Carbon Markets Outlook

OUTLOOK: Long-term Australian carbon price, supply and demand outlook

While recent growth in the price of ACCUs has been strong, increasing 21% year-to-date to $20/t, local prices remain well below international levels, such as European Union Allowances (EUAs) in the EU ETS, where prices have grown 65% year to date to €54 (A$85), or over 240% from a low of €15.71 in Mar-20.

One of the key drivers of record EUA prices is the increasing role of investors, with speculative (long) positions in the EU ETS growing from 7% in Jan-18 to 33% in May-21, while long positions in the California ETS have similarly grown from 12-27% YTD.

While on the surface, the Australian carbon offset market lacks the target, the compliance framework, and the political support to replicate the carbon boom seen in Europe, in practice, the local ACCU market is on the move, underpinned by an increasing number of corporate net-zero pledges, and a growing investor push to align their portfolios with net zero emissions. As we have seen in Europe, as investment funds begin to enter the local market, we see potential for stronger ACCU price growth, with offsets likely to be increasingly viewed as as a standalone asset class, and a way to invest in the low-carbon transition.

As investors grow their holdings, and use ACCUs to hedge climate risks in other asset classes (such as emissions intensive equities or energy commodities), Australian carbon offsets are well positioned to be swept up in the green-capital transition.

In this Market Outlook, we consider the impact of increasing investor participation on ACCU price development in the Australian market, along with implications for overall demand-supply dynamics and market balance from 2021-30.

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