Carbon pricing is considered one of the most powerful tools available to policymakers to incentivise reducing emissions as part of an integrated policy mix. A decade ago, carbon pricing policies covered only 7% of global emissions.
Today, nearly a quarter of global emissions are covered by these instruments. There is cause for optimism as carbon pricing and carbon markets continue to evolve and grow, with new schemes and instruments being introduced.
This progress led to carbon pricing revenues reaching a record $104 billion in 2023.
Large middle-income countries, including Brazil, India, Chile, Colombia, and Türkiye, are making notable progress toward implementing emissions trading schemes.
While the power and industrial sectors still account for the bulk of carbon pricing coverage, advancements are also being made in other sectors such as international aviation, shipping, and waste.
Additionally, countries like China, Vietnam, Thailand, and Singapore are increasingly seeking complementarity between carbon pricing policies and carbon markets by integrating carbon crediting frameworks into their policy mixes.
The Australian government anticipates that demand for ACCUs will exceed issuance by 2028, with holdings expected to rise from 38 million units in 2024 to 51 million units in 2026 before gradually declining to 39 million units by 2032.
The majority of ACCUs are currently generated from the land sector, particularly through vegetation and savanna fire management projects. As of the end of the 2023 financial year, the Australian National Registry of Emissions Units recorded a total of 27.6 million units.
Currently, ACCU issuance surpasses demand and is expected to continue this trend until 2027. This could result in an accumulation of unitsunless new carbon accounting methods are introduced promptly to support the development of new projects within this period.
Australia has committed to reducing emissions to 43% below 2005 levels by 2030 and achieving net zero emissions by 2050.
Financial Markets Supporting the Energy Transition
As the global community intensifies efforts to combat climate change, financial markets play a pivotal role in facilitating the energy transition.
According to the London Stock Exchange, global carbon markets nearly reached a record value of USD 950 billion in 2023. European Union Allowances (EUAs), the primary unit in the world’s most established cap-and-trade system, comprised the majority of this market.
In 2023, approximately USD 840 billion worth of EUAs were traded, with around 90% of these transactions occurring in the derivatives market.
This derivatives-based international experience offers a valuable blueprint for expanding carbon markets in Australia and New Zealand.
Derivatives uniquely facilitate market growth by mitigating uncertainty, thus promoting stability and confidence among participants.
The ASX currently offers various commodity derivative contracts that facilitate price discovery and hedging across sectors such as electricity, gas, and agriculture, aiding businesses in managing the renewable energy transition.
To further support the decarbonisation efforts of Australia and New Zealand, the ASX plans to introduce a suite of Environmental Futures contracts covering ACCU (Australian Carbon Credit Units), LGC (Large Generation Certificates), and NZU (New Zealand Units) markets.
These contracts will initially be listed on an annual basis for up to five years, providing a transparent forward curve for market participants to price and hedge their exposure.
éthica capital Research Insights
éthica capital partners with industry leading experts to offer specialised support tailored to specific transactions within the sector, with a goal to provide comprehensive solutions that drive sustainability and growth.
For a deeper understanding on Carbon Credits, read éthica capital's "Carbon Credit – The path to a more sustainable future" here; https://www.ethica.capital/research-insights
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