COMMODITIES 2025: Australian carbon prices to be bullish on ambitious baselines, method delays

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Australian carbon credit unit prices are set for a bullish 2025 on stronger demand from Safeguard entities facing compliance obligations for their annual declining emissions baselines as well as potential further method delays, market participants told S&P Global Commodity Insights.

The Australian government, in its reformed Safeguard Mechanism in July 2023, decided to lower the emissions baselines by 4.9% yearly until 2030 to ensure emissions from facilities gradually decline.

"Carbon markets are beginning to adjust to the first compliance period [March 31, 2025] for the reformed Safeguard Mechanism, with increased demand for ACCUs in response to declining emissions baselines," Australia's Clean Energy regulator said in its September Quarterly Carbon Market Report.

Declining baselines in 2025 will play a major role in driving market fundamentals and price direction, in addition to any additional policy developments or delay in releasing methodologies by the government, an ACCU trader said.

Platts, part of S&P Global Commodity Insights, assessed Generic ACCUs at A$38.80/mtCO2e, and Human-Induced Regeneration ACCUs at A$38.95/mtCO2e on Dec. 5, roughly 15% and 6% higher, respectively, from Jan. 1.

The Generic without avoided deforestation differential was assessed at 15 Australian cents/mtCO2e, 5 Australian cents higher from the start of the year.

Savanna Fire Management Non-indigenous ACCUs were assessed at A$38.85/mtCO2 (0.9% higher from Jan. 1), while the premium segment including SFM Indigenous and Environmental Planting ACCUs were assessed at A$47.45/mtCO2e (5% lower)and A$49/mtCO2e (15% lower), respectively, Commodity Insights data showed.

Price trends, market expectations

Commodity Insights tracked roughly 17 million ACCUs traded year to date across the liquid segment encompassing Generics, No AD, and HIR, of which 45% was for No AD alone, reflecting an emerging preference for the credit especially in the latter half of 2024. HIR made up the subsequent 32%, followed by Generics at 23%.

The prices in this segment are likely to rebound and comfortably move past A$40/mtCO2e in 2025, participants said, adding that buying interest from emitters will gradually pick up in the first quarter of 2025 closer to the compliance deadline in March.

Consequently, Safeguard entities will be incentivized to buy ahead of a further spike in prices, resulting in stronger demand, a second ACCU trader said.

Other than a brief dip in buying interest after March, the demand trajectory is expected to rise incrementally until the end of 2025 though some market participants expect A$45/mtCO2e to be the resistance level in the coming year.

"We've seen a significant tightening of the spread, especially in HIR, which is likely to be maintained for the method going forward. However, we have seen in both voluntary and compliance buying an increasing level of due diligence checks on HIR and other projects, [suggesting that] buyers are becoming more focused on quality which may lead to a maintained level of spread," Tasman Environmental Markets CEO Adrian Enright told Commodity Insights.

This especially applies to methods like EP and SFM Indigenous, both of which buyers are more than willing to pay a premium for due to the co-benefits attached, reflecting a trend that will likely be maintained for some time, Enright added.

"The strongest support was given to the notion that it [Safeguard Mechanism] should apply to more facilities with a lower emissions threshold (70%) and have more stringent Safeguard baseline decline rates (55%)," Climate Market Institute said in its annual survey of market participants.

These entities would then have to purchase more ACCUs for their obligations in addition to improving their technological facilities, eventually leading to a lower reliance on ACCUs to mitigate emissions, sources said.

Supply outlook

ACCU supply in 2024 has been strong as the CER expects at least 19 million issuances in 2024, the most since 17.7 million issuances in 2022, though falling 1 million units short of its initial estimate.

A spokesperson from the Department of Climate Change, Energy, the Environment and Water told Commodity Insights that the government expects there will be enough ACCU and Safeguard Mechanism Credit supply in the market [in 2025] to meet the compliance demand of Safeguard Mechanism facilities.

"There are a large number of projects that may be reaching first crediting next year," the CER spokesperson said.

The addition of new methods will be important for the mid-to-long term supply of ACCUs, but it will naturally take time for issuances from Integrated Farm and Land Management as well as other methods to be issued and flow into the market, Enright said.

The IFLM method was set to allow the registration of new vegetation-based projects following the expiration of the popular HIR method in 2023, which accounted for one of the highest number of registrations among Australia's vegetation-based projects. However, the method was delayed due to the need for more consultation.

"We are unlikely to see this [supply] materialize for several years following the sign-off on the method," Enright added, echoing the market-wide sentiment.

With market expectations for demand to outstrip supply in 2026-27, it is not farfetched for ACCUs to rise rapidly in the near term as it would only require several players who are short of their obligations to start buying.

Political changes impact

The federal election to elect members of the 48th Parliament of Australia is set to be held sometime in the second or third quarter of 2025.

If the next election is won by the Labor government or a balance of power results between Teal independents, there will be some political certainty about market longevity without political intervention that could drive down demand as fundamentals should come into play, the developer said.

The coalition government could be elected due to carryover sentiment from the recent US election, especially if the economy doesn't improve as people are more worried about "putting food on the table," a Sydney-based market source said.

On the other hand, the source said the market generally views the coalition as relatively anti-scheme, but depending on the result of the election, it is unlikely that they will remove the ACCU scheme entirely if they are elected.