The Rise of the Carbon Market and Corporate Engagement

Business Considerations Toward Climate Change

Business activity in 2022 and beyond is more entwined and aligned with the requirements of maintaining planetary health and suitable conditions upon which all life on earth can continue to thrive. A company in current times must consider its flows of money, its social impacts within its industry, and the environmental touchpoints that make the business sustainable or unsustainable. In addition, risks related to Environmental, Social and Governance (ESG) have become increasingly essential and amplified by Governments, NGOs, Investors, Financiers and Corporate watchdogs. However, to enact change, the main requirement is a shift in human mindset at all levels, as humanity can not afford to get climate change wrong.

An appropriate example of mindset shifts can be demonstrated in buyer behaviours, as the cost of inflation is felt most heavily on the shoulders of consumers due to the costs being passed down to the consumer. It makes sense to contemplate that consumers also have the power of choice, impacting a brand or company’s position in a given market. The power consumers wield by their actions to choose what they think is right can force change from the bottom up. If consumers only purchase sustainable products, an adverse reaction to a brand puts immense pressure on manufacturers to source sustainable raw materials, thereby influencing supply chains. When supply changes can be tracked, traced and autonomously verified, organisations cannot afford to ignore trends that could make their businesses redundant if quick action is not taken to rectify brand actions and perceptions.

How Companies Respond to Climate Change

Most companies respond to climate change by either mitigation efforts to lower or remove greenhouse gas emissions from the atmosphere or by educating consumers on climate change and adjusting systems and societies to prepare for the impacts of climate change. However, few manage to discover the added value in transitioning to a green economy, and many get lost in translation. To become known as a sustainable entity, a company must take measured steps to demonstrate the actions and strategies it has taken to combat climate change. Nevertheless, there is a difference between mitigation efforts and responding to climate change by adaptive strategies that are more reactive and less proactive to change.

In Australia, many large ASX listed firms have taken the risk mitigation approach to climate concerns and have been somewhat reactive to government policies orchestrated more as guide rails for internal contemplation. It is understandable to fathom the approach of local companies when Australia is predominantly a commodities export nation. The price of Australian steel, coal, copper, nickel and other commodities reinforces how reliant we are on exports and how difficult it will be to wean off fossil fuels.

Barriers to Accessing Capital Investment

The market incentives for companies to commit to climate targets and reduce emissions have seen the financial sector respond by actively seeking out and investing in companies with a climate change strategy. The finance industry effectively creates a barrier to accessing capital that was not there before. Certain organisations might find that their ability to raise capital diminishes as they lack the substance to convince their transition toward carbon neutrality. Organisations actively demonstrating the innovations they are taking to market as part of the transition phase to green are receiving the most attention. The interest and drive from corporations toward becoming carbon neutral has shed more light on the vital importance of pricing carbon into business functionality. Furthermore, governments and industries alike’ increased innovation and investment in carbon technology demonstrates the urgency to drive down carbon emissions.

The Carbon Market

The Emissions Reduction Fund (ERF) is Australia’s carbon crediting scheme through which carbon reduction can be bought and sold (traded) by the Federal Government or on the voluntary market. The ERF is a voluntary scheme that incentivises organisations and individuals to adopt new approaches and technologies to reduce their emissions. The ERF scheme evolves around carbon credits devised from the Carbon Farming Initiative Act of 2011. The ERF also includes a safeguard mechanism to ensure large emitters keep their emissions within historical levels and do not increase emissions without government approval or applying penalties.

The objective of the ACT is, in effect, to honour obligations made at the; 

  • Climate Change Convention
  • The Kyoto Protocol
  • International Agreements made to attach or supersede elements of the Kyoto Protocol

The Current Price of Carbon

In 2021, the voluntary purchase of carbon offsets drove the price of an Australian Carbon Credit Unit (ACCU) up by 180% over 12 months. Spot prices for ACCUs rose to $47 per tonne in 2021 and to a record $57 per tonne in January 2022. Comparatively, the unit price of carbon in New Zealand fluctuates between $74 to $77 per tonne, relatively higher than Australia’s $57 per tonne.

Nevertheless, the ACCU price has since experienced volatility due to the proposed changes to the fixed delivery contracting regime announced by the Federal Government on the 4th of March 2022. The changes announced explain that there will be an oversupply of ACCUs on the voluntary market, causing the volatility. However, the carbon price is expected to normalise once the market corrects itself following the changes.

Impacts of a Robust Carbon Market

A robust carbon market offers multiple ways to reduce carbon emissions over time by gradually increasing the cost of carbon, forcing manufacturers and consumers to seek greener alternatives. At present, the voluntary demand for carbon credits is setting the average carbon price. Large scale carbon emitters required to purchase ACCUs to manage excess emissions arguably will bear the brunt of price hikes. However, resource companies have other routes to become involved in and benefit from the carbon industry, both financially and from an ESG perspective, with Ocean Blocks and other participants in the green ecosystem. Participants with stakes in ERF carbon projects like investors, service providers, product developers and financiers, landholders and native title groups stand to transform industries by promoting green initiatives.

Become Part of the Carbon Market

Ocean Blocks is actively investing in carbon projects worldwide, which Australian companies can be part of. Companies can participate as supporters or investors themselves in ERF projects. A relevant example for the industry is carbon capture and storage (CCS) and the maintenance of marine and other ecosystems that sequester large volumes of carbon.

For more information, get in touch with one of the Ocean Blocks portfolio managers.

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