Current State of the Australian Carbon Market
The Australian Carbon market had a busy week, with some relatively strong volumes in Generic and HIR. The larger emitters are steadily getting ready to enter the market as they consider what the future of this market holds. If we consider the current issuance situation, we have legacy methods providing the bulk of the supply. The rosy forecast for new methods is somewhat more uncertain as I discussed last week with methods still undetermined and increased weather variability.
| ACCU Type | Bid Price | Offer Price | Volume | Demand |
|---|---|---|---|---|
| Generic | 31.00 | 31.75 | High | High |
| HIR | 34.40 | 35.00 | High | High |
| Savannah | 36.25 | 37.00 | Low | Low |
| Indig Savannah | 49.00 | 50.00 | Low | High |
| Soil Carbon | 39.00 | 41.00 | Low | Building |
| Reforestation (EP) | 60.00 | 62.00 | Low | High |
Market Dynamics and Trading Insights
I often get asked why the spot market hasn’t moved yet, when the uncertain future of ACCU issuance and overwhelming demand seem obvious and obvious long trade over the medium term. As every tried and tested trader knows timing is everything. The cost to hold your position has increased to between 6-7 %, so unless you know something lumpy is due to come to market it’s very hard to maintain a substantial speculative long position.
Understanding the Safeguard Mechanism
This week I wanted to focus more on the Safeguard Mechanism and some key features which go some way into explaining why every emitter has not rushed to the ACCU trading floor to hoover up 5 years’ worth of liabilities. Ultimately the safeguard exists to try to incentivise via a carrot and stick mechanism. For emitters who do nothing or believe there is no way to reduce the stick will get larger and hurt your business more. The carrot is that if you outpace the legislated 4.9% reductions YOY you can earn a Safeguard Mechanism Credit. This could be sold to other emitters to create a meaningful payment over the medium term.
Strategies for Emission Reduction and Hedging
Some will have more opportunities to lower emissions than others. If you have a facility with a defined end date and view on the price of ACCU’s being held around $US50 over the next few years, there is a good chance that a CFO may be inclined to let it roll. Comments that often surface are “We are not going to hedge, we saw this in 2010-2013”. Then we have some CFO’s who think it’s different this time, (so do I) and have put considerable effort into planning for reducing emissions or developing a solid hedging strategy. So let’s focus on the options at hand for emitters to hedge.
Challenges and Future Outlook
If we start with the pain points for the majority of polluting entities they include, lack of knowledge, uncertain disclosures, reputational risks, funding shortfalls. Naturally, the first port of call for a facility would be what mechanisms are there available for me to kick the can down the road. One of the best ones is the Multi Year Monitoring Period. The Safeguard has arrived, but its teeth are not yet really showing through. We have a market that knows it has a big problem but will do its best to wiggle around hard compliance over the next 6-12 months. There is a big BUT that comes with kicking the can down the road. You have to pay the piper eventually. We can see this expressed in the forward curve which is pricing the market in Q1 2026, with implied pricing 75% higher than today’s spot price. The price of Australian Carbon has moved it’s just you can’t see it unless you’re on the field. The Safeguard is designed to be a slow starter. Don’t confuse that with a market that is completely unprepared for the consequences and challenges of real abatement and ACCU’s that capture carbon. Compliance matters!