auto_stories Quarterly Carbon Market Report December Quarter 2022

2022 was an eventful year for Australia's ACCU market with significantly increased trading activity and accumulation, spot price variability likely driven by a range of factors and integrity claims followed by a review by former Chief Scientist Professor Ian Chubb.

There were some significant events shortly after the end of the quarter.

Firstly, the report of the independent review of ACCUs was released on 9 January 2023 concluding the current ACCU scheme arrangements are robust and the claims about a lack of integrity were not supported. The Review made 16 recommendations to enhance confidence in the integrity and effectiveness of the scheme. The government accepted all 16 recommendations in principle.

Secondly, on 10 January 2023, the Australian Government released the proposed design rules for the Safeguard Mechanism reforms for consultation, including a proposed decay trajectory for baselines of 4.9% out to 2030.

The market responded to these key events with the reported spot generic ACCU price increasing from $34.50 to $38.50 in the following 2 weeks. Reported spot and forward trading volumes were 3.2 million in this 2-week period, 2.5 times the previous largest 2-week volume. However, by mid-February the price had lost most of those gains.

In 2022, stratified pricing was first reported for ACCUs where some buyers were prepared to pay an increased premium for units with social, environmental and economic co-benefits. This is further discussed below.

Trade volumes and accumulation of ACCUs in the Australian National Registry of Emissions Units (ANREU) materially increased during the year, potentially related to hedging against expected increased liability in anticipation of declining baselines under the Safeguard Mechanism.

ACCU prices – the year in review

As discussed in March 2022 report, on the back of low trade volumes and some speculative behaviour the ACCU generic spot price reached an all-time high of $57.50 in late January 2022 before softening to $48 at the end of February. The announcement of the contract milestone exit arrangements in early March saw the price drop to $35.40 on the back of a single high-volume trade with further decreases in price through March and April before settling around the $30 level (see Figure 1.1).

Prices generally stabilised for much of the remainder of 2022 as the market found an effective floor within a small price range of around double the average Commonwealth contract price plus a commercial premium.

Immediately following the federal election, the price jumped from $30 to $35.50, the largest single day increase in ACCU price. Prices remained around $35 per unit on low volumes and infrequent trades until the announcement of the Independent Review of Australian Carbon Credit Units on 1 July. ACCU spot prices declined through July and August. The introduction to, and subsequent passage through, the Australian Parliament of the Climate Change Act 2022 (in which Australia’s target of 43% emissions reductions below 2005 levels by 2030 was legislated) saw some renewed interest in ACCU purchasing with a high volume of units traded at around $30 per unit.

In Q4 2022, some upward price momentum saw the ACCU spot price increase from $30.75 to finish the calendar year at $33.80.

There are many other sources of demand for ACCUs in addition to Commonwealth purchasing and potentially increasing Safeguard mechanism demand.

As detailed further in the chapter, non-commonwealth demand has more than tripled since 2018 to 1.5 million in 2022, which was up 56% year on year. Programs like Climate Active and consumer choices skewing to businesses with clear climate ambition are driving voluntary action and the demand for ACCUs. Additionally, the CER’s Corporate Emissions Reduction Transparency (CERT) report makes it easier for corporates to clearly demonstrate their progress towards their net emissions reduction commitments. Treasury has also consulted on the government’s proposed mandatory regime for standardised, internationally‑aligned requirements for disclosure of climate‑related financial risks and opportunities in Australia. These types of commitments and reporting are likely to further increase demand for ACCUs in the future.

The Australian Carbon Exchange is expected to be delivered by late 2023 and should enable futures markets to emerge. The future price signal for ACCUs may be one important factor for Safeguard entities working through their compliance options under the proposed Safeguard reforms. That is whether to invest in reducing their emissions at the source and be credited with SMCs or to use ACCUs. Where it is technically and commercially feasible to reduce emissions at their source, entities that do so will avoid the risk of long term ACCU purchases at an unknown future cost.

Trading activity stepped up in 2022

There was a step up in volumes in 2022 with 23 million ACCUs transacted in the secondary market, triple the volume transacted in 2021 (see Figure 1.3). The average transaction size also increased in 2022, up nearly 37% on 2021 from around 14,300 to 19,500 ACCUs per trade. Accumulation from corporates and financial intermediaries has contributed to the increase in transactions, especially in the second half of 2022 potentially as companies prepare for proposed changes to the Safeguard Mechanism.

