A flight to quality, as carbon traders hedge against a tightening of rules

Both voluntary and compliance buyers are hitting the carbon credit market in anticipation of regulatory changes and the release of the Chubb review in December.

ACCUs bought via brokers, which make up about a third of the market, surged in the September quarter by 22 per cent on the previous period and 406 per cent on the same period in 2021, according to data from market advisory service Reputex.

Despite the rise in buying through brokers, prices during the quarter were weak.

Generic credits were down 12 per cent over the quarter and HIRs were down 11 per cent.

Brokers handled trades of more than 1.9 million units. Two-thirds of that was for so-called Generic units in landfill gas and avoided clearing, just over a third was for Human Induced Regeneration (HIR), and a tiny percentage was in Savanna Fire Management (SFM) projects although direct contracting for the latter remains strong.

Direct contracting, however, was also surging in June as emitters sought private deals.

The rising activity of brokers in the market reflects improving liquidity and the increasing participation of trading houses, intermediaries and financials, Reputex said in its September quarter report.

Reputex managing director Hugh Grossman says voluntary demand has been rising over the last six months, spurred partially by the big four banks which are increasingly accumulating units they can on-sell to customers and the entrance of sophisticated European commodity trading houses.

Buyers hedge against tightened rules

But this quarter’s buying was prompted by two specific events: the announcement of the Chubb review into the Emissions Reduction Fund (ERF) and the federal government’s plan to reform the Safeguard Mechanism.

Voluntary corporate buyers took part in a flight to quality, buying up higher-quality HIRs, after the former chair of the ERF’s watchdog turned whistle-blower said the carbon offsets issued under the scheme lack integrity and amounted to a “fraud on the environment”.

Companies with compliance liabilities were in search of cheaper generic units as they build a buffer ahead of expected changes to the Safeguard Mechanism.

The Safeguard Mechanism requires the country’s largest polluters, those with direct emissions of more than 100,000 tonnes CO2-e, to keep the net emissions below a baseline level. It covers companies in the mining, oil and gas, manufacturing, transport, and waste sectors.

The federal government is proposing to turn it into a baseline and credit system with a new tradeable Safeguard Mechanism Credit (SMC) to reward companies which cut emissions faster.

A draft proposal is set to be released in December as is the final report from the Chubb review.

There is still a defacto oversupply of ACCUs in the market following changes to the Emissions Reduction Fund in March, but corporations hedging against risk and compliance buying will soak that up once the market has more clarity from December, says Grossman.

Both reports could be positive for the development of a more sophisticated carbon credit market, but depending on the outcomes may cause a supply squeeze by pushing big companies to further cover their emissions while tightening the supply of credits in the transition to a higher quality market.