This weekend, Australia’s carbon market will finally come of age with the reforms to the safeguard mechanism due to come into effect.
Australia’s biggest emitters, responsible for around 28 per cent of the country’s emissions or 136.9 million tonnes CO2e in 2020-21, will be subject to new baselines, and an overall carbon budget of 1233 mt CO2e between 2020 and 2030.
They must either abate the amount of CO2 they emit over the cap or purchase Australian Carbon Credit Unit or Safeguard mechanism Credits to offset the difference.
ACCU prices have been drifting downwards since the safeguard mechanism changes were legislated on 30 March, with more suppliers creating and listing credits for sale in anticipation of stronger demand from affected companies who can’t abate all their emissions away.
Coal, oil and gas will carry the biggest load
But this is all set to change come 1 July. EY has conducted analysis showing coal, oil and gas facilities will undertake the majority – 70 per cent – of the possible abatement between now and 2035.
Others, including hard to abate sectors such as steel, cement and aluminium production, will have to rely more heavily on offsets until zero emissions technology is sufficiently advanced for them to move away from fossil fuel use.
ACCU demand to skyrocket
But with the emissions caps now due to tighten every year by 4.9 per cent, EY is predicting ACCU demand to skyrocket in the coming years, with prices set to double from the current $40 to around $80, just under the Australian government’s price cap.
Escalating prices will create an incentive for companies to permanently abate their emissions rather than simply offset them from year to year, argues EY Partner Emma Herd, who points out that every dollar spent on abatement is a non-recurring cost, as opposed to offsets which must be purchased every year.
“At a certain point it is cheaper to undertake the abatement than purchase the credits. There is a lot of abatement possible at the $50 a tonne mark.
“Even if you don’t care about the planet, you care about costs. Most companies are seeing the writing on the wall for decarbonisation so they are looking at how to they deal with this now,” she said.
There are limitations on the supply of offsets – one being that Australia only has a finite amount of land on which carbon sequestration projects can be based. And demand for offsets is only likely to escalate further, given that they are now baked into numerous consumer products, such as carbon neutral electricity plans and flights.
Can the market figure it out?
Others are not so sure the market will prevail on its own accord.
The Climate Council agitated for a percentage cap on offsets to apply to companies in the safeguard mechanism, but this did not ultimately make it into the reformed legislation. Head of advocacy Jennifer Rayner said the council is supportive of the hard carbon budget imposed on emitters but remains concerned that there is not enough motivation for companies to reduce their emissions rather than reaching for offsets.
They have found some comfort in the fact that the government has asked emitters who use more than 30 per cent of offsets to disclose how they are using the offsets.
“The government has been loath to pursue offset limits because they don’t know what the limits for companies are. But they could revisit a potential cap on the use of offsets once the scheme has been operating for a couple of years,” Rayner said.
The council is expecting to see most companies cover off on the basics, including shifting to renewable electricity and electrifying their transport fleets. Beyond that, it accepts that some sectors will need to wait until the appropriate technologies are commercialised.
In the short term, Rayner agrees there is likely to be a price spike because there are no restrictions in the safeguard mechanism which force companies to cut their emissions. “This will have implications for other businesses in the economy that want to use ACCUs that aren’t in the Safeguard mechanism,” Rayner argued.
Either way, one thing that is clear is companies are going to have to step up their ambition if Australia has any hope of achieving its 43 per cent emissions reduction by 2030 target and stay on track to reach net zero by 2050.
“The industrial sector is not doing their fair share – the pace at which companies are being asked to reduce emissions is too slow.
“When they set the carbon budget, they based it on the share of emissions produced in the economy – 28 per cent if they are to reduce their emissions by 43 per cent by 2030 in line with Australia’s national emissions target, they are going to have to do a lot more,” Rayner said.
Over the next year, the government will be setting an interim 2035 emissions target, which Herd expects will be a “big step change” compared to the 2030 one. However, she is convinced that higher for longer offset prices will act as a de facto cap, making extra regulation unnecessary.