As Australia’s federal election approaches, companies are locking in supply of offset agreements several years in advance to prepare for the possibility of a Labor government requiring emission reductions, pushing the forward price of carbon credits to a new high.
In October 2021, Australian Prime Minister Scott Morrison announced the government's plan to reach net zero emissions by 2050. However, under pressure from the Nationals, he ruled out tightening the safeguard mechanism, allowing Australian businesses to choose their own timelines and tools for reducing emissions.
Despite the absence of mandate, many Australian corporations have chosen high carbon reduction goals. As a result, demand for local Australian Carbon Credit Units (ACCUs) has surged over the past year.
However, since Labor is proposing to enforce carbon reductions, the regulatory structure may soon alter. Corporates are increasing their buying of carbon credits for delivery from 2024 only months before the election that polls predict Labor will win. Prices for forward contracts have also reached record highs.
ACCUs in 2024 are currently selling at around $60 per tonne, up nearly 20% in the last several days. Due to high demand, the price of ACCUs increased by 180% last year, and analysts predict that prices will continue to rise.
Under the Safeguard Mechanism, Labor proposes gradually lowering the carbon caps. The 45% emissions reduction target by 2030 will be the starting point, and concessions to so-called energy intensive, trade exposed (EITE) companies will be negotiated sector by sector, and in certain cases plant by plant.
The strategy is expected to boost demand for carbon offsets, and ACCUs will not be the only tool developed by the Labor government. If emitters “overachieve,” they will receive carbon credits, which they can sell to other companies who have “underachieved.” The scheme, however, is slammed by Federal Energy Minister Angus Taylor, who called it a “hidden” carbon tax.
Even if the party fails to obtain more than half seats in the Parliament, the price of ACCUs is still projected to rise, as emitters seek to appease shareholder concerns and the government boosts its purchases of offset agreements.
Chevron announced in November that it would purchase 5.23 million greenhouse gas offsets to compensate for the underperformance of its Gorgon carbon capture and storage project, which S&P Global Platts estimates will cost about US$100 million. Chevron did not say where the offsets would come from, but stated they will include ACCUs in its environmental performance report.
Carbon credits is a contentious topic. Advocates for more aggressive climate action argue that the business should put emission reduction in the first place instead of offsetting it. Many emission-reduction programs can take years to fully compensate for the initial pollution.
The worldwide carbon credit market is expected to be worth US$550 billion by 2050, according to analysts, but the quality of the projects must remain good.
"Suppliers, offset purchasers, dealers, and investors will need to strike a balance between idealistic and realistic expectations. Otherwise, they risk the offset market collapsing just as it gets going," Kyle Harrison, head of sustainability research at Bloomberg New Energy Finance, said.
