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.

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