OUTLOOK: Carbon windfall gains …or losses? Long-term carbon price outlook

The price of Australian Carbon Credit Units (ACCUs) has rebounded to a 5-month high of $16.37/t in October, a 10 per cent increase from a 12-month low of $14.80 in early July, on the back of small volumes traded in the spot market. Current prices remain below the 12-month high of $17.50/t, recorded prior to the federal election.

Despite recent price gains, the government’s proposal to allow large-emitting facilities covered by the Safeguard Mechanism to be credited for emissions reductions below their baselines may represent a risk to long-term carbon value. Under such a scenario, the potential influx low-quality, non-additional offsets (which we refer to as grey credits) is likely to add further supply to an already saturated market, potentially trigging a material decrease in the value of ACCUs for existing market proponents, unless balanced by a robust source of demand.

Even without the addition of new sources of supply, we continue to model ACCU issuance outweighing demand, with a cumulative supply surplus forecast to continue to grow off the back of issuance to registered (but uncontracted) projects and contracted projects beyond the term of their ERF contract.

This surplus continues to weigh down our forecast ACCU prices, despite some near-term upside attributed to low ERF participation and reduced competition. Longer-term, we continue to model price increases in line with the cost of abatement to meet scaled up emissions target scenarios, and alternate net-zero emissions pathways (2038-48).

In this Carbon Quarterly, we summarise recent carbon price and market activity, and present our long-term price expectations, including discussion of the potential impact of Safeguard Mechanism offsets on prices, and updated forecast price scenarios.

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