Carbon Markets

INSIGHTS: Election 2022 – Market impacts, and where to next for the ALP’s “Safeguard Mechanism 2.0”?

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The Federal Election has been run and won, with the Australian Labor Party (ALP) confident of securing enough seats to form majority government. The wave of support for pro-climate candidates now provides a number of options for the ALP to implement its proposed improvements to the Safeguard Mechanism – triggering the greater contribution of the industrial sectors to Australia’s net zero emissions reduction target.

As flagged in our recent updates, the change of government will be supportive for the local carbon offset market, reflected in the return of positive sentiment to the ACCU spot market yesterday. In response to the election outcome, the ACCU spot price grew 18 per cent on Monday, closing at $35.50/t, up 5.50 from Friday’s close of $30/t.

Despite the market response, expectations that a change in government will “significantly increase” demand (and prices) for ACCUs are far from certain, with the local market facing a number of challenges that could impact medium-term price development. This includes the role of proposed Safeguard Mechanism Credits (SMCs) – or ‘below-baseline’ units created by facilities under the Safeguard Mechanism – with the development of low-cost industrial credits likely to soften compliance and voluntary demand for ACCU offsets.

In addition, following changes to the ERF in March, the Australian carbon offset market now finds itself with a potential surplus of ACCU supply of from existing carbon farming projects. As proponents begin to exit their ‘fixed delivery’ contracts under the Emissions Reduction Fund (ERF), this surplus is likely to weigh on prices, subject to the timeline and magnitude of new sources of demand entering the market.

In this article, we present initial analysis of the impact of the federal election on the local ACCU market, including discussion of the political pathway for the Safeguard Mechanism, and the factors likely to shape medium-term price development.

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