05 Aug 2021

Are we watching the carbon market grow up before our eyes?

Carbon market growing up

The domestic and international carbon markets are surging well beyond the value of most commonly traded commodity prices. So what’s the deal? Why hasn’t the economy been “wrecked” with current prices? Are these markets really starting to grow up? And why do you need to start tracking it as part of your company’s climate targets?

Fifteen years ago I stood in the office of the Head of the Economics Department at the Australian National University and was given a clear choice. Stick with my degree in Economics, or complete my degree in Environmental Science.

“It’s one or the other, kid,” he said. “There’s no such combination of Economics and the Environment in this university.”

Later that year I would graduate with a “generalised” Science degree and another in Economics. A combination which in the minds of my lecturers conveyed the mixed-up headspace of a confused student and the fanciful dream that “environmental markets” might really become a thing one day.

Fast forward to today and we see the market has not just become a thing, it’s showing signs of maturing – which is what markets are meant to do. Provide a price signal through a commodity to influence the way society works. In the case of carbon; create a fungible carbon unit and use it to drive a price in the market to stimulate emissions reductions.

In fact, the market in Australia has grown up so quickly in the last few months that spot prices for Australian Carbon Credit Units (ACCUs) have hit record highs and exceeded the “economy wrecking” $AUD23 per tonne of the “Carbon Tax” days. This is a jump of more than 15% in a few months.

This has not only helped set a price for doing business in today’s economy here in Australia, but internationally similar trends are prevalent.

Today’s average carbon credit spot prices are expected to rise to at least USD $20.00 – 50.00 per credit and depending on government action, in excess of USD $100.00 per credit by 2030 and in excess of USD $50.00 per credit by 2040.

In some locations these prices are already being realised. For example, European Union Allowances (EUAs) are currently trading on the spot market at USD $62.47 per EUA.

Lower cost renewable energy offsets have shifted in price some 300% over the last twelve months. That’s almost four times the value growth of crude oil (55%), seven times the value of wheat (40%) and more than triple the value of jet fuel (roughly 90%).

Nature-based offsets will likely fill the shoes of these lower cost units as their prices rise and supply shifts due to rule changes among some of the more commonly traded standards.

This is not only good for nature, it’s what’s needed to massively accelerate the pace of change required to drive down global emissions.

The price in the market is also helping to set an “internal cost of carbon” for many businesses who are wisely incorporating the cost of their emissions in future business decisions in anticipation of bigger and stricter compliance markets.

And this is where it gets interesting for any of the carbon offset naysayers.

By internalising the cost of carbon through the use of offsets with values that begin to reflect true market dynamics, it’s much easier for organisations to make investment decisions on renewable energy investment, technology change and efficiency measures to drive down their carbon footprint and help steepen the curve of their net zero emissions trajectory. Quite the opposite role of some that say carbon offsets are somehow a “get out of jail free card” for big polluters. Nonsense!

This is also very positive for activities on the ground. As the value of carbon rises, new projects emerge. Degraded farmland becomes a massive asset for carbon sequestration through native vegetation restoration. Virgin rainforests become far more valuable left in the ground than as a piece of furniture. Renewable energy access across parts of the world still reliant on coal becomes a reality.

This is not to say the market is where it needs to be. We still see a lot of peculiarities in the way it operates, and this necessitates companies needing a well advised carbon strategy in their net zero playbook.

However, the signs are very positive. And there’s no doubt the market is growing up. And at the same time, the sky isn’t falling in.

So as it matures and finds it’s feet, I can’t help but look up at my two fairly ordinary looking degrees and wonder how they have become such a powerful unison that was once considered a terrible mismatch, and can now surely only be seen as a small part of a cleaner, more sensible way ahead.

Want to find out more? Contact Adrian Enright at Adrian@tem.com.au.

Adrian Enright is TEM’s Partnerships Director; passionate about surfing, family and the unrelenting quest for a healthier future planet.

 

Tasman Environmental Markets Pty Ltd acting as general partner of Tasman Environmental Markets Limited Partnership (the “Partnership”) ABN: 58 778 566 524. Tasman Environmental Markets (TEM) is an authorised representative (CAR 001248300) of TEM Financial Services Pty Limited (ABN 58 142 268 479, AFSL 430036). TEM is authorised to provide financial services to wholesale clients (within the meaning of the Corporations Act 2001).