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ACCU market update—December 2018

20 December 2018

This is the first in a series of regular market updates and provides information on trends in the Australian carbon credit unit (ACCU) market in Australia. The next market update will be released after the 28 February 2019 safeguard mechanism compliance deadline.

The December 2018 market update provides the Clean Energy Regulator’s view of supply and demand of ACCUs under current policies, and explores the key factors that may influence the market in the near future.

Its purpose is to increase market transparency, and drive genuine low cost carbon abatement opportunities. This information should also assist entities who need to source ACCUs, including responsible emitters who need to surrender units under the safeguard mechanism.

Market observations, highlights and opportunities

  • At the eighth Emission Reduction Fund auction​ 3.27 million tonnes of carbon abatement was purchased through 34 carbon abatement contracts at an average price of $13.87 per ACCU.
    • The average price per ACCU purchased across the contract portfolio is $12.
  • There was 10.9 million ACCUs delivered from current Emissions Reduction Fund contracts in 2017–18, which is set to increase to 20.9 million required by 2021–22.
  • Total volume remaining to be delivered under current Emissions Reduction Fund contracts to 2029–30 is now 155.5 million ACCUs.
  • There are currently 3.3 million ACCUs in Australian National Registry of Emissions Units (ANREU) accounts1. This balance is 33 percent higher than last financial year’s average of 2.5 million ACCUs.
  • Additional supply is becoming available compared to this time last year, including 5.3 million ACCUs issued in 2018–19 to date (up 25 per cent2), and 772 projects registered (up 8.5 per cent).
    • Registered projects may supply up to 14.2 million3 ACCUs in 2018–19 (depending upon crediting applications received and decisions made on those applications by the Clean Energy Regulator). This would supply 1.1 million ACCUs beyond the 13.1 million to be delivered under Emissions Reduction Fund contracts for this financial year.
    • In aggregate, volumes bought forward at auction appear to offer a smaller proportion of expected abatement then previously registered, suggesting that participants are either intending to offer a greater share to the private market or are building in a buffer to help manage potential risks.
  • Responsible emitters under the safeguard mechanism have a number of options available to manage their emissions below their baseline by 28 February 2019. These options include applications for multi-year monitoring periods, calculated baselines, emissions intensity variations and surrendering ACCUs. We consider it likely that there will be an adequate supply of ACCUs for responsible emitters to comply with their safeguard obligations.
  • Voluntary, and state and territory government demand has more than doubled in the last two years from 138,000 ACCUs in 2016–17 to over 355,000 ACCUs in 2017–18.
  • The private market for ACCUs is emerging, and is currently conducted through mainly over-the-counter transactions. Brokers and traders are now publically advertising brokerage services. ACCU spot prices are now publically available, currently advertised at $15.37 per ACCU4.
  • In March 2019, the Clean Energy Regulator will present on supply and demand dynamics of the ACCU market at a series of workshops hosted by the Carbon Market Institute.

ACCU market status

More than 56 million ACCUs have been issued since 2011, with 37.7 million of these delivered under Emissions Reduction Fund contracts, 14.5 million surrendered under the Carbon Pricing Mechanism, 0.45 million surrendered under the safeguard mechanism (for the 2016–17 compliance period), and 0.8 million ACCUs cancelled for the voluntary market, and state government policy commitments. As shown in the ACCU market balance graph below, this leaves a current balance of 3.3 million ACCUs in the ANREU.

ACCU market balance

ACCUs issued56,782,453
ERF contract deliveries37,683,131
Carbon pricing mechanism surrender14,458,807
Voluntary and state/territory government796,524
Safeguard mechanism surrender448,097
ACCU relinquishments72,672
Balance3,323,222

The ACCU market profile graph below shows the supply and demand balance of the market since the scheme commenced, taking into account scheduled contract deliveries out to 2029–30.

Forecast deliveries from current Emissions Reduction Fund contracts are generally increasing year-on-year from 10.9 million in 2017–18, up to 20.9 million required by 2021–22. For 2018–19, contract deliveries are currently forecast to total 13.1 million ACCUs. There are currently 5.3 million ACCUs issued so far in 2018–19, up 25 per cent compared to the same time last year. Total forecast supply of ACCUs for 2018–19 is currently 14.2 million5—1.1 million greater than total demand from Emissions Reduction Fund contracts.

ACCU market profile

Note: Data and balance of ACCUs current as at 13 December 2018.

