Carbon Markets Outlook

OUTLOOK: Safeguard Mechanism 2.0 – Australian carbon offset price, supply and demand outlook

The passage of the Safeguard Mechanism (Crediting) Amendment Bill on 30 March represents the most significant structural reform for the Australian carbon market since the enactment of the Carbon Price Mechanism (CPM) in 2011 – and its repeal in 2014 – once again establishing a robust emissions limit for large industrial facilities.

While facilities will initially become accountable for just a small portion of their emissions each year, the gradual and predictable signal to guide investment decisions represents the missing demand-side lever in Australia’s climate policy toolkit to support long-term emissions reductions and innovation from the industrial sector.

Negotiated amendments will be broadly supportive for the Australian carbon market, with tighter baseline settings for liquified natural gas (LNG) export and domestic gas projects increasing total demand for abatement, subject to the wide range of potential Scope 1 emissions for Beetaloo Basin developments, and uncertainty around the development of new LNG projects. The impact of tighter baseline settings, however, will be counterbalanced by more flexible TEBA eligibility for ‘manufacturing’ facilities.

We expect positive sentiment and improved policy certainty to drive uplift across the market, however, high Australian Carbon Credit Unit (ACCU) prices are likely to be tempered by the re-opening of the Emissions Reduction Fund (ERF) exit window in H2.

Outside the timing and scale of new entrants modelled to come into the scheme, we continue to view direct emission reduction investments by industry as the strongest determinant for price development under the new compliance regime, underpinned by the availability and cost of low emission technologies.

Notably, we see potential for the material contribution of on-site emissions reductions by industry, subject to the long lead times and price incentives required for large capital expenditure (capex) decisions. This should see industry follow our “progressive” emissions transition pathway, with a period of support for ACCUs as industry initially relies on offsets in parallel to direct on-site investment, which is forecast to deliver large emissions reduction after several years.

We forecast initial below-baseline Safeguard Mechanism Credit (SMC) issuance by early 2025, scaling up as investment in direct emission reductions occurs. SMC creation (and availability) is, however, tempered by the continuous decline of baselines, along with banking and internal trading. This will strongly affect ACCU-SMC pricing dynamics.

In this quarterly Carbon Market Outlook, we present our expectations for ACCU and SMC prices and supply-demand fundamentals over a 10-year rolling horizon. Specifically, we consider scenarios for market development under the Safeguard Mechanism, modelling the interaction between industrial GHG emissions reductions, demand for external offsets, and long-term carbon price development.

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