Demand for premium priced ACCUs robust despite looming compliance obligations

Demand for premium priced Australian Carbon Credits Units was robust from compliance buyers despite the availability of competitively priced, easier-to-source Generic & HIR ACCUs to meet obligatory requirements, several market and emitter sources told S&P Global Commodity Insights.

The ACCU market largely dominated by Generic and Human Induced Regeneration credits has seen an uptick in demand particularly from big emitters such as coal and gas companies after Australia passed legislation in March to strengthen its emissions compliance scheme, Safeguard Mechanism.

The new legislation mandates the emissions limits to 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.

As per market sources, almost 80% of the ACCUs market is currently HIR and Generic, with HIR traditionally commanding a premium over Generic. 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.

Although Generic ACCUs are the most cost effective, the spread between HIR and Generic prices have narrowed compared to last year.

Platts, part of S&P Global, assessed the Generic ACCU price at A$37.75/mtCO2e ($25.49/mtCO2e) and HIR ACCU price at A$38.25/mtCO2e May 9.

"For compliance side demand there are two schools - one that wants to get the cheapest deal to be done with their obligations and then there are those players who are generally concerned about greenwashing accusations and their reputation, so they are willing to spend on high quality credits," said James Turnbull, Principal, Sustainability and Climate Change, Aurecon Group.

High-quality credits in demand

Methodologies for landfill gas and HIR are the most cost effective, but higher-priced premium credits such as Savanah controlled burning credits with both indigenous co-benefits and without them have seen robust interest from compliance buyers.

"Clients are looking to purchase Savanah burning projects, especially compliance entities which we would have not seen a few years ago," an Auckland-based broker said.

Market sources said a Savannah burning credit without indigenous co-benefits could be priced between A$42-A$45/mtCO2e, while those with indigenous co-benefits could fetch a premium of anywhere between A$8-A$10/mtCO2e.

"Those are rare to come by, but we are willing to pay that premium if needed," said a large emitter source who was looking to get hands on Savannah credits.

The more capital-intensive environmental plantings, or EP method also had a lot of interest with one project developer saying EP as a carbon removal process has seen the least controversy, helping its popularity among compliance buyers.

According to the project developer, an EP credit could currently be priced at A$60/mtCO2e.

Market participants were also bullish on the prospects of more carbon capture storage projects, especially air capture projects.

"We are big on air capture but it's a costly one which also makes it that premium. In Australia there are a few but the majority is still in US, but it has the potential if the capital flows in," said a project certifier.

Integrity issues, greenwashing

While voluntary participants have been invested in premium projects for a while, market sources said much of the demand from the compliance side could come on the back on warding off integrity & greenwashing concerns.

"Compliance entities will be required to disclose what credits they have retired, this is quite different to other compliance markets and some entities will be sensitive to the perceived quality of what they are retiring," said an Australian investment manager looking into carbon projects.

Luke Donavan, Partner at Apostle Funds Management echoed the view saying, "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."

The ACCU market came under strong criticism in 2022 for lack of integrity within the project methods. However, a government-backed panel, Chubb Review, mostly upheld the integrity of the market, but recommended some changes such as tightening of credit supply to landfill gas, discontinuation of avoided deforestation method and demanding more evidence for HIR projects.

Premium for non-Generic credits to stay

A large emitter source said they were now more focused on premium quality credits, with some amount of HIRs as they had to meet obligations but Generic ACCUs are not part of their strategy.

"Savannah burning will maintain its premium to Generic on the basis of its notable co-benefits and EP will maintain or increase their existing premium due to them being 'removal' credits and their resilience to questions regarding additionality."

"Further, we expect to see premiums for methodologies that aren't avoided, deforestation, LFG or HIR beginning to grow," said the Australia-based investment manager.

Spot market transactions for ACCUs, tripled on the year to a record 23 million in 2022, according to data from the Clean Energy Regulator.