Carbon Markets Outlook

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

From 1 July 2023, the Government will transition the Commonwealth Safeguard Mechanism to a ‘baseline and credit’ framework, with declining baselines set to align Australia’s largest emitting industrial facilities with net-zero emissions by 2050.

To incentivise emissions reductions, Safeguard Mechanism Credits (SMCs) will be issued where a facility reduces emissions below its declining baseline, which may be traded to another entity to meet its compliance obligations. Companies will therefore be given flexibility to manage their excess emissions, based on the least-cost combination of internal emissions reductions, and external abatement (SMCs and/or offsets).

In this quarterly Carbon Market Outlook (CMO) we analyse the impact of tighter emissions reduction settings for the industrial sector on the Australian Carbon Credit Unit (ACCU) market, including the introduction of declining emissions baselines under the Safeguard Mechanism, in line with ALP policy.

The transition to a regulatory-led market is forecast to be supportive for ACCU prices, with the private sector set to become the largest buyer of ACCU offsets in 2022 – for the first time since the conclusion of the Carbon Price Mechanism in 2013-14. The creation of a transparent signal to drive industry investment in long-term emissions reductions will therefore trigger a structural change in local market fundamentals.

While the enhanced Safeguard Mechanism will translate into increased demand for ACCU offsets, the magnitude of potential price impacts will depend on two key factors: the volume of internal emissions abatement from the industrial sector over 2023-32; and the timeline for corporate offset demand to soak up ACCU issuance to projects eligible to exit the ERF. The scale and timing of internal emissions reduction actions by industry will therefore impact the shape of the new safeguard market, informing SMC creation, and demand for external abatement such as ACCU offsets.

In this CMO we present our updated expectations for ACCU prices and supply-demand fundamentals over a 10-year rolling horizon. Specifically, analysis considers three scenarios for market development under the Safeguard Mechanism 2.0 framework, including a Central Case, and High and Low scenarios, modelling the interaction between industrial GHG emissions reductions, demand for external abatement, and long-term ACCU price development.

Restricted Access

This is a subscriber report. Please login to access this content.

Become a Carbon Insider today

Unlock our latest analysis, briefings and price information with our new Carbon Insider service.

Click below to see our plans.

Sign up for regular insights

LATEST UPDATES

  • Carbon Markets

    IN FOCUS: Safeguard Mechanism Credits – Flurry of changes to proposed Safeguard crediting framework

    Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone

    The government last week tabled its Safeguard Mechanism (Crediting) Amendment Bill 2022 in the House […]

    Research Insights | December 5th, 2022
  • Carbon Markets

    UPDATE: Buy interest builds for Generic ACCUs as Safeguard Mechanism policy announcement looms

    Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone

    Prices for Human Induced Regeneration ACCUs came off slightly last week, while Generic (Landfill gas, […]

    Research Insights | December 5th, 2022
  • Carbon Markets Electricity

    OUTLOOK: NEM wholesale electricity and LGC price forecast 2022-42

    Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone

    Our latest Australian Electricity Outlook (AEO) for wholesale electricity and LGC prices in the National […]

    Research Insights | November 30th, 2022
  • Carbon Markets

    UPDATE: Local activity slows, but prices hold steady, as the market looks ahead to December

    Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone

    Activity slowed in the Australian Carbon Credit Unit (ACCU) market last week, although prices have […]

    Research Insights | November 28th, 2022
  • Carbon Markets

    UPDATE: ACCU prices continue to firm as COP 27 comes to a late conclusion in Sharm el-Sheikh

    Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone

    Prices continued to rise in the Australian Carbon Credit Units (ACCU) market last week, albeit […]

    Research Insights | November 21st, 2022
  • Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someone