Online trading platforms for carbon credits offer major opportunities
10 min read
Demand for Australian Carbon Credit Units (ACCUs), and other carbon credits, continues to surge domestically. To date, carbon credits trades in Australia typically involve the purchaser and seller entering into carbon credit offtake agreements, which can entail complexity and cost. The development of online trading platforms for carbon credits presents opportunities to increase ease of trade, expand price transparency, reduce barriers to entry and facilitate more businesses participating in carbon markets. There are a number of carbon trading platforms (either available now or in development) that businesses could engage with to purchase or sell credits, and meet their emissions reductions commitments.
- The Australian Clean Energy Regulator and National Australia Bank are developing carbon trading platforms to enhance efficiency and transparency of carbon trading. The CORE Markets platform has also been launched, allowing greater access to carbon markets.
- Different carbon trading platforms will likely present different advantages in terms of access to co-benefits, sophistication of the trading that can be facilitated and timing of availability of the platform.
A carbon credit is a tradeable instrument generally representing one tonne of CO2 equivalent abatement or sequestration. Eligible activities and projects that avoid or sequester greenhouse gases can generate carbon credits. These carbon credits can then be sold to other entities wishing to offset the greenhouse gases they emit into the atmosphere. There are a number of different types of carbon credits utilised by Australian businesses. By way of a refresher, below is a summary of two of the more commonly used types of carbon credits in Australia:
ACCUs are generated under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth). Each ACCU represents the equivalent of 1 tonne of CO2 that has been stored or avoided. Only offset projects meeting criteria established under the Act, as well as associated regulations and methodologies, qualify for an allocation of ACCUs.
Certified Emission Reduction units (CERs) are generated in developing countries in accordance with the Kyoto Protocol rules.1 At present, the majority of voluntary offsetting in Australia is achieved through the acquisition and retirement of CERs. The Australian National Registry of Emissions Units Act 2011 (Cth) establishes a registry for ACCUs and is the national registry for CERs.
Carbon trading platforms
Currently, the general market for carbon in Australia faces two key challenges. First, there is a growing level of demand for carbon credits, including from businesses looking to voluntarily reduce their emissions profile. Second, the market does not always operate in an efficient or entirely transparent way. The acquisition process involves entering into a physical contract, which is often negotiated by lawyers with specialist expertise. The involvement of brokers as intermediaries can add to costs.
Carbon trading platforms represent a potential solution to such problems. The ability to more directly connect suppliers of carbon credits with potential purchasers could increase price transparency, reduce the need for intermediaries and significantly reduce the costs of participating in the carbon market. Platforms may also enable exchange of carbon credits on standard terms, with a reduced need for negotiation.
The Australian Carbon Exchange
The Clean Energy Regulator has gone to market seeking the Australian Carbon Exchange, which is intended to operate in a similar way to an online stock exchange.2 The platform would enable the purchase, clearing and settlement of ACCUs, and possibly other forms of carbon credits, by both individuals and businesses. The Clean Energy Regulator anticipates that proposals will be evaluated in the first quarter of 2022 with the platform to then be launched in 2023. It is estimated that by 2030 the Australian Carbon Exchange will save the corporate sector up to $100 million in transactional costs when trading ACCUs.3
There were 160 responses to the request for expressions of interest to develop the carbon trading platform, and now five groups (including ASX and NSX Limited) have been shortlisted to provide exchange trading and market services, as well as registry services.4 Chi-X Australia has also announced it’s been shortlisted to provide exchange trading services.
Meanwhile, the National Australia Bank has recently launched a carbon trading pilot with Natwest, CIBC, and Itau Unibanco, known as ‘Project Carbon’.5 Project Carbon would use distributed ledger technology to operate its carbon trading platform. Distributed ledger technology allows a shared, immutable record of data and transactions across a network (rather than relying on a centralised record).
We believe that distributed ledger technology could offer some significant benefits to carbon trading. For example, it may be able to increase transparency of carbon markets and facilitate automatic settlement of transactions.6
The CORE Markets platform, developed by the Renewable Energy Hub, was also launched in July. The platform aims to enable greater price transparency and access to carbon markets.7 The Renewable Energy Hub describes it as providing a ‘full complement’ of carbon credits.8 The platform also has data analytics on a range of carbon products (including ACCUs). As an over-the-counter operation, it is intended to have lower barriers to entry and attract a wider range of participants than the Australian Carbon Exchange being established by the AER.
Xpansiv operates a global marketplace for ESG commodities (including carbon credits such as the Global Emissions Offset or GEO). In August there were 15 million tonnes of carbon traded on the Xpansiv platform (an increase of 812% on the year prior).9 Xpansiv recently announced a successful (and oversubscribed) capital raise of US$100 million, with the Clean Energy Finance Corporation and Commonwealth Bank among the investors.
