24 Oct 2024, By Nick Baker, Manager of Carbon Investments and Rebecca Heard, Manager of Corporate Partnerships & Digital Solutions

Market outlook: key factors shaping the carbon market heading into 2025 

As 2024 comes to a close and COP29 is fast approaching, carbon markets around the world are preparing for a number of key developments that will shape the future of both the compliance and voluntary markets, impacting buyers. 

As countries work through their Nationally Determined Contribution’s (NDC’s), compliance markets around the world continue to be established. Australia’s compliance market is a perfect example of this, with Safeguard Mechanism entities in Australia now being required to compensate for any emissions that exceed their baseline with Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits. As a result of this, compliance and voluntary buyers of ACCUs are active in the market at the same time. 

Globally, the voluntary carbon market (VCM) has experienced suppressed demand in recent years as carbon credit purchasers and market participants reassess their strategies. A primary response to this has been the emergence of integrity standards, insurance products and the influence of carbon credit ratings agencies. Global market participants are also setting their sights on COP29, where crucial negotiations on Article 6 of the Paris Agreement will be held, which will dictate how carbon credits are traded amongst countries to support the global community meet climate targets.  

So, what does this all mean?  

Put simply, forecasts show that without drastic changes to new project origination rates, long-term global demand for carbon credits will exceed supply. The collision of various national and international market influences, means that we expect to see supply from high-integrity carbon projects limited until investments scale to deliver new projects, having an impact on pricing and project availability.

In this article, TEM’s carbon experts, Nick Baker and Rebecca Heard break down each of these key developments and highlight why they matter. 

ACCU Market 

The rise of the Australian carbon market  

The ACCU market is undergoing a significant transformation, largely driven by the growing participation of Safeguard facilities. As the next ACCU surrender deadline of March 2025 fast approaches, Safeguard facilities are actively increasing their ACCU holdings to meet upcoming demands. According to the Clean Energy Regulators Q2 2024 Quarterly Report, 55% of the 41.3 million ACCU holdings in the Australian National Registry of Emissions Units (ANREU) were held in Safeguard or Safeguard Related Accounts. As more entities prepare for future compliance obligations, this volume is expected to rise.  
 
While demand from voluntary buyers is currently growing at a slower pace, this is anticipated to ramp up as corporates require high-quality carbon credits to contribute towards decarbonisation goals. Recent analysis from Core Markets forecast voluntary ACCU demand to exceed 7 million units per annum by the late 2030s, driving positive price action and increasing competition for high-integrity ACCUs between compliance and voluntary markets.  

September 2024 alone saw the highest ACCU trade volumes of the year, with over 2.5 million spot and forward trades. Although some market observers predict a short-term oversupply of ACCUs until 2028, significant investment in new ACCU projects is crucial to meet medium-to-long term demand. However, progress is hindered by delays in method approvals. For customers purchasing ACCUs, this evolving landscape signifies a tightening market where high-quality credits may become more sought after.  

Policy changes may intensify pressures 

Potentially adding to the supply pressure, Australia is set to submit its 2035 Nationally Determined Contribution (NDC) to the United Nations Framework Convention Climate Change (UNFCCC) by February 2025, with the Climate Change Authority signaling that this could be a reduction target of 65-75% below 2005 levels. This ambitious target underscores the need for investment into new project development to ensure there is adequate emissions abatement occurring (particularly in the Land Use, land-use change, and forestry sector) to support Australia’s climate commitments. 

Exploring alternative strategies 

Rising demand is reflected in pricing trends, with the ACCU spot price increasing by ~15% over the past six months. Market analysts are now forecasting that prices will increase significantly in the short-to-medium term with ANZ Bank’s latest global carbon markets outlook outlining that ACCU prices could reach $50 by March 2025 and $70 by this time next year. 
 
Pricing forecasts showing estimated price increases have driven buyers with significant future volume needs to explore long-term forward contracts and project development opportunities. This strategy enables buyers to secure high-integrity ACCUs, while effectively managing future costs and mitigating exposure to price and supply fluctuations. TEM has seen an increase in demand for its carbon project prospecting and project development services, supporting customers to secure and develop carbon projects that align with their broader sustainability strategy.  

Global Carbon Market 

Integrity in focus: examining voluntary carbon market dynamics

While the Australian Government currently does not permit the use of international carbon credits under the Safeguard Mechanism scheme, these credits continue to play a significant role in addressing residual carbon emissions for voluntary buyers.  

