auto_stories Quarterly Carbon Market Report June Quarter 2022

Q2 2022 highlights the ongoing and growing interest in the ACCU market. This was demonstrated through record secondary market transaction volumes in ANREU and reported spot trade volumes. The quarter also saw large volumes of forward trades in ACCUs as well as increasing price stratification. Some buyers demonstrated a willingness to pay a material premium for ACCUs with defined co-benefits, particularly economic and social benefits for First Nations People.

The Australian Government has appointed an independent panel to undertake a review into Australian Carbon Credit Units. The review is being led by Professor Ian Chubb and is due to be completed by 31 December 2022.

On 11 August 2022, the Climate Change Authority released its Review of International Offsets which calls for the publication of a National Carbon Market Strategy.

ACCU transaction volumes increase

Transactions in the ACCU market started the quarter slowly. Following the election, there was significant increase in market activity in response to anticipated future demand for ACCUs. This was in line with announced policies prior to the election, including the increased 2030 greenhouse gas abatement target and changes to the Safeguard Mechanism.

There has been a marked increase in ACCU market activity in 2022. Much of this was observed in Q2 2022, with 5.5 million ACCUs transacted in the secondary market, nearly 400% more than the same quarter in 2021 and 69% higher than the previous highest quarter - Q1 2022 (see Figure 1.1). The bulk of activity occurred in June, with new monthly transaction records of nearly 3 million ACCUs traded across 130 transactions in the secondary market. The increased volumes in Q2 2022 were a result of both increased transaction numbers and larger parcel sizes, up 269% and 34% respectively on the same period in 2021.

In addition, there has been a material increase in forward ACCU contract volumes with intermediaries reporting over 1 million ACCUs contracted for forward delivery during Q2 2022. Most of these trades were for 1 year in the future.

The increased activity in the secondary market was accompanied by an increase in the reported generic ACCU price, increasing from $30.50 to $35.10 - an increase of 15% over the quarter (see Figure 1.2).

Most of this gain happened soon after the election, with the price rising 18% to $35.50 on 23 May 2022 as market expectations for ACCU demand changed. The reported ACCU price settled at around $35 for much of June, before softening in July off lower trade volumes to close the month at $28. This is still a premium to twice the average commonwealth fixed delivery contract price of undelivered volume and a strong price signal for new ERF projects. The spot price in early August remains higher than 12 months ago. It is also materially higher than the last auction average optional delivery contract price of $17.35.

Increasing stratification in ACCU prices

Increasingly, market traders and brokers are reporting growing stratification of ACCU prices by method type. This reflects a growing maturity of the ACCU market. Figure 1.3 shows prices based on transactions reported to the Clean Energy Regulator through third parties and, as such, may not be representative of the market as a whole.

Additional voluntary disclosure of transaction information by Jarden and TFS Green highlighted that Human-induced regeneration (HIR) ACCU trades made up more than half of all trades reported in May and June, with over 1 million units traded. Specifically, during Q2 2022 HIR ACCUs attracted a premium of $1.25-$3.35 compared to the generic price, whilst Savanna fire management ACCUs attracted a premium of $5.65-$9.75, albeit in lower volumes. Savanna fire management ACCUs are associated with a range of co-benefits, including social and economic benefits for First Nations People. These units have historically traded at higher prices compared to other units.

Voluntary demand for ACCUs continues to strengthen while supply remains on track

The increased level of activity in the ACCU market in Q2 2022 was also reflected in voluntary cancellations, with more entities voluntarily cancelling more units than ever before. In Q2 2022, 441,377 units were cancelled by 84 entities, double the number of units cancelled in Q2 2021 (see Figure 1.5). In addition to strong participation from existing participants, there is sustained growth in new entrants to the market, with 49 of the 84 entities cancelling ACCUs for the first time during Q2 2022.

Supported by a strong Q2, voluntary ACCU cancellations in H1 2022 reached 724,155 ACCUs, an increase of 80% from H1 2021. This will likely see ACCU cancellation for 2022 materially exceed the expectation of 1.1 million the Clean Energy Regulator foreshadowed in the December Quarter 2021 report.

