Carbon Markets Outlook

OUTLOOK: The Chubb Review – Australian carbon offset price, supply and demand outlook

At the end of December, the Independent Review of Australian Carbon Credit Units (ACCUs), led by Professor Ian Chubb (the Chubb Review), will provide advice to the government on Australia’s carbon crediting framework, including the integrity of key carbon farming methods and current governance arrangements.

The Review was announced in response to criticism from former Chair of the Emissions Reduction Assurance Committee (ERAC), Professor Andrew Macintosh, that credits generated under Human Induced Regeneration (HIR), Avoided Deforestation (AD), and Landfill Waste Gas methods do not represent “real and additional” abatement.

In recent weeks, some stakeholders have suggested that any move to restore integrity to the ACCU market would lead to a marked reduction in ACCU supply, triggering a sharp increase in ACCU prices and associated compliance costs under the Safeguard Mechanism. This prompted calls for a price cap under the Safeguard Mechanism to protect industry from the impacts of a faster ‘transition to integrity’.

While potential remains for the Chubb Review to trigger a material contraction in ACCU supply where radical changes are implemented, analysis indicates that a more nuanced impact on the supply landscape may be likely, with possible reductions in crediting expected to be offset by the annual growth profile of ACCU issuance, and the reality that many ‘at risk’ projects are nearing the conclusion of their crediting periods (Landfill Gas and Avoided Deforestation).

Combined with the current availability of ACCUs in the forward market (under the ERF exit program), modelling suggests that this dynamic may reduce the risk of a possible sharp increase in prices, subject to how material any supply contraction may be, reducing the need for any regulatory price cap (or collar) under the Safeguard Mechanism, unless more unexpected, radical changes are made.

More broadly, the speed and scale of internal actions to reduce GHG emissions by high emitting facilities covered by the Safeguard Mechanism continues to have a more material impact on our forecast market prices, with positive sentiment and early compliance contracting anticipated to lead to an uplift in prices from December as facilities begin to sure up access to offsets, until capital investments in emissions reductions and industrial behaviour begins to guide longer term price development.

In this Carbon Market Outlook, we take a closer look at the potential impact of the Chubb Review on ACCU supply. In doing so we present our long-term expectations for ACCU prices and supply-demand fundamentals over a 10-year rolling horizon, accounting for the impact of tighter policy settings under the Commonwealth Safeguard Mechanism framework, and scenarios for market development.

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