auto_stories Quarterly Carbon Market Report June Quarter 2023

Reported ACCU spot prices trended down over Q2 2023 from $39 in early April to $31.85 at the end of June. Following the end of the financial year, motivated sellers saw the ACCU price dip temporarily to $24.00. The spot price rebounded to $28.50 by the end of the following day. Spot prices recovered further to $32.00 by mid-August. Analysis and market intelligence suggests this activity was largely due to a number of intermediaries selling down their market positions to free up capital.

At the end of Q2 2023, ANREU holdings had increased by 3.8 million to 27.6 million ACCUs. Transactions in the ANREU indicate some Safeguard Mechanism entities are accumulating ACCUs, with Safeguard Mechanism account holdings increasing from 2.2 million over the year to 3.1 million by 30 June 2023. However, as discussed below, intermediaries and others may be holding for Safeguard Mechanism entities.

Holdings in the Commonwealth Emissions Reduction Fund Delivery (CERFD) account are also increasing, totalling over 1 million ACCUs at the end of August 2023.

To 30 June 2023, we have issued 6.2 million ACCUs. We expect to issue about 18 million ACCUs in 2023. Incremental growth in the annual issuance of ACCUs is likely for the foreseeable future.

Intermediaries take an active role in the carbon market

Participation in the carbon market can be broadly categorised according to the role of account holders in the ANREU. As at 30 June 2023, there were 343 ANREU accounts that held ACCUs (Figure 1.1). We have refreshed our analysis to identify Safeguard Mechanism accounts. Safeguard Mechanism accounts are accounts where Safeguard Mechanism entities control a single account, or in cases where Safeguard Mechanism entities control multiple accounts, only the accounts that have surrendered ACCUs for Safeguard Mechanism compliance purposes or specify a facility, have been included. As some of these accounts also engage in trading activity from time to time, holdings of ACCUs within this category may fluctuate. We anticipate the number of accounts in this category will increase as more Safeguard Mechanism entities enter the market.

Safeguard Mechanism facilities will be required to reduce net emissions by more than 200 million tonnes by 2030. As Safeguard Mechanism entities progressively develop and implement their compliance strategies in the coming years, demand for ACCUs is expected to increase and the market to tighten.

Holdings in Safeguard Mechanism accounts have increased 0.9 million to 3.1 million ACCUs in the 12 months to June 2023.

Safeguard Mechanism entities must surrender ACCUs to avoid being in an excess emissions situation for the compliance period ending 30 June 2023 by the 29 February 2024 deadline. For more information, refer to the key dates for the 2022-23 and 2023-24 compliance years.

The increase in holdings of ACCUs by Safeguard Mechanism associated accounts is less than the 5.5 million increase in the accounts of intermediaries over the same period. While accounts of intermediaries represent 13% of the 343 accounts, they hold 35% of total private holdings of ACCUs. ACCUs can be held for Safeguard Mechanism compliance in multiple ways including through third parties and intermediaries, longer term offtake agreements and forward contracts.

The rate of new ANREU accounts being opened is increasing. This reflects the growing interest in the carbon offset market. In 2022-23, 147 new accounts were created, compared to 177 in 2021-22 and 41 accounts in 2020-21. This increase in new accounts coincided with the surge in the ACCU spot price in the second half of 2021 and early 2022.

Of the 324 accounts that have been opened since 1 July 2021, only 97 (30%) have been used for ACCU transactions and are included in Figure 1.1. The remaining 227 accounts are yet to enter the market. It seems a significant proportion of the accounts opened in the past 12 months are for trading purposes. While these accounts are largely yet to engage in the market, some may be poised to participate in the market with any material shifts in ACCU price/volume. It will be interesting to monitor what level of involvement, if any, these accounts may have in the future.

End of financial year sale on ACCUs

The reported ACCU spot price declined by 18% over the quarter to $31.85 by the end of June. The new financial year appears to have triggered a small cohort of motivated sellers to dispose some of their ACCU inventory. On 10 July the ACCU spot price dipped to $24.00 on the back of a 6 day sell-off before rebounding to $28.50 by the end of the following day (see Figure 1.2). Analysis of transactions during this period indicates the sell-off was largely contained to accounts of intermediaries.

By mid-August 2023, the reported ACCU spot price lifted to around $32. This price is double the average contract price plus a commercial premium.

Holdings for the cost containment measure increase

Since 12 January 2023, ACCUs delivered to the Commonwealth under carbon abatement contracts are held in the Commonwealth Emissions Reduction Fund Delivery (CERFD) account in the ANREU. These ACCUs will be made available to Safeguard Mechanism facilities that exceed their baseline through the cost containment measure. These Safeguard Mechanism facilities may apply to the CER to purchase the required number of ACCUs at a fixed price. In 2023-24, the price of these ACCUs is set at $75. Thereafter, the price will be indexed by the Consumer Price Index (CPI) plus an additional 2% per annum.

