Australia's big emitters explore investment in carbon projects as compliance looms

Australia's biggest polluters are exploring investments in carbon credit projects to lower costs related to fulfilling offset compliance requirements under the country's strengthened emissions reductions scheme.

The Australian parliament passed legislation on March 30 to strengthen the country's emissions compliance scheme, called Safeguard Mechanism. The scheme covers 219 industrial facilities that produce over 100,000 mt/year of greenhouse gases and account for about 28% of Australia's total emissions.

Under the scheme, the facilities are given emissions limits and those exceeding the limits need to offset the emissions through Australian carbon credit units, or ACCUs.

"Unlike in the European compliance market, you can access credits at a much lower cost [in Australia] if you get involved at the early stage," a carbon project analyst from a major energy company told S&P Global Commodity Insights.

The new legislation mandates that the emissions limits will fall 4.9% annually starting from fiscal year 2023-24 (July-June), with an aim to cap total emissions from the scheme to 100 million mt by 2030 compared with a projected 143 million mt in FY 2022-23.

The new requirements are expected to increase the demand for ACCUs from big emitters, which included coal and gas projects, and steel and aluminum plants.

Costs

"Big emitters are looking to invest in this if they have a huge exposure to lower that cost base essentially. It is a big obligation for an Australian company that they have never faced before," the analyst said.

A compliance manager from a major transportation company with significant exposure to Safeguard Mechanism under new reforms said that ACCUs were expected to play a major role in fulfilling their compliance requirements.

"We are certainly approaching opportunities with project developers," the manager said, adding that the company was also open to buying ACCUs from the spot market.

Meanwhile, the spot market price of ACCUs has been rising, especially since the government proposed the reforms in 2022.

Platts assessed the price of Generic ACCUs at A$38.50/mtCO2e ($25.62/mtCO2e) and Human Induced Regeneration, or HIR ACCUs at A$38.75/mtCO2e on April 11, S&P Global Commodity Insights data showed.

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

"The trajectory of the market would suggest that makes sense for the larger players to do to hedge against future risk by owning your own project in terms of price risk," said Kyle Hamilton, associate director, markets, at Reputex, a Melbourne-based carbon research provider.

Some companies have already taken the lead by acquiring or investing in carbon project developers.

Oil and gas company Shell Australia bought a major Australian project developer, Select Carbon, in 2020, while industrial conglomerate Mitsui acquired a 33.7% stake in another major project developer, Climate Friendly, in 2022.

Project types

HIR projects were being seen as the most popular among the investors due to lower costs, followed by more capital-intensive environmental plantings, or EP.

"EP is also very attractive because it is a carbon removal process, which is very much less criticized," the analyst added.

The ACCU market came under strong criticism in 2022 from academics, who alleged lack of integrity within the project methods.

However, a government-backed panel, called Chubb Review, mostly upheld the integrity of the market, especially the HIR method, in its report published in January.

The review recommended some changes such as tightening of credit supply to landfill gas, discontinuation of avoided deforestation method and demanding more evidence for HIR projects.

While the project developers accepted the findings as bullish for the carbon market, some buyers are still not convinced.

"There is still a bit of uncertainty about which ACCUs you should go after and 5-6 years down the line, are you going to get penalized because you used some ACCU back here that has now lost favor or is now not viewed appropriately," the manager said.