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.
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.
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.
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.
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.)
Many markets in one: Valuing risk, opportunity and co-benefits in the ACCU market