The recent outcome of a review of Australia’s carbon credit system by Professor Ian Chubb, which propose changes to the safeguard mechanism, form an important milestone for national carbon markets. The consensus reporting has coalesced around the potential for dramatic growth of the market and the inevitability of higher prices. These are worth considering in more detail.
Australian businesses are increasingly making net zero commitments. These will likely lead to an increased uptake of Australian Carbon Credit Units (ACCUs). But that doesn’t mean businesses should rush into buying them. It’s instead important for businesses to begin the journey of understanding Australia’s carbon market.
BCG believes corporates should dig into the detail of the markets and the policy, and frame their actions to make sure it aligns with their business model, capabilities, and the demands of their numerous stakeholders. But there are some nuances businesses should consider.
Changes from the Chubb Review have solidified the ACCU market’s position as among the most significant and credible offsetting markets in the world.
The ACCU market is administered exclusively by the Clean Energy Regulator, an Australian Government body. The acceptance of the Chubb Review is an explicit endorsement of the ongoing integrity of the ACCU market. And, as a signatory to the Paris Climate Agreement, this creates direct links between the Australian carbon market and the country’s Nationally Determined Contributions (NDCs) to reduce emissions. This is a sovereign commitment, directly linked to the Paris Agreement.
This is also a bipartisan creation. By accepting the Chubb Review’s recommendations, the Labor Government has endorsed offsetting methodologies put in place by previous Coalition governments. By choosing to retain and refine the safeguard mechanism it is building on a scheme developed by a previous government. The Australian carbon market has many fathers and mothers, and as such is likely more durable than other constructs as a result.
The United States is an interesting counterexample. Under President Obama, the US was a signatory to the Paris Agreement and put in place the Clean Power Plan to reduce emissions from electricity generation. However, the following administration withdrew from the agreement and scrapped the plan. Participants in any US carbon market investments will need to constantly keep their eyes on the political winds.
Some in the market see the $75 price cap as an indication of the immediate direction of the market. Changes to the safeguard mechanism add demand for ACCUs. By 2030, safeguard mechanism facilities will have to either reduce emissions or buy offsets for ~50mt (CO2-e) per year. While this increase in demand will certainly support price, it is also necessary to consider supply.
While we expect the market to tighten and push prices higher, it doesn’t seem justified in the next three to four years. The $75 price cap, ironically, removes the risk of a flare up in prices and could take some heat out of the market.
It is also worthwhile considering the marginal cost of new supply. To date, over 200mt of ACCUs have been auctioned into the Emissions Reduction Fund (ERF) at prices averaging ~$12.50/t. Even including some measure of cost inflation, the current price of ~$35/t may be sufficient to incentivise significant new capacity. Prices may eventually rise to the cap, but it might take a while.
There is clearly reason to be excited about the new policy. But it is possible that the market price for ACCUs has already anticipated these changes.
Safeguard mechanism facilities will need to deal with the ACCU market. However, it doesn’t stop there. Any company with a carbon neutrality claim that is certified by Climate Active – a government-backed program – should seriously consider using ACCUs for some or all of their offsetting obligations. Stakeholders will want to see Australian offsets to Australian emissions.
Beyond the corporate sphere, individuals are beginning to invest in ACCUs for personal reasons. These investments can be direct, through ETFs, or through innovative platforms allowing fractional ACCUs down to a kilogram. These are small contributors to demand now, but we expect rapid growth.
As companies dig into the details to consider commitments, policies, and investments in the Australian carbon market, it is essential that they align their plans with their business model, organisational capabilities and controls, and purpose. In this volatile and growing space every opportunity will be met with some underlying risk. Australia now enjoys one of the most developed carbon markets in the world. The onus is on companies to best take advantage of it.
Partner and Associate Director
Sydney
ABOUT BOSTON CONSULTING GROUP
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.
© Boston Consulting Group 2024. All rights reserved.
For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and X (formerly Twitter).
Markets are rewarding green companies, with many sustainable businesses receiving higher valuations. But the path to being “green” is not necessarily easy. BCG has identified a series of frameworks businesses can use to evaluate green investments.
There is significant uncertainty in how technology, economics and politics will evolve over the coming decades. For most companies in hard-to-abate sectors, this means plotting a clear and certain path to net zero isn’t possible as they rely on technology that has not yet been proven commercially. However, a lack of a clear roadmap shouldn’t prevent companies from acting now.
Listed companies are increasing their commitments to ESG and announcing them to investors. But these announcements don’t automatically generate favourable market and valuation reactions and could even drive negative returns. Fortunately, there is a clear pattern of success in commitments and announcements that generate both environmental impact and shareholder value.
Whatever the strength of the outcome of the climate change conference in Glasgow, the global business context just changed irrevocably, and for the betterment of the planet. And while the world’s commitments aren’t yet enough to limit warming to 1.5 C above pre-Industrial levels, the starting gun in a business innovation race has just been fired: a race where the finish line will likely eventually move from 2050 or so, to 2040. Most racers will need to get to half-way by 2030.