ERF Scheduled Deliveries will change over time due to early deliveries, re-scheduled deliveries, contract lapses and terminations, and new contracts.

For the 2018-19 Financial Year, Safeguard Surrender and Voluntary and State and Territory Government demand forecasts are not included. Voluntary and State and Territory Government demand to date is included for 2018-19.

ACCU demand broadens

Emission Reduction Fund demand

At the eighth Emissions Reduction Fund auction, 3.27 million tonnes of carbon abatement was purchased through 34 carbon abatement contracts at an average price of $13.87 per ACCU. Regular auctions continue to provide an opportunity for participants to access funds under the Emissions Reduction Fund, and purchasing has increased the overall contract portfolio to 193 Mt of abatement. More than $200 million remains available for future purchasing.

All Emissions Reduction Fund contracts are legally binding, and contract holders are expected to meet the delivery obligations set out in their contracts. Contracts may lapse where conditions precedents have not been waived or fulfilled before the conditions precedent expiry date. Since auction seven, contracts with a total volume of approximately two million tonnes have lapsed/terminated. Funds committed to these contracts have been returned for future purchasing.

We expect those entering into a contract ensure they have forward supply to meet their delivery obligations. Defaulting on a contract can give rise to buyer’s market damages.

Other ACCU demand

The 2017–18 year was the second compliance year under the safeguard mechanism. Responsible emitters have until 28 February 2019 to manage their emissions below their baseline.

Applications for multi-year monitoring periods, calculated baselines and emissions intensity variations for the 2017–18 safeguard compliance year are currently being processed. This means the number of ACCUs that may be required by responsible emitters is not yet finalised. However, with a current surplus of 3.3 million ACCUs, estimations are that there are sufficient volumes of ACCUs for the 2017–18 compliance year if sellers make units available.

Safeguard demand for future years will largely depend on how responsible emitters choose to manage their emissions. In particular, the use of multi-year monitoring periods could see demand being pushed out by two or three years.

Voluntary demand to offset emissions for airlines and corporate entities is growing substantially. In 2014–15, 25,000 ACCUs were voluntarily cancelled, rising to over 140,000 ACCUs voluntarily cancelled in 2017–18. By 13 December 2018, 190,000 ACCUs have already been voluntarily cancelled in the 2018–19 financial year. ​

In addition, state and territory government demand for ACCUs was over 210,000 ACCUs in 2017–18. This new ACCU demand has been mainly driven by state government commitments or policies to offset emissions.

Sourcing ACCUs

We are seeing signs that supply is rising to meet the expected increasing contract and other demand. ACCUs already issued in 2018–19 (5.3 million) are 25 per cent ahead of the volumes issued at the same time in 2017–18 (4.2 million). Further, project numbers registered have also risen 8.5 per cent this year from 712 in December 2017, to 772 as at 13 December 2018.

While historically ACCU supply has mainly come from vegetation, waste and savanna burning projects, we have started to see new supply through energy efficiency, transport and industrial fugitive projects. This year has also seen 45 new vegetation projects registered in Western Australia.

Those participating at auction are not required to contract all of their expected ACCU volume. They may contract some of their volume to other parties with future demand, or may sell to the private market.

The ability of new projects to respond to an increased demand for ACCUs is constrained for some methods due to lead times—of one to two years from when a project is first registered to when a project is first issued ACCUs. Entities who expect to have a need for ACCUs in the future should consider contracting forward with entities who can bring on new Emissions Reduction Fund projects.

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.

Disclaimer

This 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, drive genuine low cost carbon abatement opportunities, and assist entities who need to source ACCUs, including responsible emitters who need to surrender units 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. Because the information is provided as general information only, neither the Clean Energy Regulator nor the Commonwealth of Australia will be liable 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. While a surplus of ACCUs may be available in ANREU at any one time only a proportion of the available 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.
  2. Timing of ACCU issuances are variable and may change across the year
  3. Supply of ACCUs for 2018-19 includes ACCUs issued to date and forecast ACCU issuances.
  4. CommTrade Carbon advertised a price of $15.37 per ACCU (as at 13 December 2018) CommTrade Carbon. https://www.commtrade.co.nz/.
  5. Forecast supply is calculated using both extrapolations from supply this year to date and also 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 modelling is refined over time, the results will be shared in future market updates. As this is a projection, there are inherent uncertainties and assumptions that will change over time.

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