Australian carbon credit units surge to 12-month highs: Here’s why

The price of Australian carbon offsets broke through $17 a tonne last week, reaching a 12-month high, spurred by increased trading activity by high emitting companies looking to voluntarily offset their greenhouse gas emissions.

RepuTex’s Australian Carbon Credit Unit (ACCU) benchmark price index climbed 4.5% on the week, closing at $17.42/t on Friday, an increase of 10% from a 12-month low of $15.80 recorded in June.

After breaking the $17/t barrier, where to next for offset prices?

In this article, we review the key factors impacting our ACCU offset price expectations for FY21, and longer-term dynamics to 2030.

Market sentiment – PM inches closer to net zero emissions by 2050

On Monday, the Prime Minister Scott Morrison gave his clearest indication yet that the Coalition would adopt a net-zero emission target by 2050.

Speaking at the National Press Club, Mr Morrison indicated that it was now his preference to meet net-zero emissions by mid-century, or beforehand, suggesting that a net zero emissions target is likely before the next federal election (between August 7, 2021 and 21 May 2022).

In a move potentially designed to soften opposition to a net-zero target within his own ranks – specifically the Nationals and the hard Right – the Prime Minister also noted that the May budget would contain a national soils strategy, providing farmers and landholders with incentives to help reduce emissions.

While Mr Morrison’s statement falls well short of a firm commitment, it is the clearest indication yet that the Coalition is likely to adopt a net-zero emissions target, with the PM previously stepping cautiously towards the pledge.

Given the carbon commodity market is ultimately a political construct, with the offset price highly responsive to any change in policy and emissions targets, expectations for Australia to commit to a net-zero target have lifted market sentiment, contributing to the uptick in our ACCU benchmark price index.

Global action means the writing is on the wall for Australia

Market expectations are also being driven by increased global action, including the return of the United States to the Paris Agreement, and stronger policy action by the new Biden administration.

As the threat of punitive international action grows on laggard countries – such as carbon border fees or quotas on carbon-intensive goods into Europe and the US – the writing is on the wall for Australia to fall into line with the net-zero objectives of the Paris Agreement, with a net-zero target seen as the lesser of two evils for the government as it seeks to avoid any further muddying of its relationships with key export markets, such as China, South Korea, Japan, the UK, Europe and the United States.

Increasing global action could place pressure on the Prime Minister to commit to a net-zero target as early as April, with the Biden administration planning to host world leaders in a climate summit on Earth Day (April 22), in a bid to create momentum before the postponed Conference of the Parties (COP 26) to be held in Glasgow in November.

As above, the prospect of Australia falling into line with international expectations continues to provide a bullish macro environment for local carbon offset prices.

The fundamentals – Voluntary demand from industry on the up

Voluntary corporate demand is the key driver of the rebound in Australian carbon offset prices, with many companies looking to reduce emissions and acquire offsets to meet interim and long-term net-zero emissions targets.

As a result, current price levels are built mostly on the back of companies and speculators looking to acquire credits while prices remain undervalued.

This includes many high emitting companies testing the market as part of their carbon neutrality and emissions reduction strategies, either as a way to mitigate future compliance risks (with long-run prices forecast to increase), or to better manage internal and external stakeholder and investor scrutiny – or both.

Expectations for future carbon price increases to 2030-50

Our ACCU benchmark price index has now recovered to pre-COVID levels last seen in February 2020, and is closing in on a record high of $17.54/t set in Nov 2019.

We forecast short- to medium-term price increases, with our FY21 price expectations around $18/t on the back of growing expectations for increased target ambition, and demand from voluntary and state government buyers.

As noted in our earlier outlooks, this should see carbon offset prices exceed historic levels over FY21.

Longer term, we continue to forecast higher ACCU prices as Australia strengthens its emissions reduction ambition under the Paris Agreement.

Net-zero emissions is a key driver of our long-term offset price expectations, with the scale and timing of Australia’s net-zero emissions target a key watch for market stakeholders.

A recent report by the Climate Targets Panel found that Australia should commit to a 2030 emissions reduction target of between 50% and 74% if it is to comply with goals of limiting global warming to 1.5-2°C.

This would see Australia reach net-zero emissions between 2035-45, suggesting that net-zero emissions by 2050 is likely to quickly become a ‘low ambition’ carbon price pathway for high emitting industries.

In such an environment, today’s carbon offset prices represent value for many companies, with early movers therefore snatching up offsets at a notable discount to our long-run price scenarios.

This article was originally published under RepuTex’s Carbon Market Intelligence service. Reproduced with permission.