Australia’s safeguard credit selling interest unclear

There is buying interest in Australia's upcoming safeguard mechanism credits (SMCs), but selling interest has been scant so far, delegates heard at a Carbon Market Institute (CMI) symposium in Canberra on 1 July.

The Clean Energy Regulator (CER) will start to issue SMCs from 2025 onwards to safeguard facilities that report scope 1 greenhouse gas (GHG) emissions below their annual baselines, effectively introducing emissions allowances into the Australian carbon market. Each SMC will represent 1t of CO2 equivalent (CO2e) below the baseline of a facility, which will have the option to either hold it for future use or sell it to facilities that exceeded their thresholds.

Facilities that overstep their baselines are required to buy and surrender one Australian Carbon Credit Unit (ACCU) or SMC for each excess 1t of CO2e, and will be penalised if they fail to do so. This means companies in need of units will have interest in buying SMCs, but there are doubts about selling interest, market experts said.

"We hear lots of our clients aiming to go out there and buy SMCs, but very few who are going to generate them are willing to sell because they see them as a mechanism for hedging future risk," said sustainability advisory firm Anthesis' climate resilience and decarbonisation lead, Thomas Hodgson.

Facilities will be allowed to hold an unlimited number of SMCs until 2030. They will be able to use the credits for safeguard compliance at any point up to that year — irrespective of when the SMCs are issued — but the Australian government has pledged to review post-2030 banking arrangements in the scheduled review of the safeguard mechanism in 2026-27, according to CMI.

Climate risk and energy transition consultancy Energetics has been working with 10 clients that account for a combined 15mn t/yr of CO2e in Australia. But most of them were not currently looking at the opportunity of receiving SMCs in the near future, Energetics' head of emissions quant David Kazmirowicz said, highlighting a potentially limited credit issuance.

Actual SMC transactions are only expected to pick up once the CER issues the first units in early 2025, when there will be more visibility on issuance volumes as well as selling and buying appetite. These below-baseline credits will be "a certificate to watch", said the regulator's principal economist Georgina Prasad.

There will be advantages in banking SMCs for future liability, but several facilities likely to receive the credits are not expected to have any liability in the next several years, according to Australian carbon advisory company RepuTex's head of research Bret Harper. "So this is probably a prime opportunity for them to test the market and see if they can monetise those credits," he pointed out.

SMCs are expected to trade at a discount to ACCUs as their use will be restricted to safeguard facilities, excluding them from voluntary and non-federal compliance demand, according to market participants. Safeguard volumes accounted for 75pc of all the nearly 1.2mn ACCU cancellations in the first quarter of 2024, according to latest CER data. Generic ACCU prices have ranged between A$33.75-34.60 ($22.50-23.05) in recent weeks.

By Juan Weik