Jun 06 2023
Australia is expected to face a shortfall in nature-based carbon credits supply over the next two-three years as a key method for carbon removal expires in 2023 with no replacement expected this year, industry sources told S&P Global Commodity Insights.
The Human-Induced Generation method made up 32% of Australian Carbon Credit Units in fiscal year 2022-23, Clean Energy Regulator, or CER, data showed. HIRs are the most prominent nature-based carbon credits in Australia, with others nature-based credits making up about 8% of the total ACCU generation in 2022-23, excluding avoided deforestation.
HIR projects involve storing carbon by regenerating permanent native forests on a property where vegetation has been suppressed by activities such as unmanaged livestock grazing, feral animal activity and chemical destruction of regrowth.
The HIR method will expire Sept. 30, after which no new projects will be registered, the CER said June 2.
HIR projects generated nearly 4 million ACCUs in fiscal 2022-23 (July-June), slightly behind the 4.4 million ACCUs generated by landfill gas-based projects and followed by avoided deforestation ACCUs of around 2 million, according to CER data.
Overall, HIR projects have generated nearly 36% of total ACCUs issued over the last three fiscal years.
While avoided deforestation is a nature-based method, it was officially discontinued earlier in 2023 and is generally not favored by buyers looking for high-integrity ACCUs.
Platts, part of S&P Global, assessed the price of Generic ACCUs at A$35/mtCO2e ($23.17/mtCO2e) on June 5 and HIR ACCUs at A$36.25/mtCO2e. Generic ACCUs mostly represent credits from landfill gas and avoided deforestation methods and usually trade at a discount to HIR ACCUs.
The only other nature-based methods that are generating credits of notable volume are Savanna Fire Management, or SFM, and Environmental Planting, or EP.
EP accounted for just 1% of total ACCU issuance in FY 2022-23, and SFM represented a 2.4% share, thus leaving a large supply gap.
There has been a significant number of project registrations for the soil carbon sequestration method, but only one of the projects has been issued ACCUs by the CER until now.
"There has always been talk about soil carbon but I just haven't seen anybody get something off the ground or execute some of the issuance or seeing signs that it can be scaled up as much," a carbon broker said.
The CER is consulting on a method, called Integrated Farm Management, or IFM, which is seen as a potential replacement for the HIR method.
The IFM method aims to allow separate land-based activities to be combined on the same property or aggregated properties, according to the CER.
The method was supposed to get the government's approval by February 2023, according to CER website.
However, there was no sign of the method being approved in the near term with most industry participants suggesting a timeline as wide as six to 18 months.
A draft for the IFM method was nearly 60%-70% complete and on track for parliamentary approval by the first half of 2023 but it got stalled due to a government-backed panel, called Chubb review, a major project developer said.
The Labor government set up an independent panel in 2022 to review the integrity of several carbon methods and overall market governance.
The panel, headed by Australia's former Chief Scientist Ian Chubb, published its report in January and recommended setting up a new committee to monitor method development and improve market governance.
The new independent panel, called Carbon Abatement Integrity Committee, or CAIC, will replace the existing panel.
However, the recruitment process for CAIC members is in early stages, according to an update from a government official May 22.
"I think there is a capacity issue in Canberra. When you consider what the government in lockstep with the CER needs to prosecute over the next three years, it's quite a material roadmap," said Guy Dickinson, CEO of BetaCarbon, a blockchain-based carbon startup.
"There is going to be a hole in supply and in two to three years when the demand is going to be ramping up particularly through compliance, with hopefully voluntary demand increasing as well," the carbon broker said.
The potential supply gap in nature-based credits is expected to appear as the demand for ACCUs starts increasing from big emitters under the country's strengthened emissions compliance scheme, Safeguard Mechanism, as well as from the voluntary market.
Even if IFM gets approved in the near term, market participants do not expect the method to start generating ACCUs before 2026 as developers establish new land management practices, assess their commercial viability and work with landowners on implementation.
"We have a shortfall around quality credits, and that shortfall will lead to a shortfall in the medium term in that 24-month period because you will get a lot of people clamoring for the same credits before they ever get to the market," Dickinson said.
The market was still uncertain on the impact of HIR method's expiry on the spot ACCU price.
"HIR sunsetting shouldn't have a direct impact on spot ACCU prices but may play into anxiety around a supply shortfall," said Kyle Hamilton, associate director, markets, RepuTex, a carbon market research firm.
The impact on the price will not be visible in the first year but two or three years down the line, it is expected to have a positive impact on price, the carbon broker said.