To meet emission reduction targets, significant financial investment is required. For Australia alone, it is estimated that between AUD $7-9 trillion of capital will be needed by 2060¹ to fund the transition to net zero.

Integrity is an important part of attracting the high-quality investment needed to achieve the rate and scale of growth required to meet 2050 targets. With due diligence at the forefront of investors’ minds, access to liquid, efficient and transparent carbon markets has become increasingly important.

Reality bites

From greenwashing to greenhushing, the reality of meeting net zero targets is starting to bite as companies face the complex challenge of reducing their emissions, often under the microscope of public scrutiny.

John Connor, CEO of the Carbon Market Institute explains. “We are now moving into carbon market 2.0. The original focus was on offsetting neutrality. Now, the focus is on net zero alignment and how companies plan to get there.”

For some organisations the complexity involved in reaching net zero, along with the risk of backlash from the public if they fail to meet stated commitments, has caused them to reconsider their approach to climate change. 

“Originally, there was a lot of green wishing going on with organisations committing to net zero without really understanding what that means. This has led to challenges around green washing and now even green hushing and green chilling, which is the opposite of what we want to achieve,” says Connor.

Green hushing refers to companies choosing to stay silent on their emission reduction goals while green chilling involves leaving the market altogether.

Georgina Prasad, Principal Economist at the Clean Energy Regulator (CER), believes the strength of Australia’s carbon markets lies in its regulatory framework. “There have been three independent reviews of the ACCU framework with all finding the scheme to be fundamentally sound. The CER plays a vital role in the integrity of the market by regulating carbon projects and issuing credits for those projects,” she says. 

The importance of scale

Facilitating growth in Australia’s carbon markets, including renewable energy, is a key focus area for the CER to support Australia meet its 2030 legislated emissions reduction target. “The provision of information and making sure we have fit for purpose infrastructure to facilitate growth is key. We are seeing a thirst for information and data to help people understand the risks and forecast what’s to come,” Prasad explains.

One way the regulator plans to do this is by developing a new unit and certificate registry. The CER is working with the carbon industry to develop a modern and dynamic registry that will support markets to trade in a more transparent, accessible and efficient way.

The regulator is also exploring the development of a centralised spot carbon exchange. The CER has been working closely with the Australian Securities Exchange (ASX) to determine what a spot exchange traded carbon market model might look like and is currently consulting with carbon market participants on its feasibility. A discussion paper has been released for public consultation and submissions will close by 22 November 2024.

The ASX already offers derivatives over ACCUs and other environmental products, which would complement a spot exchange model.

Karen Webb, Head of Issuer Services at ASX, believes the exchange has an important role to play in helping to meet net zero targets. “As the ACCU market grows, there is an opportunity for ASX to support supply and demand and the scalability of the carbon market. We already offer derivatives across carbon and renewables markets and are constantly looking to adjust the product mix to meet market demand. Ultimately, we’re about helping participants gain access to the information and tools they need to price and manage risk effectively.”

Supply challenges

The Australian carbon market has been fairly stable over the past few years with a well-balanced supply and demand dynamic. According to Josh Harris, Co-CEO of Climate Friendly, this could soon change. “The market is forecasting a 20-30 million tonne gap in carbon credits from 2030 onwards. However, we think this could occur much sooner.”

Addressing this imbalance is one of the fundamental policy challenges facing the Australian Government. ACCU project methods have an average life of 7 years for emissions avoidance and up to 25 years for sequestration.  Once a project method has expired (also known as sunsetting), ACCUs already issued under the method remain valid for trade and surrender. ACCUs continue to be issued for existing projects but no new projects can be registered.

One of the main ACCU methods is Human Induced Regeneration, which makes up around 30% of current supply. This method expired in September 2023 with the government actively working to identify an appropriate replacement.

While the supply and demand imbalance represents challenges for the future of the carbon market, Harris points out there is also huge potential for growth. “The positive side of this is that Australia is a global leader in carbon credit creation and removal in the land sector,” he says.  

While approximately 10% of farmland across Australia is now practicing some form of carbon farming, more work needs to be done. “Only 1% of eligible farms are carrying out carbon farming activities. For the land sector to make a meaningful contribution to our net zero task, we need to scale up to 8 times the amount of carbon sequestration we have across farms today,” Harris says.

Source:

1.https://www.netzeroaustralia.net.au/wp-content/uploads/2023/09/Net-Zero-Australia-Mobilisation-How-to-make-net-zero-happen-updated-19-Sep-23.pdf