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Corporate and investor activity driving prices higher in Australian carbon market

The Australian carbon spot price continues to break new ground on an almost weekly basis, with Australian Carbon Credit Unit (ACCU) spot price assessment growing 5.5% to $21.10/t over the past fortnight. The spot price has now grown 28% year-to-date, from $16.52/t on 1 Jan-21.

ACCU issuance increased 63% from our last update, with around two-thirds of supply issued to Savanah Burning projects in the NT, QLD, and WA. In line with recent updates, voluntary cancellations continue to surge, with Q2 reaching a record 4.9m voluntary cancellations in Australia, an 82% increase from Q2 2020.

Internationally, CORSIA-eligible offset prices continue their recent run, carrying over into demand for lower-priced offsets across other project categories.

In this Market Update we provide a snapshot of carbon spot and forward price dynamics, along with ACCU supply and voluntary activity in the Australian carbon market.

ACCU spot market and contracting action

RepuTex’s Australian Carbon Credit Unit (ACCU) spot price assessment grew 5.5% from $20/t to $21.10/t over the fortnight, a new record high, as the market continues to be buoyed by increasing corporate voluntary activity and investor participants.

Estimated spot traded volumes fell slightly over the period, from a high base last fortnight, with parcel sizes of between 5,000-40,000.

RepuTex’s daily price assessment captures full day transactions for spot market ACCUs, derived from polling of market participants and public information to discover price data over the trading day.

Data is collected from a cross section of the Australian market, with our daily price assessment reflecting the average of all traded values for each day.

Our daily ACCU spot price assessment has been operational since January 2018.

The Australian carbon spot price continues to break new ground on an almost weekly basis. The spot price has now grown 28% year-to-date, from $16.52/t on 1 Jan-21.

As noted in our earlier update, the last time any Australian carbon price was over $20/t was under the former Carbon Price Mechanism, which set the price of carbon compliance permits at $23 in FY13, rising to $24.15/t in FY14 prior to the scheme’s repeal.

ACCU forward transactions and forecast prices

No forward transactions were recorded over the period, with three recorded since Apr-21 for delivery between Feb-21 and Feb-23 at $18-25/t.

Settlement dates ahead of the 28 February deadline for covered emitters to surrender ACCUs under the safeguard mechanism suggest that forward activity is attributed to compliance entities looking to protect against further spot price increases and sure up access to supply.

Compliance demand is expected to grow over our outlook period as companies begin to true-up offsets against their multi-year baselines.

This is expected to lead to an uptick in offset demand from compliance entities, with voluntary corporate demand from safeguard covered entities (and Climate Active participants) also forecast to grow.

We continue to forecast further price upside over FY21-30, particularly as investors and speculators continue to grow their holdings, and eventually use ACCUs to hedge climate risks in other asset classes (such as emissions intensive equities or energy commodities), covered in our July Carbon Market Outlook.

This could begin to see ACCU prices align with growth seen in markets such as the EU ETS, where speculative (long) positions have grown from 7% in Jan-18 to 33% in May-21, while long positions in the California ETS have similarly grown from 12-27% YTD.

To view our latest webinar on Australian carbon market dynamics, including our Australian carbon offset price, supply, and demand outlook from 2021-30, please click here (free link).

ACCU issuance and project registrations

11 new projects were registered over the period, 5 of which are soil carbon projects. Notably, one new project has been registered in Victoria (Port Melbourne) under the Land and Sea Transport Methodology, which aims to reduce emissions from marine vessels.

It is just the 10th project registered under the Methodology, and third focused on marine vessels, with just one project currently generating ACCUs (contracted to the ERF).

1.2 million ACCUs were issued over the period, a 63% increase from our last update, with around two-thirds directed to Savanah Burning projects in the NT, QLD, and WA.

Total ACCU issuance has now grown to 97.3 million (since 31 December 2012), with 16.45 million issued in FY21, a 6% increase over the period. 203,873 ACCUs have been newly issued in FY22.

As noted, the majority of this total issuance has been surrendered or is contracted under Fixed Delivery Contracts to the Emissions Reduction Fund, and is therefore unavailable to the market.

Voluntary cancellations

Around 183,000 offsets were voluntarily cancelled over the period, a slight decrease from recent fortnightly cancellation rates. In line with recent trends, international Certified Emissions Reductions (CERs) continue to make up the majority of activity, at around 60% of all voluntary cancellations over the period.

Q2 saw a record 4.9m voluntary cancellations in Australia, an 82% increase from the same period in 2020. Over 6.7 million offsets have now been cancelled over CY21 (after 6 months), already around 5% ahead of total CY20 levels, as cancellations continue to occur at a record pace.

Around 95% of all voluntary cancellations are in the form of CERs, reflecting the ongoing trend for voluntary actors to utilise cheaper international CERs (while they can under the Kyoto Protocol) to meet immediate voluntary targets, primarily under the Climate Active carbon neutral scheme.

As noted in earlier updates, while the use of ACCUs for immediate cancellation is low, this does not reflect a lack of contracting for ACCUs (either via the spot market or bilateral contracting between high emitters and project proponents), but instead reflects the higher value of ACCUs (as a compliance tool or due to higher co-benefits), which are being contracted over longer forward delivery timelines rather than immediately cancelled.

Source: RenewEconomy