Australia's carbon reform stokes buying interest for credit units; liquidity, prices surge

The Australian government's proposal for carbon market reforms in early January has stoked buying interest for Australian Carbon Credit Units, or ACCUs, with prices surging by over 14% in the two weeks to Jan. 26, trade volumes hitting record levels and firms hoarding credits in anticipation of higher prices, traders, brokers and market participants told S&P Global Commodity Insights.

The proposed reforms have restored market confidence after several months of controversy and large corporates that have emissions targets are purchasing ACCUs across a variety of project types and methodologies amid expectations that bullish sentiment will continue to drive up prices in coming weeks, market sources said.

The spot ACCU price was at A$38.50/mtCO2e ($27.40/mtCO2e) as of Jan. 26, up by 14% from A$33.80/mtCO2e ($24.06/mtCO2e) on Jan. 9, just before the government proposed its reforms, according to Australia-based carbon brokerage Jarden.

Other carbon market brokers reported ACCU prices as high as A$38.95/mtCO2e during the week ended Jan. 23, with ACCUs from Human Induced Regeneration projects rising to as much as A$40/mtCO2e, and similar price surges being recorded across other project types.

Companies are stocking up on more ACCUs than they need, expecting steady price increments in the foreseeable future, driven by both the government's new policy and speculative interest, a Singapore-based trader said. "Yes I have been looking at it [ACCU market]. Perhaps too much," a second trader added.

Australian traders have reported a significant increase in speculative buying interest and cited brokerage data showing that volumes traded through brokers and intermediaries hit a record high of over 1.6 million ACCUs on the spot and forward markets in the week ended Jan. 23 alone, with liquidity continuing to rise for the week ended Jan. 27 and record monthly volumes expected for January.

Besides the spot market, the surge in trading activity for forward contracts has extended into the next couple of years and the demand surge has resulted in ACCU prices across project types converge at a high level of around $40/mtCO2e, with spreads between different ACCUs continuing to narrow.

Bullish demand signals

Australia's reforms for its national compliance emissions scheme called the Safeguard Mechanism were proposed Jan. 10 with the objective of reducing emissions and meeting national climate targets. The scheme covers around 215 of the most polluting industrial facilities across the metals, mining, oil and gas extraction, manufacturing, and waste sectors, representing 28% of the nation's emissions.

The key reform was a reduction in total emissions for the entities covered to 100 million mtCO2e by 2030, down 27% from around 137 million mtCO2e as of 2021. To realize this goal, each facility covered by the scheme is required to achieve a 4.9% annual reduction in baseline emissions, or 5 million mtCO2e/year, otherwise emissions exceeding the baseline will be charged.

According to the Australia and New Zealand (ANZ) Banking Group, emissions produced by facilities under the Safeguard Mechanism are projected to grow to 140 million mtCO2e in 2030, under a business-as-usual scenario.

"We estimate this equates to a cumulative emissions reduction task of about 170 million mtCO2e by 2030. Based on Clean Energy Regulator data, there are only 80 million mtCO2e of contracted ACCUs over the same period. This could see ACCU supply swallowed up in two to three years," ANZ said in a note to clients this week.

The reforms also introduced a new category of credits called Safeguard Mechanism Credits for companies to meet their emissions targets, but companies can also buy ACCUs generated from sectors outside the compliance market's scope.

ANZ said this could further impact ACCU supply for voluntary buyers, even as the tighter emissions targets increase demand for ACCU.

"This will spur investment in offset projects. However, with the lag to investment sometimes taking years, there will be increasing demand for government issued ACCUs. This is likely to exert upward pressure on prices for the foreseeable future," ANZ said.

Speculative buying

ANZ said investor demand for ACCUs has been increasing steadily since 2019 and interest ramped up significantly in 2022.

"After making up less than 1% of the market in 2019, total holdings by investors have now increased to more than 13%. Considering that the surge in energy prices has been a big part of rising inflation, we expect investors to use the [carbon] sector as a natural hedge," it said.

"Overall, we see significant upside for ACCU prices. The growing demand for carbon offset both from emitters and investors should drive up prices over the coming year," ANZ said, adding that increased interest in the carbon market could see the impact of the reforms being priced-in before they become effective in July 2023.

One of the price signals for the market has been the A$75/mtCO2e ($53.38/mtCO2e) price ceiling announced as part of the wider swathe of reforms.

"It is like a magnet for people. When it wasn't there, you wouldn't have thought about it. But now it's there, so investment structures will be built around that A$75 [level]. It's not a bad thing. It promotes priceand incentivizes new supply," Raphael Wood, Principal of Sustainability and Climate Change with environmental advisory Aurecon, said at an industry event this week.

Wood said the government is also formulating its hedging strategy by procuring ACCUs to build up stocks that are needed in upcoming years to cope with price volatility, but he warned that corporate buyers should not rely on the government's reserves.

Platts CNC price assessments -- which tracks activity happening on exchanges' nature-based standardized contracts -- was assessed at $2.80/mtCO2e, and the Platts CEC price assessment, tracking activity happening on CORSIA eligible exchange contracts, was assessed at $2.55/mtCO2e Jan. 26.