Australian HIR-Generic carbon credit spread narrows on integrity concerns

The premium for Human-Induced Regeneration Australian Carbon Credit Units against Generic ACCUs has narrowed by nearly 93% since August, with market sources divided over whether it will improve or completely vanish.

Platts, part of S&P Global Commodity Insights, assessed the price of HIR ACCUs at A$36.75/mtCO2e ($23.99/mtCO2e) and Generic ACCUs at A$36.50/mtCO2e on May 24, placing the spread at 25 Australian cents. This stands in contrast to around A$7.40/mtCO2 in mid-August last year after which the spread continued to narrow and reached zero several times in March and April.

While Generic ACCUs are generated by avoided emissions-based projects, such as landfill gas and avoided deforestation, HIR ACCUs are generated by projects that store carbon by regenerating permanent native forests through alternative land management practices.

The two baskets of credits account for almost 80% of the ACCU spot market, with HIR traditionally commanding a premium over Generic as the method is nature-based, according to market sources.

Integrity concerns

The narrowing of the spread might have to do with the questions on the integrity of some HIR projects and the uncertainty due to the results of the Chubb review, an Australian carbon trader said.

The review stated that more audits might be required for some projects, and it is still not clear how those recommendations will be implemented for HIR ACCUs, the trader added.

The Labor government in 2022 set up an independent panel to review the integrity of certain carbon methods, including HIR and avoided deforestation, after several Australian academics raised concerns about HIR projects' ability to store additional carbon.

The evaluation, called the Chubb review, largely upheld the integrity of the HIR method in its report published in January but issued certain recommendations to further improve the confidence in the market.

The review recommended additional checks in the form of additional data collection to establish the causation between the activities in the project area and the growth of vegetation.

The Clean Energy Regulator, which has begun implementing the measures, warned in April that issuance of HIR ACCUs may take longer as it started implementing recommendations of the Chubb review.

As a result of the measures, the issuance of HIR ACCUs has flat-lined since early 2023, according to carbon market research firm Reputex.

Market divided

While Generic ACCUs are the most cost-effective, some sources said demand for HIR and other premium credits remained robust, despite the spread between HIR and Generic prices having narrowed.

"We certainly think there is a decent premium to HIRs. The reality is there will still be generic demand given the new law, but there has never been more focus on quality credits than now, so that demand is not going anywhere," an Auckland-based trading source said.

The government in March passed legislation to strengthen its emissions compliance scheme, Safeguard Mechanism, with stricter limits expected to increase the demand for ACCUs.

"It [spread] seems to have been reluctant over the past few weeks, but we will see it widen easily to A$1-A$2 in the short term," the source added.

A large emitter source dealing in ACCUs said they were highly invested in HIR and other premium quality credits but were trying to understand why HIRs were lagging compared to the advantage they had last year when spreads were wider.

HIR projects are also attracting significant interest from investors, thus pushing up the valuations of certain properties in Australia.

As investors rush to secure a supply of ACCUs before the price starts rising in next few years, some might end up with worthless land due to a lack of due diligence, said Guy Dickinson, CEO of Betacarbon, a blockchain-based carbon startup.

Not all agreed to the HIR advantage though, with some saying they did not see the HIR premium sticking around.

"Trading in premium credits will continue to be driven by marketing rather than market fundamentals, which largely means its pricing is irrelevant to the broader market," said Luke Donavan, Partner at Apostle Funds Management.

"I don't see any premium for HIR at the end of the year. I see Generic ACCUs grinding to A$50/mtCO2e by year-end," he added.

An Australian broker also said the gap has been closing, and although demand for HIR remained, Generic credits have also sped through.

The spot market has also reported certain project-specific trades, with ACCUs from higher integrity HIR projects attracting a premium above over rest of the credits.