12 Nov 2020

Understanding the changing carbon market dynamics in 2020

2020 Carbon Market

2020 has been a pivotal year for the way companies develop a voluntary approach to offsetting emissions as part of their net zero strategies. It’s been a year marked by continuous records in the carbon market. It’s been more active, more strategic, and more than ever it has proven the importance of managing risk. Here’s a quick snap-shot of what we’ve seen at TEM, and why we are excited about 2021.

Market activity

From the latest market update, the 2020 year looks to set a new record for the amount of activity coming out of the voluntary carbon market. This has been spurred by ambitious commitments from global giants, including Google joining the likes of Apple and Microsoft in moving towards carbon neutrality.

Down Under, a host of Australian corporates have refined their plans towards net-zero and carbon neutral commitments. This has materialised into a record year for organisations certified under the Climate Active standard here in Australia.

Some of these announcements have had material impacts on market supply and pricing. A record trade in the Australian market saw prices for certain international credits double almost overnight. The deal was a good lesson in why long-term positions and sound due diligence help to shield organisations from future price, supply and reputation impacts.

From spot trades to long-term positioning

This year has also seen a maturity in corporate thinking around the strategic importance of taking long-term positions on offsetting.

Gone are the days where a price for an offset on the spot market would be matched six months later. This is sharpening the focus of organisations to work with partners like TEM and enter into deals which secure price and volume certainty, and thus avoid the awkward conversation with the CFO that the company’s carbon neutral commitment has doubled in price since last year.

Long-term positions have also been taken directly with projects in Australia and abroad. This has materialised into tens of millions of dollars of new finance flowing to support carbon projects including widespread revegetation across Australia.

These movements have set in train a flurry of activity from major domestic and international corporates looking to secure their offsetting needs well into the future.

The changing value of carbon

These long-term positions are not only being decided upon through the lens of lowest cost.

There is a heightened focus now from both the public and private sector on the benefits projects can deliver beyond carbon, including employment, biodiversity and sustaining culture.

The value of these services was also something 2020 revealed to us. While we understand the value placed by different organisations on ‘premium carbon offsets’, the Queensland Government’s Land Restoration Fund auction gave us a new benchmark of value.

In August, we saw an average price of $49/tonne paid for ACCUs alongside of matching ‘co-benefits’. This result can be compared to the most recent Federal Government auction result in September of an average $15/tonne for lowest cost abatement activities across the country.

Where the value of ACCUs and other offsets end up is an uncertain science, but again points to the importance of working with strategic partners who are deeply engaged in the market.

Trade and products

We’ve also seen some of the first movements in cross-border trades of resource products matched with offsets.

Earlier in October, Switzerland and Peru became the first two countries to enter into a bilateral transfer of greenhouse gas reductions as a demonstration of what the future could look like under the all-important Article 6.2 of the Paris Agreement.

Product lines are also being coupled with large carbon offset plays. Shell (2019) and Total (2020) have become the first two organisations to export gas alongside of matching offsets in what many see as the start of a trend from energy users to meet their net-zero targets.

Carbon neutral product demand remains strong. In fact, it looks like COVID may generate the silver lining that many of us pondered in terms of demonstrating the power of individual action in tackling major global problems.

Our work with Qantas has shown that a larger proportion of travellers are choosing to Fly Carbon Neutral than ever before. Our launch of carbon offsetting for Webjet customers has also shown very strong demand for this product among returning travellers. A remarkable result for an industry that is desperate to re-boot sustainably off the back of COVID.

New players. New focus.

Finally, 2020 has brought into focus the importance of the carbon market in international efforts towards net zero emissions through the establishment of the Taskforce for Scaling Voluntary Carbon Markets.

Launched by Mark Carney, UN Special Envoy for Climate Action and Finance Advisor to UK Prime Minister Boris Johnson, the Taskforce is a private-sector led group that will focus on key areas to strengthen the market infrastructure to connect demand with supply.

And finally, it would be remiss of me not to mention the most recent, and possibly game-changing signal to the market; the election of Joe Biden as the next US President. This result means that all three of the big continental blocks in the world will have commitments to reach net zero emissions by 2050 or 2060.

With a platform built around a commitment to net zero emissions, re-joining the Paris Agreement and a $2 trillion investment into clean technology, the Biden Administration will do wonders for investor confidence, and put pressure on Australia to target net-zero emissions by 2050.

What will 2021 bring? We have some ideas, and we can be sure that the carbon market will be very active, presenting plenty of risk and opportunity. If you would like to talk more about how your company can manage this moving forward, please get in touch.

Adrian Enright is General Manager Corporate; passionate about surfing, family and the unrelenting quest for a healthier future planet.