Macquarie Begins Coverage of Australian Carbon Market

Macquarie has launched its coverage of the Australian carbon market, examining its functionality and importance in Australia’s mission to reduce emissions.

As the nation strives to comply with the Paris Agreement objectives, the carbon market, particularly through the Safeguard Mechanism, plays a vital role in minimizing industrial emissions.

Currently, the Australian carbon market, operating under the Safeguard Mechanism, accounts for around 140 million tonnes of greenhouse gas emissions annually, representing about 28% of Australia’s total emissions. The market primarily targets high-emission sectors, including mining, oil, and gas extraction.

Industries operating within this market must adhere to stringent regulations aimed at reducing emissions through Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs), which are essential tools for compliance.

The system operates as a hybrid model, integrating compliance with voluntary carbon offsetting mechanisms. Companies are only required to offset emissions that surpass specific baselines tied to their production levels and carbon intensity, offering them flexibility in managing operations to minimize compliance costs. Infringements can lead to significant fines, reaching up to A$250 per tonne, ensuring adherence to the offsetting requirements.

Analysts predict that the scheme will witness increased stringency starting in fiscal year 2026, which runs from June 2025 to June 2026, with a substantial supply-demand gap anticipated in fiscal year 2027. This gap will largely be driven by the baseline reductions mandated by the Safeguard Mechanism, coupled with the introduction of new high-emission facilities, such as gas and coking coal plants.

These newcomers will face stricter compliance requirements, leading to a surge in demand for ACCUs. Macquarie projects that the compliance demand for ACCUs will escalate from 6.4 million tonnes in fiscal year 2024 to 38 million tonnes by fiscal year 2030.

However, the market currently has a surplus, with approximately 41 million ACCUs in circulation—more than three times the total annual demand for 2024. As compliance obligations tighten and baseline reductions accelerate, this surplus is expected to decrease, tightening the market in the upcoming years.

ACCUs are anticipated to appreciate in value as demand exceeds supply, with prices likely converging around A$55 per tonne in the long term. This price forecast reflects the marginal cost needed to initiate new carbon offset projects, particularly in vegetation and agricultural sectors, which will be crucial for addressing future supply deficiencies.

The expected price rise is based on the premise that tightening market conditions will promote the development of new projects. As supply diminishes and compliance requirements become more rigorous, the price of carbon credits is expected to rise, stimulating necessary investments in new carbon sequestration initiatives.

Despite a generally positive market outlook, Macquarie analysts have identified potential risks. One key concern is a potential oversupply of ACCUs due to a surge in project registrations. If the current influx of new projects continues, there may be an excessive number of ACCUs, which could temper price growth and postpone the anticipated market tightening. A similar situation occurred in New Zealand, where an oversupply of forestry offsets affected the carbon market.

Analysts also foresee a regulatory milestone in 2025 when Australia plans to submit its 2035 climate targets to the United Nations Framework Convention on Climate Change. This development could prompt stricter compliance regulations impacting the carbon market. Additionally, the Integrated Farm and Land Management (IFLM) program is expected to be introduced by fiscal year 2026, which will encompass soil and vegetation-based sequestration projects, expanding the array of carbon offset methods available in the market.