The Australian carbon market is maturing quickly as the federal government and the corporate sector alike ratchet up their commitments to decarbonisation. Here are some key points to help you understand how it works.

What is a carbon market?

A carbon market is a trading system allowing investors, corporations and governments to exchange carbon offsets and credits. Parties may buy or sell units to meet their limits on emissions, either under the Kyoto Protocol or other agreements. Carbon markets are divided into voluntary carbon markets and compliance carbon markets.

• Voluntary Carbon Markets are unregulated markets that allow individuals, businesses and governments to acquire carbon offsets from project developers on a voluntary basis to compensate for their greenhouse gas (GHS) emissions. Voluntary markets are still in their infancy. Their total size is estimated at USD$1 billion.
• Compliance carbon markets, also known as emissions trading systems (ETS), are schemes in which regulators auction off or give away a limited volume of carbon allowances to companies in high-polluting sectors that the government seeks to make accountable for their emissions. Companies that manage emissions more efficiently can sell unused allowances to other companies that need them to offset their own emissions. There are approximately 30 ETSs globally with a market size of USD$270 billion.

How are carbon credits priced?

The price of carbon credits differs due to variances in quality as well as market factors determining supply and demand. The quality of a carbon credit is determined by the level of certainty around its ability to reduce or remove one tonne of carbon dioxide. The greenhouse gas reductions or removals should be:

• Additional: The project's emissions reduction goal was successful and would not have occurred without the project.
• Not overestimated: The reduction of GHG emissions met expectations for the project.
• Permanent: Carbon credits must be associated with permanent GHG reductions. If a GHG reduction or removal is reversed – if the carbon sequestered or removed by the carbon project is released back into the atmosphere – it no longer reduces emissions.
• Free from other detriments: Carbon credits should not be associated with social or environmental harm.
• Not double counted: Double counting occurs when two entities claim the same carbon removal or emissions reduction.

Aside from carbon reduction, projects may produce a variety of environmental, economic, social, and cultural advantages known as co-benefits, which also contribute to the value of a carbon credit. Co-benefits include:

• boosting biodiversity via the conservation and regeneration of native plants
• adopting fire management methods to create new revenue opportunities for Indigenous Australians
• improving soil health and land quality

What is the supply of Australian Carbon Credit Units?

The supply of Australian Carbon Credit Units originates from three main sources:

• Current projects registered with the Emissions Reduction Fund (ERF)
• New and extended ERF projects - projects that will be created to meet future ACCU demand
• ACCUs in the Australian National Register of Emissions Units (ANREU)

Where does the demand for carbon credits in Australia come from?

Companies, governments, or wholesale investors can purchase carbon credits to offset their emissions or as an investment. Buyers fall within four main categories:

• The voluntary market: The demand comes primarily from companies voluntarily buying up carbon offsets, with 54 of Australia’s ASX 100 companies having pledged net-zero emissions by 2050.
• A safeguard mechanism, requiring Australia's major GHG emitters to reduce their net emissions below a baseline. Emitters have several alternatives for keeping their emissions below their baseline to manage their commitments, including sourcing and surrendering ACCUs.
• Governments: Demand for ACCUs is increasing mainly to meet government commitments to offset emissions. Government buyers are typically interested in the offsets and co-benefits a project delivers within their jurisdiction.
• Clean Energy Regulator contracts: The Clean Energy Regulator has committed AUD$2.3 billion to date through Commonwealth contracts to purchase 192 million ACCUs. More than AUD$230 million remains available from the ERF for future ACCU purchases.

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