Investing.com — Macquarie has begun reporting on Australia’s carbon market, focusing on how it works and its role in Australia’s efforts to reduce emissions.
As Australia strives to achieve its targets under the Paris Agreement, the carbon market, especially through the Safeguard Mechanism, is critical to reducing industrial emissions.
The Australian carbon market, which operates under the Safeguard Mechanism, currently covers approximately 140 million tonnes of greenhouse gas emissions annually, accounting for approximately 28% of total Australian emissions.
This market mainly includes industries with high emissions, such as mining and oil and gas extraction.
These sectors must follow strict regulations by reducing their emissions using Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs), which are the main tools to comply with these regulations.
The market functions as a hybrid system, combining compliance with voluntary carbon offset mechanisms. Facilities only need to offset emissions that exceed specific baseline values related to their production levels and carbon intensity.
This flexibility allows companies to tailor their operations to minimize compliance costs while meeting their obligations. Non-compliance can result in heavy fines, up to A$250 per tonne, forcing companies into compliance with compensation requirements.
“We see the plan tightening in 2026FY (running from June 25 to June 26), while a huge demand-supply gap will emerge in 2027FY,” the analysts said.
A supply-demand gap is expected to emerge in FY 2027, largely due to the Safeguard Mechanism baseline reductions, combined with the addition of new high-emitting facilities such as gas and coking coal plants.
These new entrants face stricter compliance obligations, which will drive demand for BATTERIES. Macquarie predicts that compliance demand for ACCUs will increase dramatically from 6.4 million tonnes in FY 2024 to 38 million tonnes in FY 2030.
Despite these optimistic prospects, there is currently an oversupply on the market. There are currently approximately 41 million BATTERIES in circulation – more than three times the total annual demand in 2024.
However, as compliance requirements become stricter and baseline reductions accelerate, this surplus is expected to decline, causing the market to tighten in the coming years.
BATTERIES are expected to increase in value as demand exceeds supply. Macquarie estimates that prices will converge around A$55 per tonne in the long term.
This price reflects the marginal costs required to bring new carbon offset projects online, especially in vegetation and agricultural practices, which will be crucial in meeting future supply shortages.
The forecast price increase is based on the belief that tighter market conditions will stimulate the development of new projects.
As supply decreases and compliance obligations become stricter, the price of carbon credits will rise to levels that incentivize necessary investments in new carbon sequestration initiatives.
While the market outlook is largely positive, Macquarie analysts have noted some risks. One concern is a possible oversupply of BATTERIES due to a recent increase in project registrations.
If new projects continue to come in at the current pace, there may be too many BATTERIES available, which could slow price increases and delay the expected market tightening. A similar situation occurred in New Zealand, where too many forestry offsets led to an oversupply in the carbon market.
Macquarie analysts expect a regulatory event in 2025, when Australia will submit its 2035 climate targets to the United Nations Framework Convention on Climate Change (UNFCCC).
This could lead to stricter compliance rules, with consequences for the carbon market. Additionally, the new Integrated Farm and Land Management (IFLM) program is expected to launch in FY 2026.
This program includes soil and vegetation-based sequestration projects, expanding the range of carbon offset methods available on the market.
