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Australian Carbon Credit Units Market Update – October 2019

18 October 2019

This publication is one of a series of regular market updates that provides information on trends in the Australian carbon credit unit (ACCU) market in Australia.

The October 2019 market update provides a view of supply and demand for ACCUs, and explores the key factors that may influence the market in the near future.

Market Highlights

  • Supply into the market is growing with 13.7 million ACCUs issued in 2018-19, up 12 per cent from the 12.2 million in 2017-18. Contributing to this increase, 64 Emissions Reduction Fund (ERF) projects entered the project crediting phase in 2018-19, up 28 percent from the 50 projects in 2017-18.
  • At the ninth ERF auction 59,000 tonnes of carbon abatement was purchased through three carbon abatement contracts at an average price of $14.17 per ACCU, up from $13.87 at the previous auction.
  • In the first quarter of 2019-20, 3.6 million ACCUs were issued.
  • There is currently $237 million remaining in the ERF.
  • Funds from the $2 billion Climate Solutions Fund (CSF) will be available for forward contracting in future months.
  • Voluntary and state and territory government demand in 2018-19 was over 380,000 ACCUs, an eight per cent increase from 2017-18.
  • ACCU spot prices are around $16.10 per ACCU1.
  • There are currently 5.4 million ACCUs in ANREU.

ACCU Market Status

More than 68 million ACCUs have been issued since 2011, with 47 million of these delivered under ERF contracts, 14.5 million surrendered under the former Carbon Pricing Mechanism, 0.5 million surrendered under the Safeguard Mechanism2 (for 2016-17 and 2017-18 compliance years), and 1.0 million ACCUs cancelled for the voluntary market and/or state government policy commitments. As shown in Table 1 below this leaves a balance of 5.4 million ACCUs in ANREU.

Table 1: ACCU market balance as at 30 September 2019

ACCUs issued 68,812,557
Emission Reduction Fund contract deliveries 47,261,346
Carbon pricing mechanism surrender^ 14,458,807
Voluntary and state/territory government 1,081,422
Safeguard mechanism surrender* 531,099
ACCU relinquishments+ 113,617
Balance# 5,366,266

^The carbon pricing mechanism was repealed, with effect from 1 July 2014.

* Safeguard mechanism surrender does not include deemed surrenders.

+ Please see more information on ACCU relinquishments.

# While a balance of ACCUs may be available in ANREU at any one time, only a proportion of these ACCUs may be available to trade on the secondary market as ACCUs may be held or banked for future needs (e.g. delivery under contract, safeguard liability or voluntary cancellation).

Graph 1 below shows supply and demand balance since scheme commencement and current ERF contract scheduled deliveries out to 2029-30. As at 30 September, over 4 million deliveries have been made in the 2019-20 year.

Graph 1: Australian carbon credit unit market profile

Source: Clean Energy Regulator.

Note: ERF scheduled deliveries will change over time due to early deliveries, re-scheduled deliveries, contract lapses and terminations, and new contracts. For the 2019-20 financial year and subsequent years, safeguard surrender and voluntary and state and territory government demand forecasts are not included. In the near term these categories of demand are expected to be broadly similar to previous years.

Supply into the market is growing with 13.7 million ACCUs issued in 2018–19, up 12 per cent from the 12.2 million in 2017-18. Contributing to this increase, 64 Emissions Reduction Fund (ERF) projects entered the project crediting phase in 2018-19, up 28 percent from the 50 projects in 2017-18.

Supply is expected to continue to grow as additional projects enter the crediting phase, with supply forecast to be in a range between 14.6 million and 20.2 million in 2019-20 and 15.7 million and 19.6 million in 2020-213. This supply, when combined with the end of 2018-19 year balance, is expected to exceed demand from ERF contracts (18.5 million) for 2019-20. There is also emerging portfolio demand from the private sector with acquisition of ACCUs that are being held against potential future surrender requirements.

Commonwealth Demand

The ninth ERF auction ran over the election period, with the associated uncertainty appearing to contribute to constrained project development and auction registration. The Clean Energy Regulator has a statutory duty to purchase abatement at the lowest cost. In practice, this means the Regulator will buy up the long run supply curve and the price is likely to rise over time as it did at the July auction. However, it is not the role of the Regulator to buy up the short run supply curve, when it appears that abatement supply is temporarily suppressed.

Climate Solutions Fund

On 25 February 2019 the Australian Government announced the Climate Solutions Fund (CSF), providing additional funding to allow for expanded investment under ERF mechanisms. The Regulator is implementing the CSF with the aim of delivering a step change to the offsets market in Australia by boosting the supply of carbon units.