At the end of June 2023 there had been little change to the 0.4 million balance in the CERFD account since it was last reported in the Q1 2023 QCMR. During July and August 2023, this more than doubled, with 0.6 million ACCUs delivered in the CERFD account. This raised the total holdings to 1 million by 22 August 2023. The ACCU method types in the CERFD account are a mix of vegetation (from 6 different methods), waste and energy efficiency.

Many reasons may motivate participants to deliver on their contracts rather than use the pilot exit arrangements. During this period, most of the deliveries were from higher priced fixed delivery contracts. As we previously explained in the Q1 2023 QCMR, this behaviour reflects commercial considerations at current ACCU spot prices. In the absence of substantive Safeguard Mechanism buying, current ACCU prices could continue to incentivise deliveries against Commonwealth fixed-delivery contracts. 

While the major source of demand will likely come from Safeguard Mechanism entities looking to secure ACCUs against their future liability, market intelligence suggests that many Safeguard Mechanism entities are yet to fully develop their compliance strategies. Some are considering opportunities for emissions reduction at source and may be waiting to see if they can secure financial support through the Powering the Regions Fund (PRF).

The Safeguard Transformation Stream Round 1 grant opportunity through the PRF fund opened in August 2023. The first grants are scheduled to be awarded in early 2024. Further batched assessments are also planned for 2024. Grants of $500,000 to $50,000,000 are available on a competitive basis. This is for trade-exposed Safeguard Mechanism facilities that are not new or expanded coal or gas production facilities to make investments that reduce scope 1 emissions. This process may give a clearer indication of the scale and timing of projects to reduce emissions at source and produce Safeguard Mechanism credit units (SMCs). As reported in the Q1 2023 QCMR, projects that deliver material emissions reductions will typically be large multi-year projects that will take time to design, contract, finance, build and commission. SMC availability will be influenced by production variables that are currently under consideration.

The Government is currently consulting on whether the pilot structured exit arrangements for fixed delivery contracts should be made permanent. We will continue to report on market dynamics and ACCUs delivered to the CERFD account to help inform how the market views availability.

ACCU issuance delayed although claim volumes are strong

The volume of ACCUs issued in H1 2023 was lower because of the pause in crediting while the arrangements to implement Recommendation 8 of the ACCU review were put in place (Figure 1.3). Despite this, we still expect to issue about 18 million ACCUs in 2023.

In response to Recommendation 8 of the ACCU Review, projects registered under the human induced regeneration (HIR) method have been subject to additional assurance measures. This is to ensure that project proponents have evidence of the mechanisms contributing to the suppression of forest during the baseline period, and the implementation of project activities in response to these suppressors. This additional important step was applied to HIR projects on receipt of the next crediting applications. This temporarily delayed ACCU issuance. As assessments are completed, the issuance of ACCUs from HIR projects will resume.

The June quarter also saw the first ACCUs issued to 2021 soil carbon projects. A total of 151,000 ACCUs were issued to two projects covering approximately 5,500 hectares in Queensland.

Tax changes to support primary producers

In June 2023, the Treasury Laws Amendment (2023 Measures No.3) Bill 2023 was passed. This means primary producers that generate income from selling ACCUs can now treat it as primary production income. As a result, those earnings may be eligible for concessional tax treatment under the Farm Management Deposit Scheme or income tax averaging for such income.

The Farm Management Deposit Scheme allows primary producers to make deposits to reduce their taxable income in years of good cash flow, then draw down on that income by making withdrawals in years when needed. Similarly, tax averaging allows primary producers to even out their income tax liability from year to year. This reduces the effect of fluctuations in their taxable income on the marginal rates of tax that apply to them year to year. This new tax incentive may encourage primary producers to diversify their income by generating and selling ACCUs.

Supply/demand balance

Total ACCUs held in non-Commonwealth ANREU accounts increased by 3.8 million in Q2 2023 to 27.6 million. This is an increase of 16% compared to Q1 2023 (see Table 1.1).

While it is difficult to quantify the volume of ACCUs tied up in off-takes and direct bilateral trades, the supply of ACCUs in the next several years will be sufficient to meet expected Safeguard Mechanism compliance demand. This supply will likely tighten with each compounding year of baseline declines and as Safeguard Mechanism entities secure supply to meet future liability. The sooner Safeguard Mechanism entities look to secure longer-term ACCUs, the sooner the market will likely tighten.

Supplementary figures