2021 was a year of records in the Australian carbon market, with prices, traded volumes, and voluntary cancellations of Australian Carbon Credit Units (ACCUs) up across the board. Key outcomes (from 2020) include:
In this update, we take a closer look at 2021 in the Australian carbon market ‘by the numbers’, and the implications for 2022.
ACCU spot price surges 209% over CY 2021
The Australian carbon market experienced a major bull run over the course of 2021, with prices for Australian Carbon Credit Units (ACCUs) growing 209% to $51/t at end-December, an annual average of $25/t. Prices grew 23% in December, and have risen 8% to $55.50/t in early January.
Record prices continue to be driven by a confluence of supportive factors, including: increasing voluntary demand from corporate buyers; increasing compliance demand under the Safeguard Mechanism (albeit from a low base); increasing investor participation; a tight supply setting (and the younger status of projects with optional delivery contracts); and bullish sentiment attributed to Australia’s net-zero target and the positive macro environment for low-carbon asset plays.
In particular, the increasing number of private offtake transactions between voluntary buyers (corporate and investors) and project developers – at large volumes – strongly influenced spot prices over 2021, with developers increasingly setting aside issuance to fulfil forward contracting demand. This triggered a supply squeeze in the spot market, creating a bullish environment for prices as demand continued to outweigh supply.
Prices for carbon abatement contracts (CACs) under the ERF ($12-18) remain well below the spot price, with a significant premium opening up against ACCUs traded in the spot market. This has led to increasing speculation that project owners may begin to trigger non-delivery clauses on fixed delivery CACs to free up supply, and access higher prices.
While speculation is warranted, we believe it is increasingly likely that the Clean Energy Regulator will provide project owners with optionality over their fixed delivery CACs under the ERF, enabling project developers to redirect some of their forward supply away from the Commonwealth to fulfill private sector demand. This is likely to avert the need for project owners to break their existing fixed delivery CACs, maintaining the integrity of the government’s contracting scheme.
As we discussed in our latest outlook, while new supply may provide some relief to the current spot heatwave, optionality is not likely to materially impact prices, with sellers expected to pursue their own self-interest and limit any large releases of supply to the broader market.
Traded volumes and transactions grow 76%
As noted, while the spot market continues to be dominated by smaller transactions, larger transactions are being executed via direct offtake contracting between project developers and voluntary buyers. Over CY21, these bilateral contracting quantities have become larger and more frequent.
Approximately 6 million ACCUs are estimated to have been transacted in the secondary market over 2021 (transactions between private sellers-buyers, intermediaries, compliance, and voluntary activity, excluding the ERF and forward transactions), a 76% increase from CY20.
Almost three quarters of all transactions have occurred via direct contracting, with the balance via the spot market. Larger participants are therefore transacting for larger volumes (and more competitive prices) over longer delivery periods via direct offtake agreements, as buyers head straight to the source rather than navigate the supply constrained and overheated spot market.
ACCU market value grows 170% on 2020 levels
Based on the estimated volume of ACCUs transacted, and annual average spot prices, the total value of the secondary market (excluding ERF deliveries) is estimated to have grown to approximately $150 million over 2021, a 170% increase on 2020 ($55 million), and a 120% increase on 2019 ($68 million). This reflects both the increase in ACCUs transacted YoY, along with the higher price environment.
Forward market activity develops
Forward activity in the OTC market increased markedly over 2021, with 42 trades recorded – up from just three in CY20. Lumpy liquidity and sparse trading saw forward prices play catch up with the heated spot market for most of the year. The Feb-22 (CAL 21) price has now risen to $52.00/t, with Feb-23 (CAL 22) prices increasing to $57.25/t, and Feb-24 (CAL 23) at $50.45/t.
Voluntary cancellations increase 101%, dominated by CERs
Almost 13 million offsets (12.9 million) were voluntarily surrendered in Australia in 2021, a 101% increase on 2020 levels (6.4 million). Over 90% of all cancellations were in the form of low-cost Certified Emissions Reductions (CERs), with under 1 million via ACCUs. In total, over 34 million offsets have now been voluntarily surrendered in Australia since 2012.
As noted in earlier updates, demand for CERs reflects the ongoing trend for Australian voluntary buyers to act based on price rather than environmental integrity, with low-cost CERs (<$2) widely used to meet immediate voluntary targets and carbon neutrality goals under the Commonwealth’s Climate Active carbon neutral scheme.
As the market evolves, an expected ‘flight to quality’ may lead to increased demand for higher quality offsets, including ACCUs, with pressure likely to build on high emitting companies to maximise co-benefits (such as job creation, improvement of natural assets, etc) by investing in local emissions reduction projects, rather than ‘exporting’ co-benefits and emissions reductions overseas.
This trend has begun to emerge in the international voluntary market, where many corporate buyers source higher quality nature based removal and sequestration activities offsets to avoid greenwashing claims attributed to the purchasing of some units, such as earlier vintages of CERs.
As ACCU prices continue to rise, however, voluntary demand is ultimately expected to flow into higher quality international offsets as companies seek to balance environmental integrity with the cost of action.
While the use of ACCUs for immediate cancellation is low, this does not reflect an overall lack of demand for ACCUs. Instead, ACCUs are being contracted over longer forward delivery timelines as corporates look to build a pipeline of supply in response to forward regulatory and price risks (rather than cancelling units today). This may include liabilities arising from the conclusion of multi-year monitoring periods under the Safeguard Mechanism, and/or longer-term expectations for tighter settings under a scaled up Safeguard Mechanism.
ACCU issuance and project registrations reach record highs
198 projects were registered over 2021, a 26% increase on 2020 (157). 55% of all registrations were Agriculture projects, underpinned by new soil carbon project registrations, while 30% of all registrations were for vegetation methods. Total project registrations have now grown to 1,088.
As of December 14, over 105 million ACCUs have now been issued to registered projects under the ERF and the former Carbon Farming Initiative (prior to 2015), with 8.2 million ACCUs issued in FY22.
All eyes on the 2022 federal election…
2022 shapes as key year for the Australian carbon market, with a range of events likely to impact price development. Most notable is the next federal election, to take place by 21 May, which stands to define the ongoing shape of corporate demand for offsets.
Should the Coalition be returned, voluntary demand for ACCUs is expected to continue to be a strong influence on prices, along with compliance demand under the Safeguard Mechanism (e.g. the conclusion of multi-year monitoring periods). In such a setting, we continue to anticipate a sustained period of higher prices – even in the absence of robust federal policy – with a raft of new corporate net-zero pledges likely to lead to ongoing support for the local ACCU market.
Should the Australian Labor Party (ALP) win power in May, the imposition of tighter emissions constraints on high emitting facilities covered by the Safeguard Mechanism is expected to be a key development for the Australian carbon market, providing a gradual and predictable signal to guide industry investment in least-cost emissions reductions, including the use of ACCU offsets and newly proposed Safeguard Mechanism Credits (SMCs).
Once again, federal climate policy will therefore have a strong influence on the Australian market over the course of an election year. Unlike 2019, however, this time around the local carbon market is far more developed, with voluntary demand for offsets likely to provide a solid base for future growth irrespective of the election outcome.
This article was initially published under RepuTex’s Australian carbon market service. Click here to learn more.
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