Carbon offset prices could double by 2030, unless companies do the dirty work

The Australian carbon market is undergoing a “fundamental repricing” on the prospect of a national net-zero emissions goal;

• Prices for Australian Carbon Credit Units (ACCUs) could more than double by 2030, rising to a range of $20-45/t
• While a net-zero target will be a supportive factor for local prices, offsets are unlikely to be used as a permanent replacement for emissions reductions. This could result in more muted demand, and prices at the lower end of the anticipated range.

In our latest Carbon Market Outlook, last week, we present our expectations for Australian Carbon Credit Unit (ACCU) prices, supply, and demand from 2021-30, including scenarios for the adoption of a net-zero emissions target for industry.

In analysing the expected impact of a net-zero target, we model three scenarios for ACCU price development, differing with respect to the prioritisation of internal abatement (emissions reduction) activities over external abatement (offsets), and the subsequent level of demand for ACCU offsets from voluntary and compliance sources.

In this article, we present a summary of our modelling outcomes and the implications for local ACCU price formation to 2030.

Spot market: Current state of play

The price of ACCU offsets has risen 11% calendar year-to-date, reaching $18.40/t at the end of March on the back of increased voluntary demand, and compliance purchasing ahead of the deadline for high emitting entities to surrender ACCUs for the FY20 compliance year under the Safeguard Mechanism.

Figure 1: RepuTex ACCU spot price.

While spot price trends and demand cycles are somewhat seasonal, with an uptrend in prices evident late/early in the calendar year due to compliance purchasing, prices are also influenced by political factors, such as expected change in policy.

This can be seen on February 1 of this year, with a statement of support for a net-zero emissions reduction target by the Prime Minister driving a notable spike in the spot price, breaking through $18.50/t.

This suggests that carbon offsets are undergoing a fundamental repricing as the market begins to anticipate the step-up to a more ambitious net-zero emissions reduction goal.

So what impact could a net-zero target have on ACCU forward prices?

Summary of modelled scenarios

In this outlook, we consider three scenarios for ACCU contract price development (the price of a 10-year supply contract, rather than a one-off spot market transaction), assuming the adoption of a net-zero emissions target implemented for industry via the ‘safeguard mechanism’.

While we use the safeguard mechanism to align industry with a net-zero emissions goal, resultant demand may also reflect increased voluntary activity as companies set their own net-zero emissions targets in response to increased external pressure (e.g. from investors and consumers, or the threat of domestic or international regulation such as carbon border tariffs).

Specifically, emissions baselines for each covered facility are set to decline to FY30, aligning with net-zero emissions in 2050.

Companies are assumed to face an annual emissions reduction task, with the prioritisation of internal abatement (emissions reductions) activities over external abatement (offsets) differing in each scenario.

This translates into a range of forward price outcomes described below:

• Low scenario: High emitting companies are assumed to prioritise internal emissions reduction opportunities, using external ACCU offsets as only an interim compliment, or a true-up to emissions baselines in any given year.
• Medium scenario: High emitting companies are assumed to invest in external offsets as an ongoing compliment to internal emissions reduction activities.
• High scenario: High emitting companies are assumed to invest in external offsets alongside internal emissions reductions, from an earlier start point for declining emissions baselines.

Outcomes therefore vary in line with the assumed timeframe for the commencement of a binding net-zero emissions target, and relative demand for external offsets, providing a plausible range of forward price estimates between 2021-30.

CO2 offset prices could double to $20-45/t by 2030

Findings indicate that the adoption of a net-zero emissions target will be a supportive long-term factor for ACCU contract prices, with increasing demand for locally sourced offsets from voluntary and compliance market companies creating a sustained uptrend in prices over the first half of the decade.

We forecast that the price of long-term ACCU supply contracts could more than double from current levels, growing to a range of $20-45/t in 2030.

At the medium and high end of our range, increased private sector demand for offsets is forecast to replace declining demand under the ERF later in the decade, largely avoiding an accumulation of ‘excess ACCUs’ as current fixed delivery agreements with the Regulator expire.

This would see high emitting companies become the largest purchaser of external abatement, supporting a more sustained uptrend in contract prices.

Increased demand for external offsets may be underpinned by compliance purchases due to declining emissions baselines to reach net-zero emissions, and/or continued stakeholder pressure for companies to voluntarily adopt more aggressive net zero targets and deliver carbon neutral products and services.

This is particularly evident in the agriculture, manufacturing, and energy sectors, where companies are increasingly seeking to manage their downstream product risks by offering carbon neutral products – be it in response to the likelihood of carbon border tariffs abroad, consumer demand, shareholder pressure, or the threat of tighter government regulation.

More of this demand is beginning to be directed to local ACCUs, rather than cheaper international offsets, as companies look to source credits from emissions reduction projects closer to the location of their operations (locally or within their state).

In addition, high-quality ACCU offsets are the most likely to hold their value, and be more durable under any future compliance framework.

Despite this, the layering of voluntary offset portfolios is common, with Certified Emissions Reductions (CERs) continuing to be the most widely used offset in voluntary carbon neutrality announcements.

This may limit the full potential for ACCU offset demand as carbon neutral portfolios potentially invest in only a minimal number of high quality local offsets, instead favouring cheaper CERs – while they are still available.

Focus on internal abatement could limit offset demand

At the low end of our range, covered entities are assumed to rely on external offsets as only an interim complement to more substantive investment in long-term emissions reductions, supporting spot price increases over the next several years.

As investment in internal abatement activities begins to translate into realised emissions reductions, however, demand for ACCU offsets is anticipated to fall away.

This dynamic, coupled with the ongoing availability of ACCU supply from expiring ERF contracts, could see contract prices decline back toward $20/t by FY30.

As a result, while the adoption of a net-zero emissions target will be broadly supportive for forward ACCU prices, limited long-term demand for offsets could result in lower contract prices later in the decade as companies prioritise internal emissions reductions in order to more permanently manage their carbon compliance risks.

This article was initially published under RepuTex’s Carbon Market Intelligence service. To access RepuTex’s full Market Outlook for ACCU contract price development, supply, and demand from 2021-30 please click here.