Commodities 2024: Australian carbon prices see upside as compliance demand grows

Australian carbon credit prices are expected to rise in 2024 on increased demand from entities covered under the country's emissions compliance program called Safeguard Mechanism, market participants told S&P Global Commodity Insights.

The compliance demand for Australian carbon credit units, or ACCUs, is expected to be centered around Generic and Human-Induced Regeneration, or HIR, methods, which represent the lowest cost for offsetting.

Platts, part of S&P Global, assessed the price of Generic ACCUs at A$31.80/mtCO2e ($21.36/mtCO2e) and HIR ACCUs at A$35/mtCO2e on Dec. 14.

The higher-priced Savanna Fire Management Indigenous and non-indigenous ACCUs were assessed at A$50/mtCO2e and A$38.50/mtCO2e, respectively, and the Environmental Plantings ACCUs were assessed at A$57.50/mtCO2e, S&P Global data showed.

The Generic ACCU price could rise to A$37/mtCO2e and HIR to A$40/mtCO2e in 2024 without much resistance, which is expected to push volumes higher, a carbon trader said.

Increase in demand

"We have seen compliance buyers begin to test the market, with brokered volumes growing to a 10-month high in November," said Hugh Grossman, managing director, energy and carbon markets at Reputex, a Melbourne-based carbon analytics company.

ACCU holdings of Safeguard entities increased 72% quarter on quarter in the third quarter of 2023 to 5.4 million, Australia's Clean Energy Regulator said in a report earlier in December.

The Australian government also forecast in December that ACCU demand from participants is expected to increase to 26 million in 2030 from less than 1 million in 2022.

A lot of the recent buying has been done by Safeguard entities but a lot more of them were yet to enter the market, the trader said.

"It is impossible to know the timing of when the deflection point will be, when enough buying comes and the market starts really grinding higher, it could be the first, second, or third quarter of next year," the trader added.

More Safeguard entities could start buying ACCUs in the early fiscal year 2024-25 (July-June) as they prepare for the first compliance date of March 31, 2025, under the reforms passed this year, CER said in a report.

"Many of the covered facilities aren't active trading financial markets, so it takes time to set up trading mandates and approvals," said Luke Donovan, partner, global carbon at Apostle Funds Management, a Sydney-based investment management company.

Some of the entities were still in the early stages of discussions in terms of spot buying or investing in long-term projects, and it is likely to take months to trigger trades or sign offtake agreements, the trader said.

HIR-Generic spread

HIR and Generic ACCUs account for more than three-quarters of the spot market trading volumes, according to market participants, with the spread between the two credits expected to tighten as prices near A$40.

Platts assessed the HIR-Generic spread at A$3.20/mtCO2e on Dec. 14 and was last seen flat on April 14, according to S&P global data.

"As prices rise into the mid A$40s we expect the HIR-Generic spread to tighten," Grossman said.

However, the current price differential is expected to be maintained until demand picks up strongly and Generic issuances start to decline, he added.

"For the sake of the market, I would like to see prices converge into a generic ACCU price. This will help build market credibility and scale," Donovan said about the price stratification between different ACCU-generating methods.

Alternative methods costlier

Other methods such as Savanna Fire Management, Environmental Plantings and soil carbon storage have also seen an increase in interest from voluntary and compliance buyers.

"We see cheapest to deliver Generic and HIR units meeting much of the near-term compliance demand, however, disclosure requirements are seeing some companies take a more hybrid 'complian-tary' approach to compliance buying, with a voluntary reputational lens," Grossman said.

Under the Safeguard Mechanism reforms implemented in July, compliance entities will also have to disclose the type of ACCUs used for offsetting emissions.

The government is also consulting with the industry to enact a new method, called the Integrated Farm and Land Management (IFLM), which is expected to replace the HIR method that expired in September.

The government is also planning to increase the baselines for landfill gas projects, which will lead to lower ACCU issuances for such projects.

"Both methods are currently on track for next year and we expect both to play an increasing role, particularly IFLM," Grossman said.

There has been a string of issuances for soil carbon projects in 2023, with the last trade heard at A$54/mtCO2e for 2,000 mt of soil ACCUs.

"We expect these units to be offered at higher prices, however, as issuances begin to flow to larger projects, we expect prices to begin to align with other nature-based units," Grossman added.

With several projects up and running, there is no justification for soil carbon to be trading at any sort of significant premium to HIR, according to the trader.