The Regulator is working with industry on innovative ways to boost supply of abatement, reduce transaction costs and maintain scheme integrity.

Details are available on the Climate Solutions Fund website.

New CSF funding will be available from the start of the 2020-21 financial year, however the Clean Energy Regulator is now able to begin forward contracting CSF funds for delivery in 2020-21 and subsequent years. In addition, $237 million of the ERF remains for purchasing, and scheme participants are encouraged to register projects.

Non-Commonwealth Demand

Safeguard demand

Safeguard demand for 2017-18 (151,307 ACCUs) was lower than 2016-17 (379,792 ACCUs).

Safeguard entities choosing to manage their future emissions by securing ACCUs are encouraged to consider long-term strategies to source ACCUs, such as forward contracting with project developers. New projects often do not generate ACCUs in the short-term and, therefore, cannot easily respond to unexpected increases in demand.

Voluntary, and state and territory government demand

Voluntary, and state and territory government demand for ACCUs continues to increase with over 380,000 ACCUs surrendered in 2018-19, an eight per cent increase from 2017-18. This growing demand for ACCUs reflects their value as local units with high integrity and often valued co-benefits associated with many projects. Some state and territory governments are assessing the suitability of using ACCUs as offsets to meet policy objectives.

Graph 2 below compares ACCU prices with carbon equivalent converted Large-scale generation certificates (LGC) prices, highlighting a possible convergence in these prices in the early 2020s. Entities may look to secure a portfolio of LGCs to reduce their scope 2 emissions to meet future carbon neutrality (such as National Carbon Offset Standard) or carbon reduction obligations.

Graph 2: Comparison between LGC and ACCU prices

Source: TFS Green; CommTrade Carbon. *Data as at 30 September 2019. The forward LGC price is based on forward trade data on the 30 September 2019.

^ The Co2-e adjusted LGC prices are calculated by dividing LGC prices by the emissions intensity of the National Electricity Market.

Market Activity

The ACCU market continues to mature with increasing monthly volumes being traded on the secondary market as forward prices emerge4. The ACCU secondary market price rose in April and May to mid $16s and then fell back to $15 in June and July. Secondary market price has since recovered to reach low $16s at the end of September.

In 2018-19 over 3.2 million ACCUs have been traded through 187 transactions. This number is up from almost 2.0 million ACCUs through 115 transactions in 2017-18, representing a 63 per cent increase in both traded volumes and in transactions between parties. The average transaction size has remained steady at around 17,400 ACCUs.

Graph 3: ACCU Market Transactions (excluding Emissions Reduction Fund transactions)

Source: Clean Energy Regulator. *Data as at 30 September 2019. Please note the market transaction data in this graph has been revised from the data published in the Statement of opportunities in the ACCU market in March 2019.

Supply and Demand Data

Along with this update the Clean Energy Regulator publishes supply and demand data to track key trends and indicators across the market.

View the detailed ACCU supply and demand data.

Disclaimer

This ACCU market update represents the Clean Energy Regulator’s views at the date of publication. The Clean Energy Regulator is providing this information to the market to increase market transparency, help identify genuine low cost carbon abatement opportunities, and assist entities who need to source ACCUs, including Safeguard entities with obligations under the Safeguard mechanism. The Clean Energy Regulator has used its best endeavours to ensure that the information is accurate, complete and fit for this purpose. The market update is not financial advice. You should obtain your own independent professional advice in light of your particular circumstances on the state of the ACCU market before making any investment decisions. The information is provided as general information only. Neither the Clean Energy Regulator nor the Commonwealth of Australia will accept liability for any direct, incidental or consequential loss or damage resulting from the use of ACCU market updates, or the information provided through ACCU market updates or the availability or non-availability of ACCU market updates.

Footnotes

1 CommTrade Carbon advertised a price of $16.10 per ACCU (as at 30 September 2019) CommTrade Carbon. https://www.accus.com.au/ N.B: This price is indicative only and does not represent actual prices paid for all ACCUs sourced on the secondary market.

2 Safeguard mechanism surrender does not include deemed surrender. A ‘deemed surrender’ occurs when ACCUs issued under an Emissions Reduction Fund project at a Safeguard facility, in a particular year, are delivered to the Commonwealth under an Emissions Reduction Fund contract.

3 Forecast supply is calculated using both extrapolations from current supply to date and forecasts from the ACCU market model. The ACCU market model forecasts supply from existing Emission Reduction Fund projects by modelling project start dates, relevant land areas and abatement profiles for each registered project. As this is a projection, there are inherent uncertainties and assumptions that will change over time.

4 Various sources are now reporting forward bids and offers, with one account of a forward trade taking place

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