Elouise Fowler, Australian Financial Review
Companies voluntarily buying up carbon offsets amid a flurry of pledges to hit net zero emissions by 2050 have pushed up Australia’s official carbon price by 180 per cent over the past year.
The rising demand from companies under pressure to reduce their emissions has paved the way for a market “supercycle” that could lift Australian Carbon Credit Unit (ACCU) spot prices to $60 a tonne, new research from carbon market consultancy Reputex says.
Reputex’s bullish outlooks comes amid a booming carbon market. Prices for ACCUs soared 180 per cent to a record $47 per tonne in 2021, spurring calls on the federal government to stabilise the market by increasing the supply of credits for voluntary buyers.
Carbon markets are booming across the globe as companies seek to hit net zero emissions via offsets.
Hugh Grossman, RepuTex’s executive director, said the price surge has been driven by the growth in voluntary demand for carbon offsets as companies set net-zero targets responding to pressure from investors and consumers.
“As companies pursue a net-zero pathway, a carbon ‘supercycle’ is almost inevitable, with voluntary demand to outpace supply, driven by a raft of corporate pledges which have come about at a rapid pace,” said Mr Grossman.
He said this trend is likely to further push up prices, supported by increasing investor capital as banks, speculators and trading houses prioritise the low carbon transition. Chevron is buying ACCUs as well as international credits to offset a $40 million liability from the failure of its Gorgon carbon capture and storage project to meet targets under its licence.
“The surge in voluntary buyers – both corporates and investors – has triggered a structural change in demand that is unlikely to be met by short-term supply, suggesting a sustained period of higher prices could be on the horizon,” he said.
The Reputex research shows the Australian rally in 2021 has surpassed even the 146 per cent increase in the European carbon market, where prices recently dramatically rose from €50 in late July to a high of €90.75, before falling back toward €80 (A$126).
But just as EU member states are calling for stability to be injected into the European market, Mr Grossman said it was in the interest of the federal government to dampen prices in the spot market by freeing up the supply of credits to voluntary buyers.
At the moment, the tight supply of credits is connected to the large volume of ACCUs contracted to the Commonwealth’s Emissions Reduction Fund.
The majority of these credits – around 210 million contracted for delivery over 7-10 years – are locked away from private buyers under “fixed delivery” contracts with the Clean Energy Regulator.
This has inflated the price for voluntary buyers, as they face increasing competition to access a smaller pool of available ACCUs, which are generated via approved emission reduction projects that avoid land clearing, re-vegetate land or cut emissions from landfill sites.
The Morrison government has recently controversially expanded the program to include carbon capture and storage projects.
Mr Grossman suggests the Clean Energy Regulator could allow project developers to break their carbon offset contracts with the federal government, enabling them to unlock supply initially promised to the Commonwealth and instead re-direct it to private sector buyers.
“We believe it is increasingly likely that the regulator will provide project owners with flexibility to redirect supply away from the Commonwealth toward private buyers,” said Mr Grossman.
“Providing project owners with optionality to unlock supply from some contracts is far more preferable than sellers going rogue and breaking their contracts, which will erode the integrity of the government’s contracting scheme.
“Just because the market is already doing it doesn’t mean policy isn’t needed,” Grossman said.
The ACCUs market has taken off in part because it provides a rare avenue for polluters to voluntarily offset their emissions rather than cut them directly.
Cut emissions first
But Tony Wood, the Grattan Institute’s energy and climate change program director, advised caution when relying on ACCUs as an emissions-reduction tool in a position paper produced in the lead up to the Glasgow climate talks in November.
Mr Wood, the lead author, acknowledged carbon offsets are an essential tool for Australia to reach net zero emission.
But the paper argued the federal government should require businesses to take an “avoid emissions first” approach and beef up the integrity of the opaque carbon offset system.
The report, titled Towards Net Zero: Practical Policies to Offset Carbon Emissions, argued governments should formulate policies that prioritise cutting emissions, leaving carbon offsetting for processes that are difficult to immediately decarbonise.
This comes as ASX-listed companies wanting to offset their emissions are being urged to conduct their own due diligence on federal regulator-approved farm land carbon credits amid fresh criticism that at least one in five are based on dubious methodologies.