Yesterday we published our latest Carbon Market Outlook (CMO) for the Australian carbon market, presenting our detailed modelling and expectations for Australian Carbon Credit Unit (ACCU) and Safeguard Mechanism Credit (SMC) prices over a 10-year horizon, along with underlying supply-demand fundamentals.
Notably, our CMO incorporates the impact of new coal mine methane emissions reporting amendments, actioned earlier this year, which we model will trigger a material change in Safeguard Mechanism covered emissions – and SMC issuance – leading to a notable re-balancing of the market, including forecast ACCU/SMC prices.
New coal mine methane reporting will therefore have significant implications that should be deeply evaluated by all participants.
In this article (open access), we take a closer look at the recent amendments, and discuss the implications for Australia’s carbon market.
A recap of the new coal mine methane reporting amendments
Earlier in the year, the federal government announced amendments to NGER scheme legislation to require open-cut mines covered by the Safeguard Mechanism to transition from the reporting of fugitive methane emissions using state-based emissions factors (Method 1) to site-specific sampling and analysis (Method 2).
The amendments focus on areas identified in the Climate Change Authority’s 2023 review of the NGER legislation, specifically in relation to enhancing the accuracy of reported fugitive methane emissions.
This follows domestic and international criticism over the under-reporting of Australia’s coal mine methane, with the International Energy Agency (IEA) estimating that methane emissions from Australian coal mines and gas production could be more than 60% higher than current government estimates (with coal mine methane emissions up to 122% higher than currently reported).
We considered the government’s amendments in detail in our October market briefing (subscribers), which utilised our bottom-up facility-level modelling framework to evaluate the impact of the new reporting framework on individual coal mining facilities in New South Wales and Queensland (both safeguard and non-safeguard).
What do the amendments mean for emissions?
While the transition to site-specific reporting is intended to more precisely capture methane emissions – which logic suggests should lead to an increase in Safeguard Mechanism covered emissions – our modelling indicates that the new amendments will materially decrease reported emissions.
This is because Method 2 fugitive intensities are modelled to be much lower (on average) than the current Method 1, due to inadequate sampling requirements.
Specifically, the current minimum number of required boreholes (3 per coal domain) is unable to adequately capture methane variability – particularly for modern deeper mines with higher methane content.
Integrity concerns around Method 2 sampling protocols have led the Climate Change Authority to call for an “urgent” review of Method 2.
This advice has been adopted by the Commonwealth, but no timeline has been set.
Higher issuance of Safeguard Mechanism Credits, lower prices
Our latest Carbon Market Outlook, published yesterday, incorporates our modelling of the new coal mine methane amendments, along with our updated expectations for long-term coal and LNG production.
As we describe above, modelled updates have materially reduced our estimates for safeguard covered coal mining emissions. Notably, this is modelled to trigger materially higher issuance of SMCs for coal mining facilities.
In our bottom-up modelling of each covered facility, we also account for intra-company transfers of SMCs. This captures the transfer of SMCs between related entities as companies balance liabilities across multiple group facilities (e.g. use below baseline SMCs from one facility to balance baseline exceedance elsewhere).
In combination with banking, this dynamic is modelled to flow through to much lower cancellation demand for ACCUs.
This materially re-shapes market balance over the decade, specifically the pace and scale of how the market will begin to tighten (previously modelled to occur from around mid-decade), and materially re-shapes our ACCU price expectations.
Just when you thought you knew where the market was going… think again!
You’ll need to subscribe to access our latest outlook, and the more detailed underlying modelling which we include in our quarterly analysis. Subscribers can click here to access our latest outlook, or contact our client services team to request access.
As coal mine methane reporting is tightened… hold onto your hats!
While coal mine methane reform will initially lower emissions, and prices, the future tightening of the Method 2 framework represents a more structural price risk/support for the market, with potential for a large increase in emissions as the accuracy of reporting improves, and more closely reflects remote sensing instruments.
As an upper bound, we model that the tightening of the Method 2 framework could see an increase in covered emissions of up to 22 Mt – per annum. That’s equivalent to 16% of reported Safeguard covered emissions – but the devil is in the detail. Click here to view our full modelling results.
Such a large influx of emissions into the Safeguard Mechanism will again materially re-shape the market.
If this is news to you, what else are you missing?
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Kind Regards,
The RepuTex Team
Australian Energy Markets
Why miss out…
Almost 70% of corporate emissions covered by the Commonwealth’s Safeguard Mechanism compliance market are RepuTex EnergyIQ subscribers.
Over 80% of traded activity in the Australian over-the-counter (OTC) ACCU market is underpinned by RepuTex customers.
