Australian carbon price jumps as climate policy pressure builds

The prospect of tighter emissions regulation may lead to a more bullish outlook for carbon prices over 2020 as public expectations build for a more robust emissions policy framework.

We now view the probability of policy action on emissions is more likely than inaction, with greenhouse gas emissions growth from large companies unlikely to continue as is.

While a shift in rhetoric is easier than a shift in policy, the government has enough levers it can pull to curb emissions growth with minimal disruption, particularly via its own safeguard mechanism.

In line with earlier updates, we continue to view emissions from this segment as Australia’s climate Achilles heel, with safeguard covered emissions forecast to surpass electricity as Australia’s largest emitting segment in the early 2020s.

The key issue for policymakers will therefore be the implementation of more robust emissions limits, particularly in the energy, mining and transport sectors, where emissions continue to grow without any hard ceiling or offset mechanism.

Recent gains in the Australian carbon price over 2019 (up 12 per cent) have outpaced broader commodity markets, with the Standard & Poor’s Goldman Sachs Commodity Index (S&P GSCI) – comprising 24 commodities from the energy, metals, and agricultural sectors –  returning 7 per cent over 2019.

Chart 1: Australian Carbon Credit Units spot price

Longer-term, we continue to model higher carbon prices as Australia tightens its emissions policy under the Paris Agreement.

As a result, the current carbon spot price represents value for early buyers, particularly high emitting companies and state buyers taking voluntary action ahead of the government.

 

Bullish as the outlook is for ACCU prices, the market is ultimately a political construct, with the carbon price highly responsive to any change in policy and targets.

Longer-term, we continue to model carbon price increases to meet a net-zero emissions pathway under the Paris Agreement, with prices rising in line with the cost of abatement for different industries.

 

Against our forecast prices, today’s ACCU prices therefore represent value for early buyers, particularly high emitting companies that are acquiring credits at a discount to a higher 1.5-2 degree carbon price pathway.