The State of Play in Australia’s Carbon Markets

Australian Securities Exchange (ASX) recently hosted The Network Forum event where Mark Williamson, Executive General Manager from the Clean Energy Regulator presented insights on carbon markets and the current state of play. John Connor, chief executive officer from the Carbon Markets Institute, and Karen Webb, head of issuer services from ASX, joined Williamson on stage to discuss recent and future developments in the Australian carbon market.

Blue skies, rolling plains and vast natural resources make Australia the envy of the world. In the race to net zero, these defining characteristics take on a new meaning. Australia has the potential to help the world decarbonise by becoming a leading provider of clean energy and using that to value add to its minerals. To achieve this, large-scale capital investment in onshore renewable projects, industrial decarbonisation and carbon sequestration is required. The Clean Energy Regulator (CER) is working with industry to ensure Australia has the infrastructure it needs to support capital investment in the rapidly growing carbon market, including the development of a new register, which it believes will form the foundation of a world leading carbon exchange.

A renewable energy powerhouse

Rich in natural resources, the transition to renewables presents Australia with the opportunity to evolve into a clean energy export superpower. Mark Williamson, executive general manager at CER, believes Australia has the potential to help the world decarbonise. “We have all the minerals to support the clean energy transition. If we meaningfully invest in this approach then we could help reduce the world’s carbon emissions by exporting production that has low greenhouse gas emissions intensity,” he says.

Capital is an important part of making the energy transition a reality and Australia represents an attractive opportunity for those looking to invest. With vast solar and wind resources, a large land mass and an abundance of minerals that are crucial to the transition, Australia has what the world needs to reach net zero.

 

Getting the foundations right

To aid in becoming a net zero emissions economy and a clean energy export super power, Australia needs market infrastructure that can support large scale investment in renewables and other climate solutions. The Australian National Registry of Emissions Units (ANREU), built in the 1990s, is where Australian Carbon Credit Units (ACCUs) are held and transferred between buyers and sellers.

The CER believes a strong foundation is crucial to support the growing carbon market. After 18 months of a multi-stage procurement process, the CER recently announced the acquisition of a new register to be delivered by technology solutions provider, Trovio Group.

According to Williamson, the goal is to enable interconnectedness between markets by allowing trusted digital platforms to connect to the register. “This will ultimately offer buyers and sellers greater choice, efficiency and transparency,” he says.

The CER believes the new register will form the foundation of a world class carbon market. The register will ultimately hold all domestic carbon units and certificates such as ACCUs and Renewable Energy Certificates (RECs). It will also hold proposed new certificates including Safeguard Mechanism Credits (SMCs) and Guarantee of Origin certificates for hydrogen and other low emissions production such as metals and liquid fuels.

In parallel, the CER is working with the Australian Securities Exchange (ASX) to understand what a centralised exchange traded carbon market might look like.

Karen Webb, Head of Issuer Services at ASX says, “The aim is to find a solution that’s as simple as possible.” Ideally, this would fit within ASX’s existing share trading infrastructure, which supports around $1.5 billion in transactions daily.

Finding a solution that fits

ASX operates its own register known as CHESS, which facilitates the clearing, settlement and transfer of products, such as shares, traded on market. The Australian carbon exchange will need to link to both CHESS and ANREU so that ACCUs can be traded and surrendered by entities to the government in order to meet their compliance obligations.

There are some key differences between ACCUs and shares that will need to be considered in the design of the exchange. While shares are fungible, some ACCUs can attract a price premium by the market depending on the project method that is used to create them.

Williamson notes, “One ACCU, by definition, represents one tonne of CO2-e abated. That does not change. We know that markets have priced ACCUs differently because of their environmental benefits or positive First Nations’ impacts such as employment opportunities, but the attributes that are valued can change and vary over time. Relatively, there’s a small proportion of ACCUs that attract a sustained and material premium.”

Finding the right balance to standardising ACCUs on the Australian carbon exchange will need to be informed by the market. The regulatory requirements for the ACCU Scheme means there will always be some level of differentiation between projects, and markets will value these accordingly.