In the past year, there has been an increased emphasis on enhancing confidence and integrity within the voluntary carbon market. The Voluntary Carbon Market Integrity Initiative (VCMI) is actively working to promote greater integrity from the demand side. Its Claims Code of Practice provides guidance for companies on the credible use of carbon credits in their climate commitments and clarifies the claims that can be publicly made about these credits. 

How the VCMI is possibly integrated into other voluntary schemes including Australia’s Climate Active program is also an area to watch in the coming months. 

Next steps for the Core Carbon Principles label 

Focused on driving integrity from the supply side, the Integrity Council for the Voluntary Carbon Market (ICVCM) recently approved the first categories of carbon credits eligible for the Core Carbon Principles (CCP) label. The CCPs establish a global benchmark for high-quality carbon credits that ensure real, additional, and verifiable impacts.  

To receive a CCP label, a carbon credit must be part of an eligible carbon credit certification scheme (e.g. Verra) and produce credits under an approved credit methodology. However, individual projects are not specifically assessed, emphasising the need for buyers to continue conducting project level due diligence.  

Buyers should note that if a project type is CCP certified, this doesn’t necessarily mean that the project is of a higher integrity. Currently, only 4% of credits in the Voluntary Carbon Market are certified as CCP-compliant, with the majority still undergoing assessment, which is expected to be completed by year-end. Additionally, credits bearing a CCP label are anticipated to command a price premium, currently ranging from $3 to $5 per tonne compared to the broader market. 

CORSIA eligibility criteria and its impact on demand 

Another key development impacting demand across markets is the progression of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The global compliance scheme for the international aviation industry has completed the pilot phase and has entered its First Phase (2024-2026). During this time, airlines that are captured by the scheme will need to start increasing their purchasing of eligible carbon credits to offset emissions that exceed a set baseline. If adoption of the scheme is as expected this will be a massive driver of demand with forecasted demand under the scheme exceeding 100m carbon credits in 2027.  

However, the sources of CORSIA-compliant credit supply is still uncertain, with the International Civil Aviation Organisation (ICAO) regulatory body recently announcing approvals for two standards so far, being American Carbon Registry (ACR) and Architecture for REDD+. While more standards are expected to be approved in the coming months, it is certain that the CORSIA scheme will materially impact supply/demand dynamics of global carbon markets across the next decade.  

TEM is anticipating decisions on CORSIA eligibility and the implications this has for its project development activities in PNG and Laos. 

Progress on Article 6 of the Paris Agreement  

Article 6 of the Paris Agreement outlines a framework for international cooperation in climate action, allowing for market and non-market approaches to reduce emissions. It facilitates carbon trading and collaborative projects while ensuring environmental integrity and supporting developing nations in their climate efforts. Article 6.2 facilitates the bilateral trading of emissions reductions, known as Internationally Transferable Mitigation Outcomes (ITMOs), while Article 6.4 establishes a new global carbon crediting system to freely trade ITMOs, overseen by the UN.  

While Article 6.2 is operational, the market is still maturing, with few projects yet to receive the necessary corresponding adjustments that prevent double counting. However, progress is being made, with countries like Singapore and Papua New Guinea (PNG) signing agreements to enable Singapore (a country that will be a net importer of carbon) to invest in carbon reduction in PNG (a country with the ability to be a net exporter of carbon).  

Global investors are eagerly awaiting an outcome from COP29 with regards to Article 6, with the outcome being increased investment into global projects improving supply to meet the demand from countries seeking to meet their NDCs and corporations meeting their voluntary climate targets. 

Carbon markets across the globe are bracing for transformation as rising compliance requirements coincide with an integrity shake up across the voluntary market. As demand for high integrity carbon credits is expected to outpace supply, buyers will need to adapt their strategies to ensure they secure investment in high quality carbon projects at the right time. 

If you’d like to discuss any of these topics or discuss your carbon offset portfolio, please contact us.  

Important information
This information has been prepared by Tasman Environmental Markets Australia Pty Ltd (TEM), a corporate authorised representative (ABN 97 659 245 011, CAR 001297708) of TEM Financial Services Pty Limited (ABN 58 142 268 479, AFSL 430036). This material is for general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation, or needs. While we believe that the material is correct, no warranty of accuracy, reliability, or completeness is given, except for liability under statute which can’t be excluded. Before making an investment decision, you should first consider if the information is appropriate for your circumstances and seek professional financial advice. Please note past performance is not a guarantee of future performance.