Tightening in the ACCU Market

Person using a laptop with carbon credit and sustainability icons floating above their hands, including CO2, recycling, solar energy, and net zero symbols.

The Department of Climate Change, Energy, the Environment and Water (DCCEEW) intends to stop the development of the Integrated Farm and Land Management (IFLM) method.

The reasoning is due to difficulties demonstrating the environmental benefits of regeneration activities in areas not previously cleared. Instead, the DCCEEW has proposed a new system to be developed, the Landscape Restoration Method (LRM), which considerably tightens grazing activities compared to the previous Human Induced Regeneration (HIR) method.

As a result, the market responded to the news with increased activity for HIR ACCUs and price firming for both generic and HIR ACCUs. The generic ACCU market has firmed since late last year, increasing from the $31-$32 range to $36.

Depending on the scope of allowed grazing activities under the future IFLM or IRM, the market could significantly move. The IFLM method was initially expected to fill the supply gap created after the retirement of two major methods by the end of 2024.

The ACCU market is currently priced to increase into the future, with a cost of carry of ~7%. This is ultimately driven by demand from safeguard participants and some voluntary demand associated with sustainability targets.

The current baselines decrease by 4.9% each financial year out to 2030, with an emission reduction contribution of 65.7% in 2030. The demand for ACCUs to offset organisations’ emissions is anticipated to surpass ACCU issuance for the first time in 2028. The high demand and low issuance are currently forecasted to continue until 2031, where demand for ACCUs is forecasted to peak at 31 million certificates. This is significantly up from 2022, where demand from scheme participants was less than 1 million. However, facilities that are covered by the Safeguard Mechanism are able to generate SMCs, which are a new type of credit issued as a reward for emitting below one’s limits, which could ease overall demand on ACCUs.

The Australian Government has made ACCUs available to liable entities at $75/cert, increasing with CPI plus 2%, ultimately setting a price cap for them. In future years, when supply and demand become tighter, could we witness an ACCU market consistently trading at or near the cap, similar to the current STC market?

The Safeguard Mechanism – not so safe anymore

Once again, the Labor government has shown its teeth when it comes to climate. Last week rebuffing the Energy Security Board’s action for a Capacity Mechanism, which would inevitably only benefit large coal and gas generators, and today bringing out a consultation paper to reform the Safeguard Mechanism.

This hasn’t come as a surprise as it was a cornerstone of their election campaign, but to have done it so quickly may surprise some, and to have a start date for these reforms at the start of the next financial year, 1st July 2023, will surprise many.

To re-cap, the Safeguard Mechanism is the legislation which came in in 2016, it was designed to reduce the emissions of the industrial sectors within Australia with targets or baselines capping the amount of emissions each facility can emit. The flaw was that the large industries could continue to re-set these baselines so as to ensure that as production increased, so did the baseline and as such the emissions would also be increased without penalty. In the Financial year 2020 – 2021, these large emitters made up 28% of Australia’s Carbon Footprint

What is currently being proposed is a type of basic cap and trade model with stricter reduction targets, to help the government achieve their net 43% reductions by 2030 and net zero by 2050. This equates to reductions for these large emitters of an initial 3-6% and increasing post 2030.

The consultations also ask for feedback on whether the concept of using industry average benchmarks should be used to set all baselines. This will be strongly argued against by industry, especially since the published default values are significantly lower than most emitting facilities. However, it may enforce the desired reductions, this I am sure will be a major discussion topic in the weeks ahead.

Other parts of the paper discuss increasing the transparency of the Australian Carbon Credit Units (ACCU) market and the Carbon Offsets used to abate the excess Scope 1 emissions. This would support the tender sent out late last year to establish a trading platform for the Carbon Credits, which would de-mystify the pricing and availability of this currently opaque market. This is a measure, I am sure, will be welcomed across the industry, especially by those projects with excess certificates.

However, what will not be welcomed from the green flank in government, and their supporters, is the possible future inclusion of international Carbon Offsetting certificates. With many of these trading at significant discounts to the Australian government accredited ACCUs, the value of these domestic projects could be significantly eroded if international credits can be applied to excess emissions.

The drafts of the responses will be being formed by C&I regulation teams over the coming weeks, with the aim to try and protect their position and emissions as much as possible. I am sure they will be arguing for facility specific, production adjusted targets with the cheapest offsets possible for over emissions. However, how successful their lobbying will be is yet to be seen. This new government is not afraid to turn the status quo on its head and with ambitious climate targets, and with international eyes watching, I am not sure that industry will receive the desired outcome from this reform. With the consultation closing at the end of September this will certainly be one to watch before the end of the year.