The outcome of Australia's upcoming federal elections on May 3 may significantly affect the country's carbon market, with a potential Liberal-National coalition win likely to soften the Safeguard Mechanism, while a second term for the Labor Party could tighten environmental policies and restore market confidence, sources told S&P Global Commodity Insights.

The Safeguard Mechanism requires facilities to have net emissions at or below their baselines, with a yearly decline of 4.9% through June 30, 2030. To reduce net emissions, these facilities can surrender Australian Carbon Credit Units or Safeguard Mechanism Credits.

"We do see the Australia Carbon Credit Unit and Safeguard Mechanism price direction very heavily dependent upon the pending federal election, with prices likely to weaken under a Liberal-National Party [Coalition] victory and strengthen under a Labor Party second term," said Matt Pollard, net zero transformation analyst at public interest think tank Climate Energy Finance.

Towards the end of 2024, election sentiment started to weigh on ACCU trades, resulting in increased volatility. ACCUs have largely traded in the range of A$33-$35/mtCO2e so far this year.

The Platts benchmark Generic ACCUs price was assessed at A$34.10/mtCO2e, up 4 cents/mtCO2e day over day, and HIR ACCUs at A$34.04/mtCO2e, up 4 cents/mtCO2e April 22.

Eyes on election outcome

If the Federal Liberal-National is elected, it will review Australia's emissions reduction commitments under the Paris Agreement to decide whether the country should withdraw, according to market participants.

For the domestic carbon market, a Liberal government would likely soften the Safeguard Mechanism regulations.

"The Senate made the compliance obligations difficult to unpick without a comprehensive election outcome. It would take control of both houses to securely unwind decline rates and related compounding demand for investment in decarbonization or ACCUs," said John Connor, CEO at Carbon Market Institute.

"Weakened emissions reduction targets under an LNP government may result in increased exit arrangements under fixed delivery contracts in which more credits will be supplied into the secondary market, thereby putting greater pressure on ACCU prices," said Pollard from Climate Energy Finance.

The fixed delivery exit arrangement requires participants to exit an ACCU delivery contract by making an exit payment instead of delivering ACCU for the contracted price.

Conversely, a victory by a minority Labor government with support from the Teal independents or Australian Greens would be bullish for the ACCU scheme due to potential enhancements of the Safeguard Mechanism and greater tightening of supply, participants said.

"A re-elected Labor government is expected to maintain or strengthen the current 4.9% annual baseline decline under the Safeguard Mechanism, while a Coalition government may reconsider the pace of reduction," said Abhijeet Thakkar, senior analyst at S&P Global Commodity Insights.

Pollard further noted that Labor's re-election would signify a move towards current Climate Minister Chris Bowen's initially flagged price cap of A$75/mtCO2e for ACCUs.

Notably, the Greens' climate and energy plan mentioned that they would push to recalibrate the Safeguard Mechanism baselines and limit the use of ACCU offsets to hard-to-abate sectors.

"They might support prices by limiting the maximum number of ACCUs you could use for compliance compared," a South Australia-based developer said.

Increasing international policy uncertainty and climate denialism after the US pulled out of the Paris Agreement, coupled with regressive industrial-energy policies implemented globally, would likely have a negative impact on the Australian carbon market, regardless of the election results, sources cautioned.

Supply-demand, price outlook

Despite the various uncertainties plaguing the market in the lead-up to the election, most participants were still optimistic about recovery in ACCU prices in the long term.

"While there may continue to be some short-term market volatility, the mid- and long-term dynamics provide confidence in maintained growth in the value of the ACCU market over time," Tasman Environmental Markets CEO Michaela Morris said.

Additionally, sources expect SMC and ACCU prices to be linked to Safeguard demand and will unlikely be sharply affected by the cost-of-living issues.

Widespread dissatisfaction amid Australia's ongoing cost of living crisis has sidelined long-term environmental goals in favor of regressive, short-term economic relief measures.

According to the CMI's Australian Business Climate Survey 2024, 65% of participants expect prices to move beyond A$90/mtCO2e levels by 2035.

A short-term drop after the election is plausible, but the emergence of a natural price floor in the market will prevent prices from plunging below the mid-A$20/mtCO2e level, Morris said.

The ACCU market is expected to experience a significant surplus from 2025 to 2028, with supply exceeding demand, according to a report by Commodity Insights. This will likely lead to inventory build-up and downward pressure on prices, which are projected to remain around A$40/mt.

According to Morris, ACCU pricing in 2025 will ultimately hinge on the portion of forecast supply that enters the market and the extent of demand following any policy changes.

"Any [negative] policy shifts are likely to face legislative hurdles and take time to implement, [while] supply is expected to remain relatively strong in the near term," she added.