Carbon

Carbon markets: what is likely to drive prices in 2024

Eric Barker, 31/01/2024

AUSTRALIA’S carbon market has started this year stronger than it finished last year, with average prices going above $35 for the first time since June.

The market for Australian Carbon Credit Units has been in a relative oversupply for most of last year, with record numbers of credits being issued and buyers watching several changes in legislation before committing to purchases.

This year, some of the big pieces of legislation passed by the Federal Government are in place – including the ‘safeguard mechanism’ which forces big emitting companies to keep their emissions below a certain baseline or to purchase carbon credits to offset them. The Labor Government last year changed the legislation to make those baselines decline year-on-year until 2030.

But more developments are on the horizon and AgCarbon Central has been talking to carbon market analyst Raphael Wood, who is principal of sustainability and climate change for Aurecon, about what might impact this market this year.

It is worth noting that benchmark prices in this article are referring to Human Induced Regeneration credits, which are seen as a ‘middle of the road’ credit. Some credits attract discounts or premiums depending on their credentials.

Demand-side considerations

Historic emissions reporting due this year

Aurecon Raphael Wood

While the safeguard mechanism made plenty of new last year, the policy pre-dates the Labor Government and has been in place since Tony Abbott was the prime minister. Labor has made a series of changes to put more pressure on emissions reduction.

Under the previous scheme, companies who had exceeded their baselines could apply for a ‘multi-year monitoring period’, which meant they could report their average yearly emissions over a three-year period.

Mr Wood said the introduction of the new safeguard mechanism ended the multi-year reporting period early for many facilities at the end of June last year and they will be required to offset any excess emissions before the end of February.

“Those entities are now buyers in the market and they will have to true up their accounts before they report,” he said.

“I suspect the rise in January was on the back of more entities buying credits for compliance. But I think that will probably happen on-and-off throughout the year with compliance buyers.”

Companies hedging for future compliance

Companies covered under the safeguard mechanism have now had almost 10 months to come up with strategies to comply with the declining baselines over the years to 2030.

Mr Wood said while he was not expecting a huge rush on demand for ACCUs by ‘compliance buyers’ this year, he was expecting them to start buying ACCUs as a hedge for the coming years.

“In saying that, the overwhelming driver of the carbon market this year is still an oversupply and we don’t expect scarcity to be a factor until at least 2027. Things can change though and we will be watching it,” he said.

“But we do think an increase in compliance activity will slowly tick the market up across the year and our forecast has the average price closing 2024 around the early $40 mark.”

Government expected to announce emissions target for 2035

Under the Paris Agreement, the government is required to progressively set targets known as Nationally Determined Contributions. The current NDC is the target is for a 43pc emissions reduction from 2005 to 2030.

Consultation is already underway for a new 2035 target, which the Government is set to deliver by 2025. Organisations have been lobbying the Government to increase the ambition to a 70pc reduction by 2035.

Mr Wood said the NDC’s have a significant impact on the carbon market.

“We are already going to be lucky to get to 2030. All of the current climate policies, like renewables and electrification of cars, are needed to achieve the current goal of 43pc by 2030,” he said.

“So, if the Government goes and increases that to above 70pc by 2035, meeting the goal will become a lot harder and will require new policies.

“With these goals, we are not talking about immediate scarcity but they would result in a dramatic increase in demand.”

Supply-side considerations

Under the supply-side considerations, Mr Wood has highlighted two major factors which could have an impact on the market this year.

Handling of Government contract exits

One of the biggest factors to impact the market in recent years, was a decision made in 2022 by the former energy minister Angus Taylor to allow credit-holders to exit Government contracts, with a fee, and sell ACCUs on the open market.

Following the decision, the carbon market virtually halved overnight and has never reached the record prices seen before it.

This year, the Labor Government will have to negotiate the exit of many carbon abatement contracts (CACs).

Mr Wood said any changes to the ‘CAC transition’ were likely to have an immediate impact on the carbon market.

“The Government still calls the CAC transition a pilot, which means there is no certainty on it until it is legislated,” he said.

“They could reduce the amount of CACs being exited by 20pc and they would do that because they need the ACCUs to uphold their ‘cost containment measure’ – which is their commitment under the revised safeguard mechanism to sell ACCUs for $75 to entities who have exceeded their baseline.

“There has been no indication of any changes to the CAC transition, so we are really unsure of the possibility of this.”

New carbon farming methodology coming

Another that many carbon project developers have been watching is the development of the Integrated Farm and Land methodology – which will allow producers to run multiple projects in one area.

IFLM is also replacing the Human-Induced Regeneration methodology, which wound up last year and has accounted for most of the credits generated since the start of the carbon market.

Mr Wood said the introduction of IFLM was integral to the supply of ACCUs later in the decade.

IFLM is currently being developed by the Carbon Abatement Integrity Committee and is set to be delivered Minister Bowen by the middle of this year. AgCarbon Central will have more of a look into the methodology in the coming months.

Mr Wood said he was forecasting the market to close at about $44/ACCU by the end of the year.

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