When it comes to the future of Australia’s carbon market, Marco Stella is not mincing his words. ‘We can’t scale this market on a voluntary model. The compliance market has a huge role to play in helping to build the foundation that the carbon industry needs to project forward.’ This sentiment is echoed by John Connor, CEO from the Carbon Market Institute, ‘It has been a tumultuous yet transformative 10 years, and the next decade promises to be even more intense. Minimising costs and maximising opportunities will require strengthened institutions, policies, collaboration and standards in order to target and turbo-boost public and private investment.’

Safeguard reforms to drive change

Recent Federal Government reforms of the Safeguard Mechanism have led to more stringent emission reduction targets for Australia’s biggest emitters. Entities captured under the Safeguard Mechanism are now required by law to keep annual emissions below a target level (baseline), with that target to reduce by 4.9% each year until 2030. Failure to meet annual targets will result in a penalty, designed to incentivise industrial emitters to invest in strategies and technology that will help reduce carbon emissions. Safeguard entities can also purchase Australian Carbon Credit Units (ACCUs) to offset emissions and remain below their baseline. Stella believes that these reforms will spark the evolution of Australia’s carbon market. He believes this next chapter will see the ACCU market transition to something far more significant, driven primarily by demand from compliance buyers captured under the Safeguard Mechanism.  

Valuing co-benefits

Until recently, the majority of activity in the ACCU market has been from voluntary buyers looking to invest in carbon reduction projects or wanting to offset their carbon emissions. Stella believes voluntary buyers are more discerning when it comes to the type of ACCU they are buying. ‘Voluntary buyers are more sensitive as to the type of benefit or co-benefit that the ACCU is attached to resulting in a price differential between various ACCU methods’. Whilst each ACCU technically represents the same measure (one tonne of carbon avoided or removed from the atmosphere), buyers can perceive value differently. This has created a price spread among some methods.

Stella explains, ‘While co-benefit valuation is completely subjective, we have seen distinct trends emerge among certain ACCU methods. Savannah burning with First Nations co-benefits is perhaps the best example of this, trading at a premium to standard savannah burning ACCUs with the spread moving as wide as A$10.00.’ 

The data in the graph below shows the ACCU spot price variation by method. Stella believes these price differentials will decline as more compliance buyers enter the market. ‘Compliance buyers tend to view ACCUs as a uniform commodity. For a compliance buyer, one ACCU means one tonne of CO2 avoided or removed from the atmosphere. It’s as simple as that.’