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

Unique compliance scheme characteristics enable project-based valuations

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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.

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Unique characteristics of the ACCU market

Let's look at the unique elements of the scheme design.

• ‍The Australian carbon market is a baseline-and-credit scheme.
  Most compliance schemes globally are cap-and-trade schemes where a hard cap is set on emissions with emissions allowances allocated and then traded among affected entities. A notable example is the European compliance market and its European Union Allowance (EUA) carbon credit unit.
  
  The Australian carbon market operates under a baseline-and-credit system, governed by the Safeguard Mechanism legislation, where high-emitting facilities must keep their emissions below government-set baselines.
  
  Entities that emit below their baseline create credits they can sell to others, in the form of Safeguard Mechanism Credits (SMCs). While those that emit more must purchase additional carbon credits, either SMCs or project-generated ACCUs.
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• ‍The bulk of market activity is in project-generated ACCUs
  Most cap-and-trade schemes involve only the trade of emissions allowances under the hard government-determined emissions cap.  
  
  The Australian market also allows for trade of baseline credits (SMCs) and these are, in many ways, like emissions allowances. While some entities may manage to reduce their emissions early on, for others the task will require significant investment over many years.
  
  As such, the bulk of the market activity for the foreseeable future is expected to be for ACCUs created by accredited projects, under numerous methodologies (more on this below).
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• ‍It’s a homogeneous market, that uniquely behaves in a heterogenous manner
  In general terms, compliance carbon credit units under cap-and-trade schemes, are like-for-like and created equal. Such markets are homogenous in nature and usually trade under the one price point, in a closed- loop system.
  
  However, the bulk of Australia’s carbon credit supply comes from a variety of project-generated ACCUs, and not ‘emissions allowances'. As such, there is more flexibility for buyers to make choices in what they procure based on characteristics such as method, project location and even developer reputation.  
  
  Therefore, even though each ACCU represents the same volume of carbon abatement (a homogenous market feature), we are also seeing project or value-based pricing of a heterogeneous market. Much like what we are seeing in the global voluntary carbon market (VCM).  
  
  The Australian carbon market has a unique mix of nature, biodiversity and cultural co-benefit opportunities that make it a great platform for developing these project outcomes.

One tonne of carbon, several price points

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:

• Opportunities for industry, such as carbon capture and storage, energy efficiency, landfill and alternative waste treatment.
• Opportunities for the land sector, such as agriculture, Savanna fire management and vegetation.

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.

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Fundamentals driving ACCU price stratification

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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.

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Buyer value and risk minimisation alignment

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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Examples of value-based project selection criteria

• ‍Connecting with stakeholders, across a particular geographical region or specific community group
  For example, an organisation may wish to support carbon projects located in their home state, in a town where many of their employees reside, or in a region where they manufacture their goods. As such, the business has very specific location-based criteria.
  
  Or the business determines to actively support traditional landowners and ensure they are adequately remunerated for their land stewardship over millennia. In doing so, it will actively seek projects that support local Indigenous communities and define Free and Prior Consent and renumeration arrangements.  
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• ‍Extending positive impact to include social, economic or biodiversity benefits
  Projects that deliver additional value beyond the removal or avoidance of carbon emissions are deemed to have co-benefits. And organisations are increasingly seeking projects with very specific co-benefits that are aligned with their brand values and priorities.
  
  Co-benefits are usually expressed in terms of the 17 Sustainable Development Goals (SDGs), as defined by the United Nations. This includes creating employment, education and training opportunities for people in local communities, ensuring clean water and sanitation, and promoting gender equality.
  
  Certain co-benefits are receiving increasing attention from buyers. For example, the expected launch of the Taskforce on Nature-related Financial Disclosures (TNFD) and the range of nature and biodiversity standards expected to follow mean that there is growing interest in nature and biodiversity co-benefits.
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• ‍Optimising a strategic or commercial position, based on the subjective belief that some projects are worth more than others.
  Large organisations, particularly in hard-to-abate sectors, have a significant financial exposure associated with their emissions footprint.
  
  Deep and meaningful emissions reduction, while a priority, will take considerable investment, often over many years. In the meantime, many businesses are modelling their unavoidable, residual emissions over time and exploring various carbon sourcing options.  
  
