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Carbon trading in Australia is enjoying a boom that could last
for years even as the country—one of the world's largest GHG
emitters per capita—continues with some of the least ambitious
decarbonization targets among developed economies.
With an aim of cutting country-wide
GHG emissions by 26-28% compared with 2005 levels by 2030 and no
deadline for reaching carbon neutrality, Australia has come under
strong diplomatic pressure to set more aggressive goals ahead of
the COP26 climate summit in November.
But local experts say more companies in the country are
purchasing Australian Carbon Credit Units (ACCUs) in the spot and
forward markets due to demand from civil society, overseas trading
partners, and potentially more stringent environmental regulations
in the future.
"The demand increase comes from both voluntary and compliance
buyers, as well as investors and speculators," said Bret Harper,
research director at Melbourne-based energy consultancy
RepuTex.
"Compliance and speculative buying is the main source of the
spot price increases, while investor and voluntary demand is the
primary source of long-term contracting interest," he told Net-Zero
Business Daily.
The ACCU spot price rose to a new record high of A$26 ($18.89)
per metric ton (mt) in recent trading, up 57% from the level seen
at the beginning of 2021.
"Because the market is tight and there can be a two-year lag
between project registration and ACCU issuance, demand has far
outstripped supply this year… All signs are that the ACCU market
remains bullish in both the short- and long-term, and we forecast
long-term prices to go up," said Harper, who predicted a spot price
of A$50/mt by 2030.
Growing market
In Australia, qualified entities can earn ACCUs from the federal
Clean Energy Regulator (CER) by operating projects that reduce or
avoid GHG emissions. The carbon offsets are generally sold to the
government-run Emissions Reduction Fund via auctions, as well as to
voluntary or compliance buyers in the secondary market.
With an increasing focus on decarbonization efforts across the
globe, Australia's carbon market has enjoyed more liquidity and
attracted foreign investors in recent quarters.
According to government figures, ACCU trading volumes in the
first half of this year reached 2.7 million units, almost double
the 1.4 million units traded during the same period of 2020.
Japan's Mitsubishi and NYK Line recently joined forces to
acquire a 40% stake in Australian Integrated Carbon (AIC), an
Adelaide-based carbon offset project developer, in a foray into the
expanding market. The parties involved did not disclose a price tag
for the deal.
"With this capital participation as a foothold, NYK will acquire
knowledge of the carbon credit creation business and aim to expand
its business in Australia," the shipping group said in a statement 21 September.
AIC, which focuses on primeval forest restoration, is now aiming
to develop projects delivering up to 100 million ACCUs following
the Japanese investment.
The company is "excited to deploy our environmental and
financial expertise to expand our portfolio as nature-based carbon
will play a critical role for companies seeking carbon neutrality,"
Chief Operating Officer Russell Seaman said.
More voluntary buyers
Regardless of government targets, a growing number of companies
in Australia and other countries have committed to reducing
emissions from their operations there. Jeffery Bye, founder and
chief executive of Sydney-based consultancy Demand Manager, said
the phenomenon has driven up demand for ACCUs.
"Over the last six months or so, there has been a growing
realization in Australia that these ACCUs were comparatively
underpriced and represented a relatively cheap mechanism for
companies wishing to voluntarily go carbon neutral," Bye said.
"So, this has resulted in a price increase as some large
corporations have been buying ACCUs in order to meet voluntary
carbon reduction and offset goals," he said.
While international voluntary carbon offsets are priced below
$10/mt, Australian firms are often willing to pay premiums for
ACCUs to maintain a good image in their home market.
"The perception in Australia, deserved or otherwise, [is] that
overseas credits are of lower quality, or a lower value proposition
as it is not keeping investment in Australia," Bye said.
Harper said the majority of voluntary buyers place a high value
on the co-benefits for Australian society associated with most ACCU
projects.
"As such, small buyers often prefer local, photogenic, and/or
specific project types. Mid-size voluntary buyers will often layer
their offset portfolio with both ACCUs and lower-priced units," he
added.
"ACCUs from premium photogenic projects like aboriginal fire
management and Australian native forests are highlighted as what a
company is doing about climate change, while most of the offset
portfolio necessary for their carbon neutral certification comes
from cheaper international units," said Harper.
"Large corporate buyers invest in ACCUs because it is seen as
the most likely credit to be applicable to any future Australian
policy changes that may make them more accountable for their
emissions in the future," he added.
