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Australian carbon credit prices hit record high on demand surge

Highlights

Carbon credit unit price hit record high at $18.88/mtCO2e Sept. 16

Driven by strong demand from both government, commercial buyers

Prices of Australian carbon credit units, or ACCUs, hit a record high in the week ended Sept. 17 due to a bullish environment in the country's carbon market driven by strong demand from both government and commercial buyers with compliance obligations.

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The spot price of ACCUs was recorded at A$26/mtCO2e ($18.88/mtCO2e) on Sept. 16, according to latest data from Sydney-based environment consultancy Demand Manager. This compares to around A$16-A$17/mtCO2e at the start of this year and in 2020.

The prices of Australian carbon credits has been rising at a time when carbon prices in the European ETS have hit a record level of Eur62.91/mtCO2e ($73.76/mtCO2e) in recent weeks. The rise also comes amid intensifying debate over emissions policies in the run-up to the United Nations Climate Change Conference, also known as COP26, in Glasgow later this year.

Voluntary carbon market prices are also surging. The Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, eligible carbon credit price has reached $7.40/mtCO2e, according to Platts assessment on Sept. 21.

Australia's carbon market follows a hybrid regime, in which the government established specialized fund called the Emissions Reduction Fund, or ERF, purchases ACCUs generated from qualified carbon reduction or avoidance projects, while commercial buyers can also purchase ACCUs either on voluntary basis or under a compliance regime.

Australia's compliance regime is called the Safeguard Mechanism, which requires large emitters or companies that have facilities with annual emissions beyond 100,000 mtCO2e to purchase ACCUs to offset emissions that exceed the baseline quotas. The quota allocation method is different in different sectors and can be either fixed or flexibly adjusted for production.

Several demand-supply factors are driving up ACCU prices.

"At present the supply of quality credits is constrained compared to general market sentiment which is indicating strong demand from several sources and as a result, we are seeing increasing prices for ACCUs," Phil Cohn, executive director with Australia-based investment and advisory firm Pollination Group, said.

He said on the demand side there was increased government buying, with the federal government's ERF being complimented by Queensland's Land Restoration Fund, or LRF.

"Similarly, entities with potentially large compliance obligations under the Safeguard Mechanism are entering the market to build ACCU portfolios and hedge future exposures," Cohn said.

ACCU prices have been steadily increasing this year, touching A$18.5/mtCO2e as of March 31, 2021, and A$19/mtCO2e as of June 30, 2021, according to the quarterly reports by Clean Energy Regulator, or CER, the government body currently managing Australia's carbon market.

Cohn said demand for ACCUs is expected to increase significantly over the next decade as corporates continue to roll out new voluntary emissions reduction targets, and those with existing targets develop strategies to meet them.

"The reality is that for most Australian corporates, the use of carbon offsets will be an integral part of their net-zero transition strategy," he added.

"Alongside corporates looking to implement their net zero strategies, we are also seeing interest in the Australian market from investors that are increasingly viewing carbon as an asset class," Cohn said.

On the supply side, CER's quarterly report said ACCU supply hit a record high of 5.7 million units in the April-June quarter, which led to a total supply of 8.8 million units for the first half of 2021, a 5% increase over the same period in 2020.

"On the supply side, we do expect higher prices to support previously marginal project activities, however, the key to unlocking additional ACCU volume will be new methodologies with the Government working through new method priorities including soil carbon, carbon capture and storage and blue carbon," Cohn said.

Australia allows certain types of projects called methodologies to generate carbon credits including capture and destruction of coal mine fugitive emissions, reductions in emissions-intensity of transport, capture and combustion of landfill gas and agricultural waste, reducing livestock emissions, expanding carbon sink plantings, reforestation, etc.

It has been working to expand the types of projects that can qualify for producing carbon credits, and recently began public consultations for including technologies like Carbon Capture and Storage projects in the national carbon market.