INTERVIEW: Australia sees tight carbon credit supply by 2030, potential market overseas, says CMI

Australia may face tight supply of domestic carbon credits by 2030 while potentially new demand centers emerge in other compliance markets for its relatively higher integrity offsets, said John Connor, CEO of Carbon Market Institute, the country's industry body.

"I think there is some general understanding that we are going to have some challenges in supply, particularly towards the end of the decade," Connor told S&P Global Commodity Insights in an interview.

The tight supply may also emerge from a lack of enough methodologies to generate Australian carbon credit units, or ACCUs, at a large scale.

The Human Induced Regeneration, or HIR, method will expire in September, with a lack of land-based methods in place to replace one of the biggest supply of ACCUs in Australia.

HIR ACCUs accounted for 33.5% of total ACCUs issued in the fiscal year 2022-23 (July-June).

Platts, part of S&P Global, assessed the Generic ACCU price at A$28.75/mtCO2e ($19.54/mtCO2e) and the HIR ACCU price at A$33.50/mtCO2e July 27, both up 25 Australian cents on the day.

Method development

The Australian government said in June that it will prioritize(opens in a new tab) the development of two new methods: Savanna Fire Management, and Integrated Farm and Land Management, or ILFM. The ILFM is expected to replace the HIR method.

"It is certainly a strong view in the industry that we should be facilitating that as quickly as possible. There is some latest draft of that method (ILFM) that can be gotten out there," Connor said.

He added that the method was being fine tuned to better meet the tests of integrity and additionality.

The government has also set up a technical working group to modify the existing landfill-gas method that will further tighten baselines for the projects, resulting in lower ACCU generation and higher integrity.

"That's a third priority if you like for the government and they are working through it with the industry, but need to do that with the community as well," Connor said.

He added that getting the changes cleared this year was possible but if the government wants to go through proper negotiations, there was no clear timeline.

Connor also highlighted the potential of the development of new methods led by the project developers, such as avoided deforestation or feral animal reductions.

Integrity

The avoided deforestation, or AD, method has faced strong criticism over lack of additionality and integrity, with S&P Global data showing that the spot market saw higher volumes of trade that excluded AD credits.

"It is important to state on the record that even the Chubb Review said that there was no problem with those AD units. It's just reached the end of its time," Connor said.

A government-backed independent panel, headed by Australia's former Chief Scientist Ian Chubb, published its report in January and largely upheld the integrity of the current carbon market framework in Australia.

The review recommended discontinuing the AD method but upheld its integrity and called for additional data collection for HIR projects.

"One of the major detractors of the current (AD) credits' integrity are proponents of alternative AD. This issue is not going to go away particularly when we have high land clearing rates," he added.

The HIR method has also faced consistent criticism(opens in a new tab), with two new studies by the Australian National University in June claiming that most of the HIR projects lacked integrity.

"I am hoping that the framework that is taking shape will throw up the bad actors or bad projects but also reward the good ones and many are passionately defending that saying they are achieving on-ground results and that the data they are submitting is showing that as well, in contrast to satellite level only data that is the basis of some alternative analysis," Connor said.

Still, the HIR ACCUs have continued to attract a premium over the Generic ACCUs, with the spread between them at more than a five-month high.

"All of this is pretty esoteric and not surprising that it puts off some buyers but there is still ongoing interest and investment there," Connor said.

New markets

While Australia does not allow exports of ACCUs overseas and is currently more focused on capacity building, Connor said there was potential for new markets outside the domestic market.

"There are no inflows or outflows of ACCUs yet but that may happen in time and I think certainly from the CMI perspective we want Australia to be net negative so it should be a provider in the form of supply," Connor said.

He added that as the carbon tax in Singapore increases, it could be a potential market for international offsets.

Singapore levies a carbon tax on certain polluters, with the tax set to be increased to S$25/mtCO2e ($18.77/mtCO2e) in 2024 and 2025 and higher in later years, from S$5/mtCO2e currently.

From 2024, the Singapore government has allowed(opens in a new tab) emitters to buy high-quality international carbon credits to offset up to 5% of their tax-liable emissions, with exact criteria yet to be announced.

However, Connor warned that this will have to be balanced with the offset requirements of the Australian businesses.