Coalition's carbon market plans at risk from low quality "grey" credits | RenewEconomy

Coalition’s carbon market plans at risk from low quality “grey” credits

Carbon price jumps, but long term clouded by Taylor’s climate policy review and the threat of low quality “grey” credits for big polluters.

In short

The price of Australian Carbon Credit Units (ACCUs) has rebounded to a 5-month high of $16.37 a tonne in October, a 10 per cent increase from a 12-month low of $14.80 in early July, on the back of small volumes traded in the spot market.

Current prices remain below the 12-month high of $17.50/t, recorded prior to the federal election.

Despite recent price gains, the government’s proposal to allow large-emitting facilities covered by the Safeguard Mechanism to be credited for emissions reductions below their baselines may represent a risk to long-term carbon value.

Under such a scenario, the potential influx low-quality, non-additional offsets (which we refer to as grey credits) is likely to add further supply to an already saturated market, potentially trigging a material decrease in the value of ACCUs for existing market proponents, unless balanced by a robust source of demand.

Even without the addition of new sources of supply, we continue to model ACCU issuance outweighing demand, with a cumulative supply surplus forecast to continue to grow off the back of issuance to registered (but uncontracted) projects and contracted projects beyond the term of their ERF contract.

This surplus continues to weigh down our forecast ACCU prices, despite some near-term upside attributed to low ERF participation and reduced competition. Longer-term, we continue to model price increases in line with the cost of abatement to meet scaled up emissions target scenarios, and alternate net-zero emissions pathways (2038-48).

An industry crediting mechanism for the Safeguard scheme?

 The Minister for Energy and Emissions Reduction, the Angus Taylor, has convened an expert panel to explore possible sources of new abatement into the Emissions Reduction Fund (ERF), renamed the Carbon Solutions Fund (CSF).

A discussion paper circulated in October asks for feedback on ways to ways to increase participation in the ERF, with a focus on the industrial, manufacturing, agricultural and transport sectors. Notably, the document proposes the possible development of a new crediting rule for safeguard covered entities by crediting abatement actions that “go beyond business as usual”.

After amendments to the Safeguard Mechanism Rule earlier this year, all safeguard facilities will be transitioned to ‘calculated baselines’ for FY20-21, applying a forecast of a facility’s emissions-intensity and production over three years (using either company or default intensity variables). Current reported (historical) baselines will expire on 30 June 2020, with new calculated baselines updated annually to reflect actual production.

According to the government’s crediting proposal, new emissions intensity baselines could provide the opportunity to measure improvements in facility emissions performance, establishing a crediting mechanism similar to a ‘baseline and credit’ scheme. No further advice has been given on the design of the crediting rule, or how it will limit crediting to projects that ‘would have happened anyway’.

Influx of ‘grey’ offsets may undermine carbon value

As noted in earlier updates, the transition of the safeguard mechanism to a more traditional ‘baseline and credit’ scheme may represent challenges for policymakers, with the considerable headroom allocated to companies through generous emissions limits potentially triggering the creation of a large volume of new supply, should the same emissions baseline be applied as the reference point for any crediting mechanism.

Under such a scenario, the potential influx of a large volume of low-quality, non-additional offsets (which we refer to as grey credits) into the local market has the potential to trigger a substantial decrease in the value of existing ACCUs, undermining the value of high-quality (green) emissions reductions from carbon framing projects.

Even should a stricter test for additionality be developed, any new source of ACCU supply may still represent a downside risk to prices, with potential for the already long market to become further saturated by new supply, unless balanced by new sources of demand.

 How real is the downside price risk?

 Given the current design of ERF emissions reduction methods, there is little evidence to suggest that any new crediting rule would be subject to a more robust additionality criterion. For example, the current design of the ERF has led to concerns over the crediting of emissions reductions from landfill gas, with criticism that these projects would have occurred even in the absence of support from the ERF.

As part of the expert panel feedback process, industry proponents such as Woodside have called for facilities to automatically be issued with ACCUs where their emissions are below their new calculated baseline.

To avoid windfall gains, Woodside proposes that baselines move to “common definitions of production and industry average emissions intensity”. Subject to the design of default industry emissions intensity variables by the government, which are unlikely to be highly ambitious, such an approach would be likely to trigger large-scale issuance of so-called ‘grey’ credits to industry.

Alternatively, the little used ‘Facilities Method’ under the ERF sets a higher threshold for crediting, whereby facilities are credited for improvements in emissions intensity (excluding changes in production, etc), measured against a 4-year historical baseline.

As a result, a method for crediting ‘additional’ emissions reductions against industry baselines already exists but is not viewed favourably by industry.

Any future crediting mechanism is set therefore assumed to be less onerous on industry, potentially opening large emitters to windfall gains – and downside risks for current proponents. This is particularly true if the objective of any new rule is to simply reduce the cost of ‘abatement’ for industry, by opening the door to lower-quality emissions reductions, rather than strengthening the environmental integrity of the safeguard scheme.

The development of the safeguard crediting rule, and how this impacts our modelled supply surplus, is therefore a key short-term watch for market participants.

In this Carbon Quarterly, we summarise recent carbon price and market activity, and present our long-term price expectations, including discussion of the potential impact of Safeguard Mechanism offsets on prices, and updated forecast price scenarios.

This article is derived from RepuTex’s October (Q2) Carbon Quarterly. To access the full market outlook, please click here.


Print Friendly, PDF & Email

Get up to 3 quotes from pre-vetted solar (and battery) installers.