Asia carbon prices tumble in H1 on oversupply, policy uncertainty; hit 2023 lows

Asian carbon prices ended the first half of 2023 at year-to-date lows across markets, signaling weakness, dominated by policy concerns and oversupplied units.

Prices were at their lowest levels for Platts Asian compliance carbon assessments for South Korea, Australia & New Zealand in the week starting July 3.

The New Zealand Unit price is down 48% since Platts started the Asia compliance carbon assessments March 1, while the Generic and HIR Australian carbon credit unit, or ACCU prices are down 23% and 17.2%, respectively, during the same time.

Platts is part of S&P Global Commodity insights.

While both the New Zealand and Australian markets were seen as oversupplied, the former was facing fundamental concerns around policy uncertainty, market sources said.

Policy uncertainty for NZUs

The NZU price has fallen 60.5% since touching a record high of NZ$88.50/mtCO2e ($54.85/mtCO2e) in November 2022 and was assessed at NZ$35/mtCO2e on July 5.

"There are fundamental concerns around NZ ETS, with the government consultation, the forestry decision and huge amount of uncertainty," an Auckland-based carbon broker said.

The price downtrend began in December after the government rejected recommendations from the country's national climate body to implement higher price settings for its emissions trading scheme.

While this undermined the market's confidence, it was further shaken by the government's plan to implement new rules for ETS to reduce dependence on forestry credits and encourage emissions abatement at source.

"I suspect some of the regional carbon traders have lost their patience with the policy development in that market and have decided to either exit or significantly reduce exposure," said Luke Donovan, Partner, Apostle Funds Management.

ACCU supply increases

In Australia, the ACCU price has fallen to a more than 10-month low amid a lack of demand from big emitters and an increase in issuances.

Platts assessed the price of Generic ACCUs at A$28.25/mtCO2e ($18.82/mtCO2e) July 5, down A$2.5/mtCO2e on the day, while Human-Induced Regeneration ACCUs were at A$31.25/mtCO2e, down A$1/mtCO2e.

The recent volatility was due multiple factors, most notably the large influx of ACCU supply and thin demand from compliance buyers, amplified by traders closing out positions at the end of the financial year, said Reputex, a carbon market research firm.

The increased supply of ACCUs is a result of the Clean Energy Regulator resuming issuance of HIR ACCUs after a brief pause to implement additional audit requirements.

Supply has also increased as more project developers exit their ACCU delivery contracts with the CER by paying a fee, thus allowing these ACCUs to enter the spot market.

About 2.7 million ACCUs have been issued by CER in the last five weeks since the resumption of crediting to HIR projects, representing 45% of total 2023 issuances, Reputex said.

"The majority selling in ACCUs is from a few large players which seems to have taken a toll," a carbon broker said. "It is more like trimming risk."

With the government offering an average price of A$17.12/mtCO2e for ACCU delivery, and including the cost of the exit fee, market sources said the developers will be better off delivering to the government rather than selling in spot market.

The current price slide could result in the Generic ACCU price continuing to slip to around A$26-A$27/mtCO2e, reflecting the minimum price to encourage project developers to exit contracts with the government, Reputex said.

K-ETS players call for reforms

In South Korea's emissions trading market prices plummeted more than 50% in 2022, and that bearish trend continued into 2023 while the market remains largely limited to emitters and a handful of market makers and security companies, with no sign of reform implementation in the near future.

Platts assessed the Koran Allowance Unit price at Won 9,000/mtCO2e ($6.90/mtCO2e) on July 5, down 30% since the launch of the assessment on March 1.

"The current market is expected to remain bearish until the compliance deadline, as near-term price drivers only concentrated on whether the market can defend the resistance line and if and when the government will enforce the stabilization measures," said Maureen Lee, market analyst at Ecoeye, a leading South Korean carbon developer.

KAUs have struggled to find buyers, with an oversupply of free allowances providing little incentive to pick up the compliance units.

The South Korean government had announced major reforms in November 2022, including incentives to low emitters, easier procedures, as well as adjusting emissions caps and expanding paid allocations.

However, no clear direction for implementation of those has emerged yet except increasing holding limits for some sectors.

The holding limits of both market makers and securities companies were doubled June 28.

"The reason for this limit increase is done to expect market makers to absorb more surplus," said a market maker source. "But market makers will not comply. It is another trick or sham to transfer all the market risk and to blame us for market crash or failure."

Most market participants said they expect KAU prices to stay below $10/mtCO2e unless there is a big change, unlikely before 2024.