  This analysis usually involves tracking various carbon price points over time and making forward-looking assumptions on their future value. These assumptions then influence purchasing decisions.
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• ‍Alignment with new standards and regulations, such as Taskforce for Nature-based Financial Disclosures (TNFD).
  We are seeing an increased focus on corporate impact on nature more broadly, and not just climate. An example of this is the launch of TNFD and the range of standards, including compliance standards, that are expected to follow.
  
  TNFD is just one example. Forward-looking businesses are actively monitoring the regulatory landscape to ensure they are well-informed and can respond quickly.

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Examples of risk mitigation project selection criteria

• ‍Forming a regulatory risk profile for certain projects or methodologies
  Buyers are keeping a close eye on government signals, and policy and regulatory changes. An example of this is Australia’s high profile ‘Chubb Review’ which proposed some progression in auditing requirements, and implementation and monitoring process of Human Induced Regeneration (HIR) ACCUs.
  
  While the review deemed the HIR method sound, suggesting minor improvements, this resulted in the price gap closing between the Generic ACCU price and the HIR price where previously a substantial differential has existed.
  
  The comments made in an official government publication were enough for some organisations to reevaluate the scheme and policy risk attributable to their portfolio make-up.
  
  However, a price premium for HIR ACCUs has since been re-established and remains at the time of writing.
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• ‍Aligning with corporate narrative on climate action / disclosures
  Public demand for climate action and climate investment is at an all-time high, bringing a warranted increase in scrutiny of impact outcomes. Corporate claims made possible through the purchase of carbon credits are being scrutinised, as are some carbon project vintages or methodologies.
  
  Some manage the risk by setting very specific criteria for what carbon projects they will not invest in.  This may include certain vintages, locations and methodologies.  
  
  But in setting these criteria, it is important to recognise that many of the challenges highlighted are legacy issues that have since been addressed with improvements and investment in market frameworks, standards and technologies.
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• Due diligence of individual projects for their performance outcomes
  ‍Even with a comprehensive list of value-based and risk mitigation-based criteria in hand, buyers are investing in extensive due diligence of short-listed projects.
  
  This includes an assessment of technical performance risk, counterparty risk and credit risk assessments, in order to understand the project risk profile against similar projects of the same methodology or in the same region.
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Seller considerations

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.

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For example:

• ‍Different method-specific projects are viable at different price points.
  Project developers will use ACCU price insights to help determine the feasibility case on a project-by-project basis. This analysis will also consider the demand for various project co-benefits to determine the cost and benefit of delivering those.
   
  A detailed cost considerations for each method type and co-benefit delivery is essential to building a complete picture. For example, an HIR project on existing land will require a significantly lower capital investment than an Environmental Plantings project on the same land, but it will have a different delivery and revenue forecast.
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• ‍Projects increasingly have multiple revenue streams
  Project developers and investors must consider the value of all potential revenue streams in determining their investment, sales and pricing strategy. Carbon removal or avoidance projects will be increasingly valued on their impact on nature and biodiversity, as well as the other co-benefits they deliver.
  
  While biodiversity-only transactions are in the formative stages, they are likely to become more frequent in the future and over time we expect the evolution of nature specific market frameworks.  
  
  The complexity as to how co-benefits that are already ‘priced in’ to carbon contracts are deemed eligible for prospective revenue streams requires advanced planning.  We can learn from the development of the carbon market to ensure intelligent frameworks avoid any double counting overlays.

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Implications for ACCU buyers, sellers and investors

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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.

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What this means for buyers

• 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.  
  

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What this means for project developers

• Project developers need to 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 critical to understand the unique valuation and positioning of existing projects within the context of the competitive landscape.
• Developers should 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 that carbon credit units cannot be sold twice.
• In some instances, when valuing a project as a carbon project, there may be a trade-off with 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.  

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What this means for investors

• 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.

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A springboard for impact beyond carbon abatement

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.)  

Stay up-to-date with ACCU market developments here:
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• Request a demo of our carbon markets analytics platform, which includes ACCU market data across major methodologies

• Track the Generic ACCU price, it’s updated on our website each day

• Get in touch with our in-market team for the latest insights

• Sign-up to our regular carbon and clean energy insights at the bottom of this page