ACCU cancellations by Climate Active participants increased 34% (from 248,179 ACCUs in H1 2021 to 331,534 ACCUs in H1 2022) (see Figure 1.5). The long-term uptrend in ACCU cancellations by Climate Active participants highlights the increasing interest in Climate Active certification.

Following cancellation of 85,000 ACCUs in Q1, Chevron Australia cancelled 117,670 ACCUs during Q2 2022, comprising 28% of total voluntary ACCU cancellations in H1 2022.

Total ACCUs held in ANREU accounts increased by 3.2 million in Q2 2022 to 16.1 million ACCUs – an increase of 25% over the quarter. Over the last year, holdings have risen by 6.4 million ACCUs, a 66% increase. The increase this quarter has been driven primarily by holdings by project proponents, up almost 2 million ACCUs over quarter (see Figure 1.6). In contrast, total holdings in accounts of intermediaries decreased marginally during Q2 2022.

ACCU holdings in Q2 typically rise strongly towards the end of the financial year, ahead of milestone delivery for Commonwealth contracts. The fixed delivery milestone exit arrangement may have contributed to an increase in ACCU holding in Q2 2022. Contract holders with milestone delivery dates eligible to participate in the pilot window for the exit arrangement were permitted to extend their milestones to 31 August under the transitional arrangements. Some contract holders are still considering options or working through exit arrangements with external parties and the Clean Energy Regulator.

As foreshadowed in the March Quarter 2022 report, not all project proponents eligible for the exit arrangement have yet taken up the option to exit their applicable fixed contract delivery milestone in the pilot window. The Clean Energy Regulator continues to expect an orderly exit from Commonwealth fixed delivery milestones, which will contribute to liquidity of ACCUs in the secondary market. The outcome of the pilot phase, including the volume of ACCUs released under the exit arrangement, will not be known till the end of August. As such the market implication of this will be reported in the September Quarter 2022 report in addition to reporting the results to the market in early September.

Total ACCUs held in ANREU accounts increased by 3.2 million in Q2 2022 to 16.1 million ACCUs – an increase of 25% over the quarter. Over the last year, holdings have risen by 6.4 million ACCUs, a 66% increase. The increase this quarter has been driven primarily by holdings by project proponents, up almost 2 million ACCUs over quarter (see Figure 1.6). In contrast, total holdings in accounts of intermediaries decreased marginally during Q2 2022.

ACCU holdings in Q2 typically rise strongly towards the end of the financial year, ahead of milestone delivery for Commonwealth contracts. The fixed delivery milestone exit arrangement may have contributed to an increase in ACCU holding in Q2 2022. Contract holders with milestone delivery dates eligible to participate in the pilot window for the exit arrangement were permitted to extend their milestones to 31 August under the transitional arrangements. Some contract holders are still considering options or working through exit arrangements with external parties and the Clean Energy Regulator.

As foreshadowed in the March Quarter 2022 report, not all project proponents eligible for the exit arrangement have yet taken up the option to exit their applicable fixed contract delivery milestone in the pilot window. The Clean Energy Regulator continues to expect an orderly exit from Commonwealth fixed delivery milestones, which will contribute to liquidity of ACCUs in the secondary market. The outcome of the pilot phase, including the volume of ACCUs released under the exit arrangement, will not be known till the end of August. As such the market implication of this will be reported in the September Quarter 2022 report in addition to reporting the results to the market in early September.

ACCU issuance in H1 2022 was 8.3 million (see Table 1.1) which is down 6% on H1 2021 due to the variability of timing of issuance. As outlined in the March Quarter 2022 report, the Clean Energy Regulator still expects total ACCU issuances for the 2022 calendar year will be over 18 million.

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.

There is a strong pipeline of projects with new ERF project registrations reaching 109 for the quarter, more than double the same period last year (see Figure 1.7). There were 231 projects registered over the first half of the year, and more projects have been registered in H1 2022 than in any previous year in total (excluding projects that have subsequently been revoked). Soil carbon and vegetation projects continue to dominate new registrations and supply of units from these projects will likely start to flow from late 2023.

Footnotes

¹ 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.

² For more information on ACCU relinquishment see Australian carbon credit units.