Australian miners and energy producers have also faced pressure
to cut emissions, with major multinational commodity traders
seeking to decarbonize their supply chains.
The Minerals Council of Australia, a trade body representing
mining giants BHP Billiton and Rio Tinto amongst others, has
stated that the industry aims to achieve net-zero emissions by
2050.
BHP has promised to reduce its operational GHG emissions by at
least 30% before fiscal year 2030 from 2020 levels, but admitted
carbon offsets will be used as required.
Government under scrutiny
Through the "Safeguard Mechanism," Canberra has set baseline
emission levels for Australia companies with Scope 1 emissions of
more than 100,000 mt of CO2-equivalent.
The big emitters, which include utilities and LNG producers,
need to acquire ACCUs to offset their excess emissions. But critics
said the government has been too willing to raise the baselines and
that the scheme has limited decarbonization effects.
The policy tool won't be used to cut down emissions aggressively
unless the ruling Liberal-National Party coalition loses power in
the next House election, due to be held next September or earlier,
Harper suggested.
"We don't expect big emitters under the Safeguard Mechanism to
face lower baselines under the current government," he said. "While
the Australian government is expected to eventually bend to
pressure to commit to net zero by 2050, we don't think this will
translate into high emitters facing a lower baseline policy."
However, Harper added that a Labor-Green coalition with a
pro-climate approach would likely toughen up the baselines in
accordance with emissions reduction goals, potentially resulting in
more demand for ACCUs.
All Australian states and territories have vowed to achieved
carbon neutrality by 2050. At the federal level, the Liberals are
leaning toward to the target while some National Party leaders
remain net-zero opponents, according to media reports.
Future developments
Looking forward, Canberra is introducing several measures to
further enhance Australia's carbon market.
While trading has been taking place on an over-the-counter
basis, the CER has announced plans to launch an online carbon exchange in
2023 to reduce transaction costs.
The government will also begin issuing ACCUs to carbon capture
and storage (CCS) projects, which could mitigate the economic pain
for Australian energy producers during the energy transition.
On 30 September, the Department of Industry, Science, Energy and
Resources announced a new funding program to
provide A$250 million for commercial-scale CCS projects and hubs
across the country. This is on top of the A$50 million handed out
to six companies in June.
Other paths to qualifying for ACCUs include capturing and
destroying fugitive methane emissions in coal mines, energy
efficiency upgrades at commercial facilities, and reductions in
transportation emissions intensity.
The government has, however, faced criticism over the "avoided
deforestation" projects that account for over 20% of the total
supply of ACCUs.
Landowners can apply to receive the carbon credits by promising
not to remove the forests on their lands, if they hold clearing
permits issued before July 2010.
In a research report, think-tank
Australia Institute (AI) and environmentalist group Australian
Conservation Foundation (ACF) concluded that the method has
"significant integrity issues" and should be immediately
revoked.
The central argument of the joint report is that those projects
do not have climate benefits because in most cases most landowners
would not clear their forests anyway.
By comparing historical removal rates and the number of 15-year
cleaning permits issued in New South Wales between 2005 and 2010,
researchers argued that the land-clearing capacity is far below
what landowners need should they choose to remove their
forests.
"It is clear that the avoided forestation's assumption that the
areas would be cleared in the counterfactual is not plausible," the
report said.
The method is under review by the Emissions Reduction Assurance
Committee, an independent statutory body. But the CER and some
market participants said the researchers ignored the fact that
nearly all project owners commit to halting deforestation for 100
years, even though they are receiving ACCUs over a 15-year
period—the same length of time as their clearing permits.
By assuming the impact is limited to only 15 years instead of
the typical 100-year commitment, the CER suggested that the AI and
the ACF are underestimating the positive impact on emissions of the
program.
John Connor, chief executive of the Carbon Market Institute,
formed by buyers and sellers of carbon credits, said the report
could be counter-productive for decarbonization.
"We share a frustration with the report's authors at Australia's
lack of urgency in industrial decarbonization efforts, but errors
in this report undermine community confidence in nature-based
climate solutions," Connor said.
"There is a suggestion that these properties weren't going to be
cleared; unfortunately, every year more land is cleared, and it's a
mug's game to say what will happen over the next 100 years," he
added.
Posted 01 October 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability