Investors place Australian bets on compulsory emissions reductions
Companies are buying up Australian carbon credits at an increasing rate even though they’re not required to offset their emissions under local laws, in what experts say is a bet on future international regulations.
Market Advisory Group managing director Raphael Wood said investment in Australian carbon credits was doubling every year, albeit off a low base.
Projects that earn credits include those that sequester carbon by re-growing vegetation or investing in large-scale protection of forests to lock in ongoing carbon capture that could be lost to land clearing.
“We were seeing around 100,000 tonnes of credits each month going through the registry in 2018. That went to about 250,00 tonnes a month in 2019,” Mr Wood said. “If you take three months after COVID out, in March, April and May last year, we are now seeing 350,000 tonnes to 400,000 tonnes a month.” The Coalition has committed to never impose mandatory emissions reductions on industry but has supported carbon markets by funding projects under its Emissions Reduction Fund.
Green market experts say strong voluntary investments show companies are getting a foot in the door purchasing emissions offsets in case they become compulsory, with investor and consumer expectations also a contributing factor.
“We are seeing substantial investment as these companies know they will have future liabilities arising under any carbon neutral commitments,” Carbon Market Institute chief executive John Connor said.
He noted private equity firm KKR last year spent about $100 million buying into Greencollar, the largest Australian generator of carbon credits, while Woodside and Shell had made similar moves.
“They are recognising what their future climate liabilities will be and also the commitments many companies have made for carbon neutrality,” Mr Connor said. Australia has huge potential for emissions reduction due to its vast landmass.
“Australia has a big opportunity not just as a clean energy exporter with hydrogen and renewables, but also in selling credits for carbon reduction,” Mr Connor said.
Emma Herd, the chief executive of the Investor Group on Climate Change, which represents institutional investors with total funds under management of more than $2 trillion, said polluting companies and investors in carbon markets were betting on future international regulations for emissions reduction.
The cost of achieving emissions reduction and therefore generating carbon credits is higher in Australia than in lower-cost economies such as India’s.
The federal government’s Clean Energy Regulator latest quarterly report said 84 per cent of the voluntary carbon credits purchased by Australians were international and most “originated from renewable energy projects in India”.
However, Ms Herd said investors saw value in Australian credits despite the cost.
“They’re making small bets on higher-cost credits, like in Australia, in anticipation that they will need a higher volume of high-integrity credits from well-regulated markets, depending on the Paris Agreement,” she said.
Signatories to the Paris Climate Agreement, including Australia, are negotiating Article 6 of the treaty, which includes a potential international mechanism for certifying and trading carbon credits.
“Australia’s government officials have played a very active role in negotiations, arguing for high-integrity credits under Article 6, because we are well regulated and would have strong advantage,” Ms Herd said.