Carbon Markets Outlook

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

The Australian carbon market has experienced a major bull run over the course of calendar year 2021 (CY21), with prices for Australian Carbon Credit Units (ACCUs) growing over 180% to $47/t, underpinned by a surge in voluntary pledges from high emitting companies and a growing investor push to net zero emissions.

Increasing voluntary demand has led to a significant uptick in direct offtake contracting with project developers (quantities of 100,000-2,000,000 ACCUs for spot and forward delivery) as larger buyers head straight to the source rather than navigate the opaque and illiquid OTC market. This influx of demand has created a tight supply setting across the market, driving prices higher, supported by bullish sentiment attributed to Australia’s net-zero emissions reduction target.

The surge in corporate voluntary buyers has triggered a structural change in demand that is unlikely to be met by short-term supply. This suggests a sustained period of higher prices may be on the horizon, even in the absence of robust federal policy. As companies pursue a net-zero decarbonisation pathway we believe a carbon “supercycle” is therefore inevitable, with corporate demand to outpace supply, driven by a raft of new voluntary net-zero pledges, which continue to be adopted in step with our more bullish scenarios.

In response to the tight supply setting, we believe it is increasingly likely that the Regulator will provide project owners with optionality over their fixed delivery CACs under the ERF, enabling them to redirect some of their forward deliveries away from the Commonwealth to fulfill private sector demand. This is likely to avert the need for project owners to trigger non-delivery clauses under their fixed delivery contracts, maintaining the integrity of the ERF contracting scheme, while enabling the Regulator to better control the availability of new supply. While this may provide some relief to the current heatwave, optionality is not likely to materially impact prices, with short-term demand to continue to outpace supply.

In this quarterly Carbon Market Outlook, we take a closer look at the current drivers of Australia’s carbon bull run, and our expectations for carbon offset demand, supply and prices, including the prospects for a sustained rally in the price of ACCUs.

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