Australia's carbon credit demand to surpass issuances in 2028 as compliance tightens

Demand for Australian carbon credit units is expected to surpass their issuance for the first time in 2028 due to tightening offset targets for polluting facilities under the country's emissions compliance scheme, the Australian government said Nov. 30.

The high demand and lower issuance scenario is expected to continue until 2031 when the demand for ACCUs is expected to peak at 31 million units, the government said in its emissions projections report.

The shortfall between demand and issuance will be met by market participants' existing holdings, which will increase from 38 million units in 2024 to 51 million units in 2026 and then drift down to 39 million in 2032, according to the report.

Most of this demand is expected to be generated from facilities covered under Australia's newly reformed emissions compliance scheme, called Safeguard Mechanism.

The report forecast that ACCU demand from the scheme is expected to increase from less than 1 million in 2022 to 26 million in 2030.

The scheme covers 219 facilities that emit more than 100,000 mtCO2e/year and account for around 28% of Australia's total greenhouse gas emissions.

The facilities emitting below their limits starting July 2023 will be rewarded with a new type of credit called Safeguard Mechanism Credit, or SMC, while those breaching the limits will need to offset their emissions by retiring either SMCs, or ACCUs.

The report added that facilities cover under the Safeguard Mechanism are expected to generate 6 million SMCs in 2030.

The government added that gross emissions of Safeguard facilities are projected to decline by 13% from 138 mtCO2e in 2022 to 121 mtCO2e in 2030 and further fall by 20% to 97 mtCO2e between 2030 and 2035.

"After 2031, ACCU demand is projected to decline as more on-site abatement opportunities are taken up to meet Safeguard obligations," according to the report.

On the supply side, the annual issuance of ACCUs is projected to grow from 16 million-17 million ACCUs in 2023 to 30 million ACCUs by 2033, with majority generated from the vegetation, and savanna fire management methods.

Price

The price for ACCUs is expected to rise to A$60/mtCO2e ($39.61/mtCO2e) or higher by 2030, the report said, citing models from external parties such as consultant Ernst & Young Australia and Melbourne-based carbon research firm Reputex.

Platts, part of S&P Global Commodity Insights, assessed the price of Generic ACCUs at A$31.50/mtCO2e and Human Induced Regeneration ACCUs at A$34.55/mtCO2e on Nov. 30.

The projected price, however, is expected to remain below the cost containment measure, or CCM, price -- a mechanism to tackle price volatility by selling ACCUs to Safeguard entities.

Under the CCM, the government will sell ACCUs to the emitters in case of a shortfall at a fixed price of A$75/mtCO2e from fiscal year 2023-24 (July-June), increasing with the consumer price index plus 2% each year.

The holdings of ACCUs under CCM reserve increased to 1 million by Aug. 22 as more project developers chose to deliver their credits to the government rather than sell in the spot market, S&P Global reported on Sept. 29.