Carbon Markets Outlook

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

The Federal Government recently released its long-awaited discussion paper on the proposed establishment of a pilot ‘below-baseline crediting mechanism’ for facilities under the Safeguard Mechanism, from 1 July 2022. The scheme would credit facilities that reduce their emissions intensity relative to a historical baseline, with new units referred to as Safeguard Mechanism Credits (SMCs).

The proposed scheme seeks to move away from the underutilised Facilities method under the ERF, designed with strict additionality requirements, instead implementing a lower additionality threshold to encourage industry participation. As a result, the proposed framework raises questions over the rewarding of business as usual (BAU) improvements in emissions intensity (which we refer to as grey credits), and the potential legitimacy of emissions reductions purchased by the Commonwealth.

Should the framework be implemented in its current form, we anticipate a range of potential implications for SMC prices, and Australia’s existing ACCU market, with newly created credits likely to trade at a discount to projects that capture and sequester carbon. This is expected to result in increasing price stratification in Australia, or the development of a two-speed price environment, with unit prices set in line with the differing cost and value of underlying abatement.

We estimate the development of a new low-cost industrial unit may erode investment in Australia’s ACCU market by between $227-$1,980 million, with potential for low-cost SMCs to become the primary tool for liable entities to manage excess emissions (and potentially meet voluntary commitments), resulting in lower demand for ACCUs.

In this Carbon Market Outlook, we discuss the implications of the government’s proposed Safeguard Crediting Mechanism on Australia’s existing ACCU market, along with potential SMC-ACCU pricing considerations. In doing so, we present our quarterly expectations for ACCU prices and supply-demand fundamentals between 2021-30, including our Central Case forecast for contract prices, and alternative scenarios for market development.

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