Activity consolidated in Q4 2022 with around 2 million ACCUs transacted per month.

The increase in transaction numbers is reflected in broad trends of reported trading volumes by environmental brokers (see Figure 1.4), though trading activity continues to be sporadic at times. In 2022 over 6.8 million ACCUs (of the total 23 million traded) were reported in spot trades, which is more than 5 times the volume reported in 2021. Since May, when price stratification reporting began, HIR units made up 54% of the ACCU volumes reported in spot trades. HIR ACCUs represent approximately one third of all units issued in 2022.

In addition to the reported spot trades, environmental brokers reported significant interest from market participants in forward trades with almost 3 million ACCUs agreed for future delivery in 2022, 1.2 million of which were reportedly contracted in Q4 alone. Forward trade volumes were infrequent but often for large packets.

The material increase in forward trade volume is not necessarily indicative of forward price predictions in the spot market as there may be several reasons for why market participants engage in forward trades including for hedging purposes.

Market sources have also reported increased use of repo (repurchase) trades. These are short term agreements to sell ACCUs and buy them back later, using a combination of spot and forward trades. These trades occur because sellers may wish to manage working capital whilst maintaining access to ACCUs. With repo trades, the premium – the difference between the spot and forward price – primarily reflects cost of carry.

Non-Commonwealth demand for ACCUs

Cancellation of ACCUs to meet compliance obligations has been a strong driver for ACCUs in 2022. The 1.5 million ACCUs cancelled exceeds the 1.1 million expectation from the March report (see Figure 1.5). Excluding compliance, cancellations in 2022 reached 970,000 ACCUs—modest growth from 886,000 in 2021. Voluntary cancellations comprised 58% (855,000 ACCUs) of volume, the majority of which were for Climate Active purposes.

Breakdown of new ACCU supply

95% of the nearly 4 million ACCUs issued in Q4 2022 can be attributed to 2 method types – vegetation (78%) and waste (17%), see Figure 1.6.

In 2022, 385 projects were registered, bringing the total portfolio to 1,434. Throughout 2022, 31 projects were credited for the first time, contributing 1.4 million ACCUs to supply. In total, 593 projects are generating ACCUs.

Contract milestone exit arrangements

Under the exit arrangements for fixed delivery contract milestones, 2.6 million ACCUs completed exits in the first window from 4 March to 30 June. A further 3.2 million ACCUs of contract milestones were eligible to participate in the second pilot window from 1 July to 31 December. The first two exit rounds were run as pilots, and the government will decide if there are to be future exit arrangements in due course.

ACCU Supply Balance

At the start of 2022, total ACCU holdings in ANREU was 11.5 million units. By the end of the year, holdings had nearly doubled to 22.7 million units (see Table 1.1), largely on the back of reduced delivery against fixed delivery contract milestones.² In the December 2021 report, the CER noted that 12 million ACCUs were scheduled for delivery against fixed delivery contracts in 2022.³ Over the course of the year, contract holders delivered 4.7 million ACCUs to ERF contracts while others opted-in to the streamlined exit arrangements, increasing ANREU holdings and providing additional ACCU supply to the market.

Within a specified period, supply of ACCUs refers to ACCUs issued. Demand of ACCUs incorporates Commonwealth ERF contract deliveries, safeguard mechanism cancellations, relinquishments and state and territory government and private sector voluntary cancellation.

All holdings' categories increased during 2022 with business and government enterprises nearly tripling holdings (see Figure 1.6). ACCU holdings by intermediaries are nearly double that of Q4 2021 as intermediaries position themselves to play an increased role in facilitating trading between the supply and demand sides of the market. There could be a variety of reasons motivating accumulation of ACCUs amongst these participants including anticipation of safeguard mechanism reforms, increased voluntary corporate ambition and speculation as traders become more active.

Footnotes

¹ This is typically cancellations of ACCUs voluntarily by business to reduce net emissions or as required by state/territory approvals. Commonwealth demand is considered delivery against carbon abatement contracts.

² There were 4.7 million ACCUs delivered against Commonwealth contracts in 2022 versus 12.4 million in 2021.

³ See Table 1.7 in the December 2022 Quarterly Carbon Market Report.

⁴ Safeguard mechanism cancellations do not include deemed cancellations. A ‘deemed' cancellation occurs when ACCUs issued under an ERF project at a safeguard facility, in a particular year, are delivered to the Commonwealth under an ERF contract.

⁵ For more information see Australian carbon credit units.