ACCUs see record surrender for 2023-24 period; SMCs used less than 20% of issuance

The 2023-24 compliance period for Australia's Safeguard Mechanism saw a record surrender of Australian carbon credits, driven by massive demand, while less than 20% of Safeguard Mechanism Credits issued by the Clean Energy Regulator were surrendered during the same period.

The Safeguard Mechanism sets limits, known as baselines, on the greenhouse gas emissions of covered facilities in Australia. These facilities can surrender Australian Carbon Credit Units or Safeguard Mechanism Credits to reduce net emissions below their baselines.

While ACCUs are issued to incentivize carbon abatement activities and can be traded between any party, SMCs incentivize emitters to reduce their emissions below baseline.

In 2023-24, 142 facilities incurred a total liability of 9.2 million mtCO2e because their emissions were above their baseline, thus surrendering 1.4 million Safeguard Mechanism Credits and 7.1 million Australian Carbon Credit Units.

Of the total units surrendered, 84.5% were ACCUs, reflecting a substantial increase of 479% in surrendered ACCUs under the scheme for the first compliance period of 2023-24, rising from 1.2 million in the preceding year.

Platts, part of S&P Global Commodity Insights, assessed Generic ACCUs at A$33.75/mtCO2e ($21.45/mtCO2e) April 15, down 75 cents day over day.

Platts last heard SMC traded on March 21 at A$31.25/mtCO2e, at a discount of A$1.80/mtCO2e to Generic ACCU on that day.

The report revealed that 62 facilities received an approximate total of 8.3 million SMCs, but only 18.87% of SMCs were surrendered by entities against their extra emissions, signaling that entities are holding SMCs and using ACCUs to meet their compliance needs.

The holding stance for SMCs was attributed by market sources to the expected reduction in SMC issuances due to yearly decline in baselines.

"A few small-scale direct swaps of SMCs for HIR units have occurred, generally at a modest premium, [but] more time is needed to observe how buyers incorporate SMCs into their strategies, how much supply enters the market, and where prices ultimately settle relative to ACCUs," Tasman Environmental Markets CEO Michaela Morris said.

"As was expected, there is a significant use of carbon credits in the early years of this scheme as larger decarbonization investment decisions are made for these facilities," John Connor, CEO of the Carbon Market Institute, said in a statement.

SMCs impact on ACCUs

Platts earlier reported that the first SMCs were issued in early February, following which the ACCU price fell to a seven-month low. The presence of SMCs in the market has put downward pressure on the ACCU market amid a cautious market ahead of federal elections to be held on May 3.

The Safeguard Mechanism has been in place since 2016, but reforms were made in 2023 to make it more aggressive. Under the reformed mechanism the baselines decline by 4.9% each year.

"We are still seeing supply far outpace demand for carbon credits and will require a significant reduction in credits on the secondary market or an accelerated reduction in baseline emissions intensity values under the Safeguard Mechanism to drive demand sufficient enough to materially increase prices," said Matt Pollard, net zero transformation analyst at public interest think tank Climate Energy Finance.

While the ACCUs market is currently volatile amid signs of caution ahead of the upcoming elections, activity for SMCs has diminished since the first compliance deadline under the reformed Safeguard Mechanism on March 31.

"Not hearing anything on SMCs for a while now, it's been really quiet. Sometimes they will be all over the market, and on most days, they will be absent," a New Zealand-based trader active in the Australian carbon market said.

The report highlighted that in the 2023–24 period, 219 facilities were covered by the Safeguard Mechanism, and emissions from these facilities fell by 2.7 million mtCO2e, from 138.7 million mtCO2e in 2022-23, to 136.0 million mtCO2e in 2023–24.