John Connor, CEO of the Carbon Market Institute, agrees. “Part of the challenge in building a centralised exchange is the wide range of methods available to create ACCU’s. While most volume comes from a handful of methods, there can be significant stratification in prices among those methods.”

This highlights the need for the existing Over the Counter (OTC) market, which has played an important role in supporting price stratification and facilitating trading among different ACCU methods with co-benefits.

An exchange traded market is intended to complement rather than replace the OTC market, which Webb acknowledges works well. “Investors appreciate the stratification among methods and co-benefits that the OTC market provides. However, as more volume comes onto the ACCU market, we need a platform that can support and scale that volume to help the market to reach its full potential. The best way to achieve this is through standardisation,” she says.

Taking a collaborative approach

The CER and ASX are working together to develop a consultation paper on the design of the Australian carbon exchange, requesting feedback from the market on the potential structure and functionality. The local regulator, Australian Securities and Investment Commission (ASIC), will also be part of the process with a focus on ensuring buyers are clear on what they are purchasing via an exchange traded model.

At this stage, the timeline for the Australian carbon exchange is unclear with much depending on the outcome of market and regulator consultation. The CER expects the new register to be functional by the end of 2024 with the carbon exchange currently set to follow some time in 2025.

Looking to the future

ASX believes it has the ability to scale Australia’s carbon markets by connecting its ecosystem with the ACCU market. Webb believes the ACCU market fits nicely within the ASX universe which, when combined with the existing customer base, provides a powerful tool for growth.

In addition to the spot carbon exchange, ASX is currently working on a range of derivative contracts to support forward pricing across the ACCU, Large-scale Generation Certificate (LGC) and New Zealand Unit (NZU) markets. The futures contracts are scheduled for launch in July 2024[1] and will provide a transparent forward curve out to five years, sending important price signals for risk management and investment.

An active and transparent derivatives market complements a centralised Australian carbon exchange. Williamson agrees stating, “Consistent forward price signals, in addition to the development of a liquid spot market, will give investors’ the confidence they need to commit funding to clean energy, industrial transformation and carbon offset projects leading to an increase in genuine and additional carbon abatement.”

ABOUT THE PRESENTERS

Mark Williamson, Executive GM, Clean Energy Regulator. Mark Williamson is an Executive General Manager at the Clean Energy Regulator, reporting to the CER’s Chair/Chief Executive. In over 11 years at the Regulator, Mark has successfully led many major initiatives including implementation of the Carbon Pricing Mechanism and Australia meeting its Renewable Energy Target. Mark has extensive senior executive experience in the private sector and state and local government prior to joining the Commonwealth in 2012. Mark has tertiary qualifications in applied science and postgraduate qualifications in management. He is a graduate of the Australian Institute of Company Directors and a Fellow of the Environment Institute of Australia and New Zealand.

John Connor, Chief Executive Officer, Carbon Market Institute. John has had over 30 years in public and private policy with a focus on building the evidence and strategic partnerships to drive change. John is CEO for the Carbon Market Institute (CMI), an independent member based institute for best practice in decarbonisation and market solutions in the transition to net-zero emissions. CMI’s around 150 member companies span the carbon value chain from primary producers, carbon service providers and emission intensive companies.

Karen Webb, Head of Issuer Services, ASX Limited. Karen has held a range of positions at ASX since joining the organisation in 2000, working in the Listings, Market Data, Operations, Equity Post Trade and Issuer Services teams. Karen has worked on key customer focused initiatives including Corporate Actions STP, the implementation of T+2 Settlement and CHESS Replacement. Karen has over 25 years’ experience in financial markets covering equity and corporate debt. Prior to joining ASX Karen held positions with Warburg Dillon Read and UBS Australia Limited with experience including corporate and institutional lending, credit risk management, corporate and agency loan portfolio management.

ABOUT THE AUTHOR OF THIS ARTICLE

Monique Bell is a Commodities Product Manager at ASX. She is working on the upcoming listing of a new Gas Futures contract as well as a suite of Environmental Futures products to support Australia and New Zealand’s energy transition. Monique is a CFA, holds a Masters’ Degree in Finance and recently completed certification with the Cambridge Institute for Sustainability Leadership.

Disclaimer

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