Carbon Markets Outlook

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

The price of Australian Carbon Credit Units (ACCUs) climbed back above $16/t in early September, trading in a narrow band of $16.10-20/t through October. Prices remain well below the 12-month high of $17.50/t recorded in December 2019. The spot price is again trading at a premium to the ERF average price of $15.74/t, following a decrease in the ERF average price (from $16.14/t) at the 11th ERF auction held in September.

Despite an increase in contracting at the 11th ERF auction, with abatement volumes growing to 7 million (up from 1.7 million at Auction 10), the scheme continues to contract at low volumes, with the last six events failing to contract above 10 million ACCUs, for an average of just 2.9 million over the last three auctions.

As we have noted in earlier updates, this slowdown is primarily attributed to the low price environment and the voluntary nature of the scheme. While early auction rounds contracted many existing projects (transitioning from the former Carbon Farming Initiative), modest price increases in later rounds have failed to incentivise the participation of higher cost abatement activities.

Should the Clean Energy Regulator ease restrictions on the participation of higher cost abatement, allowing contract prices to rise above $20/t, the handbrake on ERF contracting could be released, with a higher price environment potentially incentivising more widespread participation. However, based on recent history, we continue to view the ERF as a complimentary policy lever rather than the primary driver of large-scale GHG emissions abatement through to 2030, with any significant turnaround in market sentiment and contracting volumes unlikely.

In this outlook, we provide updated analysis of activity in the ERF and carbon spot market, including our long term carbon price, supply, and demand forecasts to 2030, and our alternative 1.5-2 degree ACCU price pathways under the Paris Agreement.

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