26/01/2024 – ACCU Bull Market Beckons

The Australian Carbon Credit Units have started to see an increase in demand in line with expectations of higher forced purchase requirements from the safeguard mechanism. Since our last market update in mid-Dec, the prices of the generic and HIR credits have increased around 11% on what can only be described as moderate volumes. In the November and December period, large volumes were procured and the expectation is these units will not be generally available for resale.

Demand and Delivery in the Australian Carbon Market

Demand in the Australian Carbon Market is clear and rapidly growing, particularly in popular low volume methods. However, supply faces significant constraints. This tension is evident with the Clean Energy regulator’s recent revision, decreasing the issuance forecast by 5.3% from 18 million to 17 million Units. This change, driven by transitional challenges around HIR and new methods, may seem minor but significantly impacts the approval landscape for new methods. The impending discontinuation of the HIR method has triggered a rush to register new projects, highlighting the urgency as the window for project registration narrows.

And thus, delivery risk emerges as one of the the biggest problem in the market. At Clima, we understand that successfully completing a carbon project and meeting its objectives is crucial for its value appreciation. As we expand our project pipeline and engage with stakeholders in both tech and nature-based sectors, we recognize that these risks are amplified by funding costs and a growing awareness that managing a carbon project as a side task is likely to fail. This scenario underscores the importance of careful project management and delivery in a market where demand is high and supply is tight

Australian is good – but complex

The Australian landscape is one of the most progressive markets globally, which at the same time throws in serious complexities. We now have compliance markets and voluntary markets co-existing. This is important, and understanding what that means will also be critical to both demand side and supply side participants. Demand for ACCUs is not only important for entities that are regulated into the scheme; it is important to Australia’s largest companies who have pledged action on their scope 1, 2, and 3 emissions. Here is an example: https://mcdonalds.com.au/our-impact/our-planet/reducing-agricultural-emissions. There are some serious supply issues that can be exacerbated by global rules and how that translates to onshore credit supply.

You’ll never see the majority of quality ACCUs on the secondary market

McDonald’s has signed up to SBTi. They have a rule that for agricultural emissions to be offset, the reductions need to come from on-farm decarbonization activities or insetting. In short, that means unlike an office or manufacturing business, a beef farmer cannot simply purchase an ACCU or voluntary unit from some random place. They need to decarbonize, yes, but they probably don’t want to sell most of the units as they may need them to be able to sell their meat to McDonald’s. This is a great outcome for meat eaters but means a great deal of the expected and modeled ACCU supply from the Agriculture sector is not available for sale in the secondary markets. So yet another example of voluntary noncompliance use case muddying the waters around the supply of ACCUs.

Another one is Coles offering Carbon Neutral Beef. They buy ACCUs to offset the meat they sell as a value-added and differentiated product. Wesfarmers/Coles are one of Australia’s largest companies, and if they are using ACCUs and also localizing the supply chains as much as possible, we can expect more pressure on the supply of ACCUs. Expect Coles and Woolworths to push our Ag sector to do this to remain a supplier. Our point remains the same, just because it’s been modeled for delivery, it’s not part of the supply when we are talking about the SafeGuard mechanism demand. Which leads us to price.

Price Expectations 2024-25

The Clima team sees the prices of ACCUs continuing to be underpinned by an increasing movement to decarbonize across the voluntary and compliance space. We do not subscribe to the view that the market is oversupplied.

For more details or assistance regarding carbon credit calculations and related services, Clima is here to help. Visit our website for more information and support.