The Australian carbon market is maturing quickly as the federal government and the corporate sector alike ratchet up their commitments to decarbonisation. Here are some key points to help you understand how it works.
What is a carbon market?
A carbon market is a system that allows investors, businesses, and governments to exchange carbon offsets and credits. Parties can buy or sell units to meet their emissions limits under the Kyoto Protocol or other agreements. Carbon markets are divided into voluntary and compliance markets.
- Compliance carbon markets are regulated schemes in which the government holds companies accountable for their emissions by requiring them to reduce their emissions below a certain level. Companies that efficiently manage their emissions can sell unused allowances to other companies that need them to offset their own emissions. These markets encourage companies and individuals to invest in projects that reduce or remove greenhouse gases from the atmosphere.
- Voluntary carbon markets in Australia are unregulated and allow individuals and businesses to offset their greenhouse gas emissions by purchasing carbon credits from project developers on a voluntary basis.
How are carbon credits priced?
The price of carbon credits varies due to differences in quality and market factors that affect supply and demand. The quality of a carbon credit is determined by the level of certainty that it will reduce or remove one ton of carbon dioxide. In addition to carbon reduction, projects may also have a variety of environmental, economic, social, and cultural benefits, known as co-benefits, which contribute to the value of a carbon credit.
What is the supply of Australian Carbon Credit Units?
The supply of Australian Carbon Credit Units originates from three main sources:
- Current projects registered with the Emissions Reduction Fund (ERF)
- New and extended ERF projects - projects that will be created to meet future ACCU demand
- ACCUs in the Australian National Register of Emissions Units (ANREU)
Where does the demand for carbon credits in Australia come from?
Companies, governments, or wholesale investors can purchase carbon credits to offset their emissions or as an investment. Buyers fall within four main categories:
- The voluntary market: The demand comes primarily from companies voluntarily buying up carbon offsets, with 54 of Australia’s ASX 100 companies having pledged net-zero emissions by 2050.
- A safeguard mechanism, requiring Australia's major GHG emitters to reduce their net emissions below a baseline. Emitters have several alternatives for keeping their emissions below their baseline to manage their commitments, including sourcing and surrendering ACCUs.
- Governments: Demand for ACCUs is increasing mainly to meet government commitments to offset emissions. Government buyers are typically interested in the offsets and co-benefits a project delivers within their jurisdiction.
- Clean Energy Regulator contracts: The Clean Energy Regulator has committed AUD$2.3 billion to date through Commonwealth contracts to purchase 192 million ACCUs. More than AUD$230 million remains available from the ERF for future ACCU purchases.