Macquarie Initiates Coverage of Australia’s Carbon Market via Investing.com

Investing.com — Macquarie has initiated coverage on Australia’s carbon market, focusing on how it works and its role in Australia’s efforts to reduce emissions.

As Australia aims to meet its targets under the Paris Agreement, the carbon market, particularly through the safeguard mechanism, is crucial to reducing industrial emissions.

Australia’s carbon market, which operates under the safeguard mechanism, currently covers about 140 million tonnes of greenhouse gas emissions annually, which is about 28% of Australia’s total emissions.

This market mainly covers industries with high emissions such as mining and oil and gas extraction.

These sectors must follow strict rules by reducing emissions using Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs), which are the key tools for meeting these regulations.

The market operates as a hybrid system, combining compliance with voluntary carbon offset mechanisms. Facilities only have to offset emissions that exceed specific benchmarks, which are linked to their production levels and carbon intensity.

This flexibility allows companies to adjust their operations in a way that minimizes compliance costs while meeting their obligations. Failure to comply can result in severe penalties of up to $250 per tonne, ensuring companies comply with compensation requirements.

“We see the pattern tightening in 2026 (June 25 to June 26), with a huge supply-demand gap in 2027,” analysts said.

A supply-demand gap is expected to open in fiscal 2027, largely due to base reductions in the safeguard mechanism, combined with the addition of new high-emitting facilities such as gas and coking coal plants .

These new entrants face more stringent compliance obligations, which will drive demand for ACCUs. Macquarie estimates that compliance demand for ACCU will increase dramatically from 6.4 million tonnes in FY2024 to 38 million tonnes by FY2030.

Despite this optimistic outlook, the market is currently oversupplied. Currently, approximately 41 million ACCUs are in circulation – more than three times the total annual demand in 2024.

However, as compliance obligations become more stringent and benchmark cuts accelerate, this surplus is expected to diminish, tightening the market in the coming years.

ACCU is expected to increase in value as demand outstrips supply. Macquarie expects prices to converge around $55 per tonne in the long term.

This price point reflects the marginal cost required to bring new carbon offset projects online, particularly in the areas of vegetation and farming methods, which will be essential to cover future supply shortfalls.

The expected price increase is based on the belief that tightening market conditions will stimulate the development of new projects.

As supply decreases and compliance obligations become more stringent, the price of carbon credits will rise to a level that will stimulate the necessary investment in new carbon sequestration initiatives.

While the market outlook is largely positive, Macquarie analysts noted some risks. One concern is a possible oversupply of ACCUs due to a recent surge in project registrations.

If new projects continue to emerge at their current rate, there could be too many ACCUs available, which could slow price increases and delay the expected tightening of the market. A similar situation happened in New Zealand, where too many forest offsets led to an oversupply in the carbon market.

Macquarie analysts expect a regulatory event in 2025, when Australia is due to submit its 2035 climate targets to the United Nations Framework Convention on Climate Change (UNFCCC).

This could lead to stricter compliance rules, affecting the carbon market. In addition, the new Integrated Farm and Land Management (IFLM) program is expected to be launched by fiscal year 2026.

This program will include soil and vegetation-based sequestration projects, expanding the range of carbon offset methods available on the market.