August 10, 2023

Navigating carbon markets for net zero

Carbon markets have a role to play in the transition to a net zero economy, especially when seeking to meet and beat Australia’s interim targets this decade.

With abundant natural resources and energy-intensive industries, Australia is a country with significant potential in both supply and demand for carbon credits on the road to net zero.

The recent reform of the Federal Government’s Safeguard Mechanism for heavy emitters, coupled with the rise in sustainability ambitions generally, means accessing carbon markets is now an important transition tool for many organisations as interim deadlines fast approach.

“There’s definitely been an accelerating level of interest in addressing and accessing carbon market solutions this year leading up to and following the introduction of the reformed Safeguard Mechanism,” says NAB Head of Carbon and Commodity Sales Sam McEvoy.

“This is a function of the Safeguard Mechanism itself but also of the momentum, both domestically and globally, around transition planning for organisations. Carbon markets will have a role to play in helping Australia on the way to net zero as part of these strategies.”

Different forms of carbon markets apply in different jurisdictions. Australia allows credits generated by certified carbon abatement projects – like forms of land management or energy efficiency – to offset emissions when considered as part of a credible hierarchy of transition planning which prioritises avoiding emissions first. This generation of credits is done through what is known as the Australian Carbon Credit Unit (ACCU) Scheme, which supports investment in projects to reduce emissions across all sectors of the economy.

Approval of carbon credits under the scheme aims to ensure the credibility of units generated through registered projects run to reduce emissions or store carbon in soils and vegetation. Projects are registered through the Clean Energy Regulator and must follow one of the currently active and approved methods to maintain integrity of the greenhouse gas emissions cuts represented by the carbon credits.

NAB’s 2022 Renewables Survey noted about 90 per cent of ASX-listed top 50 companies had established renewable energy and net-zero targets, with nearly 60 per cent planning to use carbon offset strategies to help achieve their goals.

At the same time, less than 5 per cent of respondents were currently active in carbon markets, the survey found, highlighting the potential shift in demand from these companies as 2025 and 2030 emission targets approach.

Minding the gap

McEvoy says for currently hard-to-abate emissions or where abatement technologies are not yet available, NAB’s carbon offering is a tool to enable emitters to meet their compliance obligations.

“The Australian Carbon Credit Unit (ACCU) Scheme becomes especially relevant for those customers in hard-to-abate sectors who are facing into declining baselines from 2025 to 2030 under the Safeguard Mechanism,” he says. “As their banking partner for transition, we are continuing to develop solutions to help our clients meet their objectives. Our specialist team is here to help navigate effective carbon market solutions as part of this process.”

The Federal Government’s revised emissions legislation for the heavy industrial and resources sectors came into effect on July 1 this year and forms the centrepiece for achieving its emissions reduction target of 43 per cent below 2005 levels by 2030.

The legislation covers the nation’s top emitters, meaning the owners of the 215 Australian industrial facilities that annually produce more than 100,000 tonnes of CO2 equivalent face a decline in emissions baselines of 4.9 per cent a year until the end of the decade.

McEvoy says that unless these entities reduce emissions at the required pace, through changing their processes and technologies, they may need to compensate for above-baseline emissions by acquiring ACCUs or other credits authorised under the mechanism, to meet their obligations.

Once surrendered, the credits can be used to offset any greenhouse gas emissions above the safeguard baseline.

The ACCU market has undergone several changes since its inception early in the previous decade.

NAB’s Global Head of Carbon Trading Benjamin Jackson says: “The role of the ACCU market in creating a price signal is clear for entities operating in Australia, particularly with regard to industrial emissions.”

Jackson notes that alongside, and in advance of, the start of the reformed Safeguard Mechanism rules, measures of market depth and function in ACCUs had begun to rise.

“The ACCU market has been put on a more prominent footing since the Safeguard Mechanism changes were confirmed and the Chubb Review was concluded,” Jackson says. “The fulcrum, if you like, of the ACCU price, coupled with the perceived policy certainty provides participants with greater confidence to make decisions around allocating capital for both originating ACCU projects and on the other side of the ledger, projects that decarbonise operations at source.”

The Chubb Review is the Federal Government review led by former chief scientist Professor Ian Chubb released in January this year which confirmed the overall integrity of Australia’s system among its findings and provided recommendations for improvement.

The entities covered under the Safeguard Mechanism form the core of Australia’s compliance market and have until 2025 to start making up their liabilities incurred. Aside from compliance purposes, ACCUs can also be purchased voluntarily in line with rising decarbonisation ambitions and stakeholder expectations.

Global reach

NAB’s carbon team is based in Sydney, Singapore and London and offers trading, sales solutions and research services across government-backed emissions and renewable energy schemes in Australia, and Europe. In addition to ACCUs, the team trades in Large Scale Generation Certificates (LGCs) and European Emission Allowances (EUAs).

NAB Carbon Research released in January following the Chubb Review, found ACCUs were in fact undervalued for the step-change in demand to come. There was an expectation of a steep rise in demand by 2025 in line with the rising adoption of net zero commitments and reporting requirements, with a doubling of prices implied to signal investment in local carbon capture projects, the research found.

NAB is also building capability for customers interested in accessing markets for the different types of voluntary units, which are expected to have significant future growth potential.

International voluntary units are generated from a diverse range of carbon projects globally and generally trade at a lower price than sovereign units. They are administered by non-government organisations (NGOs) that set standards and validate the offsets.

The voluntary market is evolving, with the recent release of new guidelines from the Voluntary Carbon Market Integrity Initiative, a global NGO aimed at enhancing rigour in the space after public concerns over the integrity of many of the schemes used to generate these credits.

NAB has piloted the Carbonplace settlement platform which uses the speed, security and traceability of blockchain technology to enable transactions for customers in voluntary units between a number of international partner banks.

The platform is a SWIFT-style system for transactions and has been developed by global financial institutions including NAB, BNP Paribas, CIBC, Itaú Unibanco, NatWest Group, Standard Chartered and UBS.

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