New findings from the Transforming Energy Markets Research Centre have identified changing government regulations as one of the reasons behind the very low and highly volatile prices of carbon credit units in Australia.
Economic mechanisms designed to reduce carbon emissions and limit the effects of climate change take many forms. In Australia, one of these is Australian Carbon Credit Units (ACCUs), which can be purchased by companies – and traded on the Australian carbon credit market – to offset their emissions.
Macquarie Business School researchers have studied the dynamics of the Australian carbon credit market in a new project titled ‘What Drives Emerging Carbon Credit Markets – Fact or Fiction?’
The study identified several key drivers that influence the performance of the voluntary carbon credit market in Australia, including changing Government regulations.
The research was conducted by Dr Marjan Nazifi, a lecturer in the Department of Economics, Professor Stefan Trück, Director of Macquarie University’s Centre for Transforming Energy Markets, and Ha Thanh Chu, a PhD student in the Department of Actuarial Studies and Business Analytics.
The work was presented at the 45th International Conference of the International Association for Energy Economics (IAEE) in Istanbul, Türkiye, in June 2024.
“Our study underscores that regulation and credibility are major determinants of price behaviour in the voluntary carbon market,” says Dr Nazifi.
“One of the most critical findings is the significant impact that regulatory and policy/market events have on ACCU secondary markets. The effectiveness and efficiency of the voluntary carbon market are undermined by ongoing policy and regulatory changes, and shifts in public opinion.
“Currently, the voluntary carbon credit markets suffers from very low and highly volatile prices, coupled with a lack of price transparency.”
Strategic solutions
For example, Dr Nazifi says, the price of Global Carbon Emissions Offset recently dropped to below USD$1, which indicates a credibility issue with carbon offset markets. This instability reduces the financial incentive for companies to invest in carbon offset projects and makes it difficult to attract sustained participation.
“Australia is in the process of designing an Australian Carbon Exchange and our analysis provides key insights on the market dynamics,” says Dr Nazifi.
“The effectiveness of carbon markets depends on their design, the commitment of participants, robust monitoring, regulatory frameworks and the verification of credits.”
The current Australian carbon credit market is voluntary, and companies are motivated to participate to meet their sustainability goals, enhance their corporate reputation, or fulfil their corporate social responsibility (CSR) objectives.
“We found that the behaviour of the voluntary carbon market differs markedly from traditional financial or commodity markets,” says Dr Nazifi.
“Traditional markets are well-established, with mature infrastructures, practices and regulations, whereas the voluntary carbon market is relatively young and still evolving. It has a unique ‘commodity’, and prices are driven by public opinion, the credibility of the market and policy and regulatory expectations.
In a mandatory, non-voluntary market, such as an Emissions Trading Scheme (ETS), companies must comply with government-imposed caps on emissions. An ETS requires companies to purchase allowances to cover their emissions. Failure to comply results in penalties.
“Our analysis did not identify statistically significant relationships between other financial variables and ACCU returns. This shows that voluntary carbon markets are primarily driven by the interplay between policy decisions, regulatory frameworks and specific market events, rather than by broader financial market trends.”
Nazifi says the credibility of the voluntary carbon market also depends on the integrity of its Monitoring, Reporting, and Verification (MRV) processes, which are critical for maintaining trust in the market.
Ensuring that carbon credits are of high quality will build trust in the market and attract more participants.
She believes that carbon markets can contribute to the transition to a low-carbon economy if properly implemented. However, if the challenges the study identified are not addressed, the voluntary carbon market could struggle to achieve the size and reliability needed to meaningfully contribute to global emission reduction efforts.
“We believe the Australian carbon credit market can be better managed through several strategic approaches,” Dr Nazifi says.
“Firstly, enhance the transparency and consistency of regulatory frameworks. Clear and predictable rules provide market participants with the certainty they need to make informed decisions.
“Secondly, improve the credibility and integrity of carbon markets. Strengthening MRV processes and ensuring that carbon credits are of high quality will build trust in the market and attract more participants.
“Thirdly, expand coordination between policymakers and market participants to achieve more effective regulation.
“Finally, manage political risks to mitigate the impact of sudden policy shifts. For example, governments should establish long-term commitments to emission reduction targets, providing greater stability and predictability in the market.”
Dr Marjan Nazifi is a Senior Lecturer in the Department of Economics in the Macquarie Business School. More details of the research paper are here, p125.
