Derivative market emerges amid new dynamics in Australia’s carbon market
Australia has seen growing activities in the carbon credits system after the government reformed its emission reduction policy.
Globally, Australia as an economy ranks fifthteenth in greenhouse gases (GHG) emission and accounts for about 1.1% of the world’s total.1 The country has an emission reduction commitment of achieving 43% below the 2005 level by 2030 and net-zero by 2050. The Australian Carbon Credit Unit (ACCU) Scheme, a national voluntary carbon credit system, was created by the Australian government as one of the tools to facilitate the national emission reduction goal.
The ACCU Scheme encourages the development of Australian-based GHG emission projects. Under the ACCU Scheme, ACCU certificates are issued by the Clean Energy Regulator (CER), the government body for emission regulation, to participants who run projects that avoid the release of emissions or remove greenhouse gases from the atmosphere. To be eligible for the ACCU Scheme, a project must follow methods approved by the Australian government. ACCU Scheme methods set out requirements and rules for running an ACCU project by specifying project activities, carbon abatement measurement as well as monitoring, record keeping and reporting requirements.2
Eligible projects are credited with one ACCU for each tonne of carbon dioxide equivalent (tCO2-e) avoided, stored or sequestered. ACCUs are issued by making entries in accounts in the electronic Australian National Registry of Emissions Units (ANREU). Market participants are required to apply for ANREU accounts to hold ACCUs.
ACCUs can be sold to the Australian government through public auctions, referred to as a carbon abatement contract. Holders can also surrender ACCUs to voluntarily offset their emissions, or to meet compliance requirements if their facilities are covered under the Safeguard Mechanism, Australia’s compliance scheme.
The Safeguard Mechanism applies to facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (tCO2-e) per year. There are currently more than 210 facilities covered under the Safeguard Mechanism, with a combined covered emissions of 138 million tons CO2-e accounting for roughly 30% of Australia’s GHG emissions.3 It requires the covered facilities to keep their emissions at or below a baseline. Facilities that exceed their corresponding baseline can surrender ACCUs to offset their emissions.
Safeguard Mechanism Reform and increased ACCU activities
In 2023, the Australian government passed the Safeguard Mechanism amendment bill to further strengthen its climate policy. One of the key new features introduced includes the baseline decline rate. This feature gradually reduces the baseline for the covered facilities, targeting a 4.9% per year rate from 2023 to 2030, and an estimated 3.285% rate for 2030 onwards.4 The reform motivates business operators to focus on GHG emissions reduction strategy and measures.
It has also stimulated ACCU demand. The number of ACCUs surrendered for Safeguard requirements surged after the reform commenced in July 2023. Coinciding with the surrender deadline, Q1 2024 saw almost 900,000 ACCUs cancelled for Safeguard, compared to 203,000 ACCUs in Q1 2023 and 251,000 ACCUs in Q1 2022.
Rising ACCU demand to meet Safeguard Mechanism requirements (numbers in millions)
A similar trend is reflected in the composition of ACCU holders. As the total holdings continued to increase, ACCUs held by Safeguard and Safeguard related entities reached a new high of 22.6 million, which accounts for roughly 55% of total outstanding ACCUs at the end of Q2 2024.
ACCUs are increasingly held for potential Safeguard Mechanism uses (numbers in millions)
In the private sector, companies are also increasingly adopting emission related policies. According to the Australian Council of Superannuation Investors (ACSI), the number of ASX200 eligible companies with a net-zero commitment has climbed from 14 (7%) in 2019 to 131 (66%) by the end of Q1 2024.5 At the same time the ACCU Scheme also saw solid gain in the number of new projects since 2019, with a peak of 134 new projects onboarded in Q3 2023. The number of ACCUs issued showed a milder growth trend. In 2019, there were 14.8 million ACCUs issued. The number topped in 2022 at 17.7 million and moderated to 17.2 million in 2023.
Growth in new projects registration and ACCUs issuance
New derivative market meets the need for ACCU risk management
As Australia’s carbon policy continues to evolve and the ACCU market dynamic changes, participants are increasingly looking to the derivative markets for price risk management solutions.
In October 2024, CME Group launched the CBL Australian Carbon Credit Unit (ACCU) futures on NYMEX in response to the market needs. Upon expiry, the futures are settled by physical delivery of ACCUs at the CBL-Platts Australian Carbon Credit Unit (ACCU) spot price. The delivery process and transfer of ACCU is administered by CBL Markets, a leading platform for environmental commodity products.
The monthly listing structure of the CBL ACCU futures allows firms and facilities to manage their long-term exposures up to three years forward. The futures also strengthen CME Group’s emission product offering, providing market participants access to hedging tools for both voluntary and compliance markets on one exchange.
Key contract specifications of CBL Australian Carbon Credit Unit (ACCU) futures
|
Contract Title |
CBL Australian Carbon Credit Unit (ACCU) Futures |
|---|---|
|
CME Globex and CME ClearPort Code |
ACU |
|
Settlement Type |
Physical |
|
Settlement Registry |
Australian National Registry of Emissions Units (ANREU) – administered by the Clean Energy Regulator |
|
Contract Size |
1,000 environmental offset units |
|
Pricing Quotation |
Australian dollars and cents per environmental offset unit |
|
Minimum Price Fluctuation |
A$0.01 per environmental offset unit |
|
Value per tick |
A$10 |
|
Termination of Trading |
Trading shall cease at the end of trading hours (5:00 p.m. Australian Eastern Standard Time (AEST) or 5:00 p.m. Australian Eastern Daylight Time (AEDT) when daylight saving time is observed) on the last Australian business day that is also an Exchange business day prior to the 10th calendar day of the contract month. |
|
Listing Schedule |
Monthly contracts listed for the current year and the next three calendar years. List monthly contracts for a new calendar year following the termination of trading in the December contract of the current year. |
Footnotes
- https://edgar.jrc.ec.europa.eu/booklet/GHG_emissions_of_all_world_countries_booklet_2023report.pdf
- https://cer.gov.au/schemes/australian-carbon-credit-unit-scheme/accu-scheme-methods
- https://cer.gov.au/markets/reports-and-data/safeguard-facility-reported-emissions-data
- https://cer.gov.au/schemes/safeguard-mechanism/safeguard-baselines
- https://acsi.org.au/wp-content/uploads/2024/07/Promises-Pathways-Performance-Climate-reporting-in-the-ASX200.Jul24final.pdf
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
