian carbon market has many characteristics of the heterogenous voluntary carbon market. This brings complexity but also opportunity for market participants to expand their positive impact and deliver nature and social benefits.
There is more interest in the Australian carbon credit market than ever before.
Continually reducing emissions baselines under the Safeguard Mechanism are driving internal emission reduction initiatives at large emitters. This process of re-engineering takes time, and many will need to offset residual emissions through carbon credit purchases. Often for the first time.
But the Australian carbon market is unique among other compliance-based carbon markets. It can be described as many markets in one.
While market analysts often refer to ACCU price movements as a single price, the market has multiple unit valuations depending on the individual project characteristics, method type and associated co-benefits. In fact, the most highly valued methodology has changed hands at over a 90% premium to the generic price.
For ACCU market participants this brings both risk and opportunity.
To optimise both, ACCU buyers, seller and investors must stay up to date with this complex of commercial market considerations in order to support astute decision making.
In this article we explore:
The Australian carbon market runs somewhat differently to other high-profile compliance schemes around the world.
Predominantly compliance-based and homogenous by design, it also has many characteristics of the heterogenous voluntary carbon market. This unique scheme design enables project-based valuations and, therefore, various price points for what is mainly a compliance carbon credit unit.
Let's look at the unique elements of the scheme design.
To produce ACCUs, projects must first be accredited by the Clean Energy Regulator (CER).
The CER has a range of current methodologies for creating ACCUs, as well as some in development. They are broadly classified as follows:
Each ACCU, regardless of method, represents one tonne of carbon dioxide equivalent. As such, they are created equal and, regardless of methodology, are eligible units that may be used for compliance under the Safeguard Mechanism.
Yet, the market price for ACCUs by different methodology, and project types can vary greatly.
The ACCU price that’s most frequently referenced is the ‘Generic ACCU’ spot price, the price in transactions where the buyer and seller do not stipulate a specific ACCU method or project.
These transactions are a ‘catch all’ – any type of ACCU can be delivered in fulfilment of the contract - and usually trade at the lowest ACCU price available in the market. While method or project-specific ACCUs most frequently trade at varying premiums to the generic price.
The chart below shows ACCU spot price curves for some of key ACCU methodologies, as available in the CORE Markets carbon analytics platform.
The significant ACCU price distribution shown above is based on project methodology as well as individual project credentials.
The range of project credentials, and attributable co-benefit values (beyond carbon outcomes) can be aligned with the UNFCCC Sustainable Development Goals (SDGs), more on that below.
But there is also a collection of further drivers of valuation playing a significant role in the Australian market. This includes location, Indigenous and native tittle arrangements, and bespoke project regulatory and technical risk assessments.
Let’s look at the key trends and motivations of both buyers and sellers.
Put simply, buyers increasingly want to maximise value and minimise risk. But buyer views of value and risk can be highly subjective.
Each buyer – whether buying ACCUs for compliance under the Safeguard Mechanism, to fulfill corporate voluntary commitments, or as an investor - has a different risk profile and different preferences and motivations in terms of project characteristics.
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Participants in the sell-side of the ACCU market may be project developers, aggregators/service providers, or corporates and investors.
These sell-side participants are driven by similar motivations to the ones described above. The focus is also on maximising value and minimising risk, but with specific sell-side nuances.
For example:
Looking into the future, some market participants are hoping for greater price uniformity found in other compliance markets, while others value the flexibility and opportunity that comes with the greater complexity.
One thing is for certain, current market signals tell us that many of today’s buyers are very discerning in their demand for specific project characteristics and are willing to pay a premium for the right investment. And the current strength of this trend suggests that ACCU prices will remain stratified for some time to come.
Finding and purchasing right-fit carbon projects is a strategic process. Buyers need a clear framework that brings alignment to the organisation’s overall decarbonisation strategy, risk and value matrix, and broader commercial imperatives, and sets out clear preferences.
Decision makers need to understand market price movements for their preferred project types, including forward price projections. This enables proactive planning for how to manage residual emission over time and contracting carbon credit purchases in the most cost-effective way.
Buyers also need to know the benchmark value of individual project types at the time of assessing opportunities, and the market is always evolving. If you don’t understand these metrics, a lot of work can be sunk into analysis which can be very quickly outdated.
Accessing independent, unbiased data and insights to valuation metrics and benchmark pricing is essential. This can bring efficiency and rigour to the carbon procurement process, helping buyers build internal knowledge and capability.
It is essential that project developers understand how the market values specific project features today and the expected trends over time. This feeds into feasibility analysis, project design and execution.
Building robust community connections (including Free and Prior Consent from Indigenous stakeholders), remuneration arrangements, and planning for specific co-benefits needs to happen at the very outset, as early as the of development of the project study.
It’s also critical to understand the unique valuation and positioning of existing projects within the context of the competitive landscape.
Developers need to be aware that if you are contracting the co-benefits of a project in addition to the carbon abatement, these co-benefits will not be eligible to be sold again through another future revenue stream. Much in the same way carbon credit units cannot be sold twice.
It’s important to be mindful of this when valuing your project. In some instances, if you are valuing it as a carbon project, you may be trading off prospective value under another future mechanism, such as the emerging biodiversity market, which may potentially be more attractive.
There are no firm rules or frameworks for this yet. We can however anticipate that there will be additional complexity in the future as the carbon and biodiversity markets increasingly overlap.
Australia is a unique case in this regard because we have vibrant platform of co-benefits, with nature and biodiversity outcomes already inextricably intertwined in our compliance market.
Investors need to understand the unique dynamics of the Australian carbon market to help them better assess project financials and the assumptions made to project future yield.
It’s also important to use up-to-date, method-specific market prices to value projects, at the points of both investment and exit.
The Australian carbon market is indeed many markets in one. Predominantly compliance-based and homogenous by design, it also has many characteristics of the heterogenous voluntary carbon market.
Will this be the sustaining characteristic of the market over time? Or is this just an early phase of an emerging market?
Only time will tell.
In the meantime, however, the additional complexity also brings flexibility and opportunity for Australian market participants to expand their positive impact beyond carbon abatement and deliver additional social and biodiversity benefits.
Australia is perfectly positioned to lead from the front with the highest standards of developing, monitoring, and implementing multifaceted carbon projects rich in co-benefits, and be a global leader for the emerging nature and biodiversity markets (more on that in our upcoming biodiversity piece.)
Let’s make it happen!
Many markets in one: Valuing risk, opportunity and co-benefits in the ACCU market
Predominantly compliance-based and homogenous by design, the Australian carbon market has many characteristics of the heterogenous voluntary carbon market. This brings complexity but also opportunity for market participants to expand their positive impact and deliver nature and social benefits.
CORE Markets acknowledges Aboriginal and Torres Strait Islander Peoples as the Traditional Custodians of the land on which we live and work, and acknowledges and pays respect to their Elders, past, present and emerging.
