As the federal election draws closer, considerable attention is being paid to the ALP’s proposed Safeguard Mechanism amendment, which proposes to tighten emissions limits for high emitting industrial facilities via the establishment of a ‘baseline and credit’ trading scheme.
The ALP’s policy would cover around one-third of national emissions (in parallel to a specific framework to the electricity sector), extending to facilities emitting over 25,000t/CO2e per annum – encompassing the Metals & Mining, Other Materials (Chemicals, Cement, Paper, etc), Oil & Gas, Transport and Waste sectors – re-establishing a carbon price for these industries.
Below, we provide initial observations on the Safeguard 2.0 market, derived from our recent update, “Safeguard Mechanism 2.0, A carbon price under the ALP’s tighter baseline scheme”, including an initial analysis of supply-demand balance through to 2030 and price interaction between domestic and international offsets.
For these companies, it can be challenging to monitor the Australian carbon spot price, with the secondary market for Australian Carbon Credit Units (ACCUs) conducted via private OTC transactions, while the weighted average price at ERF auctions is of little help as a price signal for spot market contracting.
So what is the current Australian carbon spot price?
In this article we take a tour of local and international carbon price dynamics, and key considerations ahead as the federal election campaign draws to a close.
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What is the current Australian ACCU spot price?
ACCU spot prices are currently trading at around $16.50/t, a 12 month high, reflecting a step up in prices from a $15.50/t price barrier since ERF Auction 8 in December-18.
The below chart illustrates the daily price evolution of the RepuTex ACCU spot price over the last 12 months. The RepuTex ACCU spot price is a proprietary measure of over-the-counter ACCU transactions, derived from a rolling survey of offset project developers, brokers and traders, and compliance companies.
In broad terms, the ALP’s policy framework provides long-term architecture to guide high emitting industries towards Australia’s 2030 emissions reduction target, while ensuring liable entities have the flexibility to access external credits – such as emission reduction credits, domestic ACCU offsets or international units – to meet any compliance obligation at least cost.
Current prices are around 20 per cent above the volume weighted average price under the Emissions Reduction Fund ($13.87/t) reported by the Clean Energy Regulator, and 10 per cent above our modelled highest contract price at the eighth ERF auction ($15.20/t).
Current ACCU prices reflect moderate voluntary and compliance demand, with even small demand creating upward pressure on prices. Price movements therefore reflect low liquidity in the market, with the bulk of issued ACCUs locked away due to long-term delivery contracts under the ERF.
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As noted in earlier updates, we continue to anticipate growth in available ACCU supply towards 2020 due to changes to ACCU issuance methods and continued issuance to projects beyond their ERF contract terms. Combined, these increases in supply are likely to occur independent of ACCU demand.
What is happening in international markets?
Australian ACCUs continue to trade below comparable international units such as European EUAs (A$39), Californian CCAs (A$21), New Zealand NZUs (A$24) and South Korea KAUs ($36).
In particular, European carbon prices hit a 10-year high in early April, reaching €26.89 (A$42) driven by higher natural gas prices, the Brexit delay, and the Market Stability Reserve (MSR) from January 1 – reducing the over-supply of EUAs by 24% of the outstanding cumulative surplus each year over 2019-2023.
EUA prices have more than quadrupled from less than 5 euros ($8) since the middle of 2017 after European Union governments agreed to reduce the surplus of allowances that had depressed prices since the financial crisis in 2008.
April prices are the highest seen in the EU ETS since July 2008, bringing EUAs closer to their Phase 2 high of €29.69 (A$47) and their Phase 1 peak of €31.00 (A$49).
What would the Australian carbon price be today if the CPM had remained in effect?
Should the ‘floating price’ period of the CPM have come into operation from 1 July 2015, our earlier analysis suggests that structural and economic factors would have constrained the policy.
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Should it have remained in effect, the CPM is likely to have faced similar problems to the EU ETS, notably the overallocation of free permits to Emissions Intensive, Trade Exposed (EITE) companies and lower industrial emissions than projected by the Commonwealth.
These factors are modelled to have reduced compliance demand, with the initial CPM shortfall predominately made up by low-cost CERs (trading at under $1 at the time).
While the use of international offsets was subject to quantitative limits, lower emissions are modelled to have significantly reduced demand for higher priced EUAs (trading between A$7-15), resulting in a high blend of low-cost CERs being used by compliance companies.
In line with our analysis at the Time , this is likely to have seen ACU prices initially trade at a discount to EUA prices – around $1-2 – before a tightening of the domestic cap caused the Australian price to trade at parity with EUAs through to 2018, averaging around $8 between 2015 and 2018, until more recent EUA price rises over 2019 triggered a shift in the offset landscape toward cheaper domestic ACCU offsets.
What will impact the future Australian carbon price?
Since the conclusion of the CPM, a clear price gap between international and domestic offset prices has become evident, with domestic ACCU offsets modelled to be the cheapest source of external abatement under any expanded Safeguard Mechanism.
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Longer term the carbon price will be determined by the size of the emissions reduction task for safeguard liable entities to meet the target, and the lowest cost combination of: 1) internal abatement activities by covered facilities; 2) domestic Australian offsets (potentially including the use of electricity sector offsets such as LGCs converted to ACCUs); and 3) international offsets.
The price and annual availability of external offsets will therefore be critical to local price formation, and the economics of internal abatement activities.
Please refer to our earlier Market Update, “Safeguard Mechanism 2.0 – Modelling the Australian carbon price to 2030” for more detailed market and pricing analysis, or contact our Melbourne office.
This article was originally published here by Reputex. Reproduced here with permission.
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