Platform challenges and benefits
One of the important challenges facing carbon trading platforms is that purchasers often value environmental, social or economic co-benefits. These are additional benefits that arise from the carbon avoidance or sequestration activity over and above the fact that it has resulted in a reduction in greenhouse gases – such as procuring carbon credits from a project run by an Indigenous community or carbon credit projects that may increase biodiversity. Seen in this way, carbon credits are not as fungible as a class of shares traded over an online stock exchange.
We believe this will be an important consideration in the operation of these platforms. Businesses looking to utilise a carbon trading platform should consider whether it provides a way to easily access information on co-benefits in relation to carbon credits. For example, the functionality of the CORE Markets platform enables visibility of co-benefits.
Sophistication of trading activity
We expect that the increasing use of technology in carbon trading platforms, and reduction in transaction costs, may see a consequential reduction in barriers to entry for the carbon market. This could cause an increase in both the supply of credits onto these platforms and continued demand for the carbon credits themselves as more participants enter the market.
Businesses considering utilising a carbon trading platform should look at whether their preferred platform enables the level of sophistication in carbon trading that they require. It will be important to understand whether that can be achieved through simple configuration or would require more extensive customisation. For example, the Renewable Energy Hub recently announced that it had facilitated the first put option trade in ACCUs. The option related to 100,000 ACCUs and provided the buyer the right to sell them in 2023 at a strike price of $18, providing downside risk protection if the price of ACCUs falls.10 The Renewable Energy Hub also promotes that its platform allows access to forward contracts in carbon.
When you can access these platforms
The CORE Markets and Xpansiv platforms are available now, and NAB’s Project Carbon pilot is intended to operate this year, while the Australian Carbon Exchange is not anticipated to launch until 2023. Businesses should think about any timing preferences they may have for access to carbon markets. At the macro level, an issue to watch is whether the carbon trading ecosystem will be able to sustain a number of trading platforms. In other platform markets, there has been fierce competition to gain the benefit from the network effect of a large number of participants. Consider, for example, the market for ride-sharing services. The presence of a number of trading platforms may encourage healthy competition and require providers to hone their product differentiation (for example, identification of co-benefits) to attract customers and participants.
Why engage with carbon trading platforms?
Interest in the trade of carbon credits is surging due to a confluence of factors. For instance, the role of carbon offsets in the transition to net zero emissions has come under renewed focus following the conclusion of the COP26 negotiations in Glasgow. Net zero by 2050 targets currently exist at a Federal, State, Territory and local government level across Australia. Voluntary emissions reduction commitments are becoming increasingly mainstream in the private sector. Businesses are progressively coming under pressure from stakeholders, such as investors, customers and employees, to reduce their emissions and to make emissions reduction commitments. Certain businesses may struggle to find technical solutions to abate their emissions – offsetting emissions through the purchase of carbon credits is one way that businesses can reduce the emissions profile of their goods and services, and deliver on their carbon commitments.
Recent international developments also have the potential to influence demand for carbon credits in Australia.
The European Union has proposed a Carbon Border Adjustment Mechanism (CBAM), which, in effect, taxes heavily polluting imports. Its objective is to not disadvantage European producers from having to pay a price for carbon within the European Union. It is intended that importers will start paying the CBAM from 2026, with a reporting system to commence in 2023 to facilitate its rollout. If an importer can show that a price has already been paid for the carbon emitted, it would not need to pay the tax when importing into the EU. As Australia does not currently have a national carbon price, engaging in voluntary offsetting (including through carbon trading platforms) may be one way for Australian businesses to avoid the costs of the CBAM.11
In the United States, Democratic members of Congress have proposed their own form of CBAM. That tax is designed to impose costs on imports from countries that are not significantly reducing pollution. The proposed tax is equivalent to costs faced by American companies in complying with environmental regulations.12 The mechanism is intended to raise as much as USD$16 billion each year,13 with revenue to be directed to the commercialisation of emissions reduction technologies.14 The Democrats are reportedly exploring passing the legislation through a process known as budget reconciliation, which would not require any Republican votes.
These developments in the EU and United States show the increasing pressure that businesses are under to reduce their emissions. Other jurisdictions may follow in developing regimes similar to a CBAM, both to take further action on climate change and, possibly, also to protect their own industries from importing countries with less strict environmental regulations.
Finally, the long-awaited ‘article 6’ mechanism of the Paris Agreement has been resolved at Glasgow, paving the way for international carbon markets. This means that there is potential future scope for linkages between Australian and international offset markets, and perhaps the ability for international purchasers to be able to access Australian carbon credits through domestic trading platforms.
Actions you can take now
- Consider whether purchasing carbon credits may assist your business to align with stakeholder expectations for emissions reductions.
- If you are considering the potential use of a carbon trading platform, look at how adequately it may be able to meet your needs in areas such as co-benefits, sophistication of trading, and timing of market access.
- If you are developing a carbon trading platform (or assisting a business in doing so) consider factors such as product differentiation and whether your market segment is large enough to be able to benefit from a network effect of a large number of participants.