The Australian carbon market remains in flux, with key developments on hold due primarily to shifting geopolitical priorities and political uncertainty ahead of the upcoming domestic election.
Over the past two years, Australia’s voluntary carbon credit market has largely remained on pause, reflecting investor caution amid uncertain policy direction. Project developers have experienced a decrease in M&A capital flows as large emitters remain hesitant to pursue deals amid regulatory uncertainty and the absence of mandatory compliance obligations. Investment has also been sluggish, hindered by high capital costs and the long investment horizons of decarbonisation technologies, further complicating fundraising efforts. Attracting foreign investment for carbon sequestration projects remains challenging, due to the difficulty in securing access to agricultural land resources, heightened scrutiny from the Foreign Investment Review Board, and concerns raised regarding the integrity of carbon credits.
We explore the key trends and policy shifts shaping the carbon market, including the global framework established under Article 6 of the Paris Agreement, the latest developments in the Australian Carbon Credit Unit (ACCU) Scheme, and growing investment opportunities for private sector entities. It will also examine how geopolitical shifts – particularly in the United States and China – are shaping the future of carbon trading.
The international context
Background
Australia is among 195 signatories to the Paris Agreement 2015 (Paris Agreement), which came into force on 4 November 2016. The overarching goal of the Paris Agreement is to limit global temperature increases to 1.5°C above pre-industrial levels.
The United Nations’ Intergovernmental Panel on Climate Change has assessed that, to achieve this goal, greenhouse gases must peak before 2025 at the latest and decline 43% by 2030.1 Accordingly, Australia has committed to reducing emissions by 43% by 2030 (from 2005 levels) and achieving net zero by 2050.2
Every five years, signatories to the Paris Agreement submit a national climate action plan – known as Nationally Determined Contributions (NDCs) – which are intended to continue to grow in ambition with each new pledge that is made. New NDCs are due to be submitted by countries throughout 2025.
A key issue in making genuine progress towards the Paris Agreement targets to date has been the lack of international cooperation, and in particular, the difficulty developing countries face in meeting ambitious NDCs without having the means and resources to transition to a low carbon economy.3
Article 6 of the Paris Agreement
This is where Article 6 of the Paris Agreement comes into play. Article 6 provides a framework for international cooperation on emissions reduction, including private sector investment in carbon abatement projects. It was a central focus at the 29th Conference of the Parties (COP 29) in Baku, Azerbaijan, in November 2024 – dubbed the “Finance COP.”
The nuts and bolts of Article 6
Under Article 6.2 of the Paris Agreement, countries can either bilaterally or multilaterally trade carbon reduction and removal credits – known as Internationally Transferable Mitigation Outcomes (ITMOs). This provides a means for credits from climate projects in countries that are expected to exceed their NDCs to be used to help other countries without the same level of available capital, project sophistication, or who are otherwise struggling to achieve their climate goals, to meet their own NDCs.
While Article 6.2 is a country-to-country mechanism, Article 6.4 establishes a global carbon market, called the Paris Agreement Crediting Mechanism (PACM). The PACM is overseen by a United Nations Supervisory Body, under which reduction or removal credits in the form of Emission Reduction Units can be earned by approved projects registered by private project developers and subsequently traded to enable countries to meet their NDC goals.
It has been estimated that the cross-border cooperation embodied in Article 6 may reduce the cost of implementing countries’ NDCs by up to US $250 billion per year.4
Progress at COP 29
COP 29 marked a major step forward in giving effect to Article 6 by establishing clearer rules for carbon trading and project integrity. In particular:
- ITMO Trading (Article 6.2): Countries must now authorise bilateral carbon credit trades through a central reporting system to ensure transparency and compliance; and
- Global Carbon Market (Article 6.4): New standards for monitoring, risk assessment, and sustainability reporting were endorsed to enhance the credibility of emission reduction projects.
These measures are, together, intended to enhance the credibility and integrity of carbon projects under the Paris Agreement framework.
In 2025, it is anticipated that a formal registry will be established to track and transfer carbon credits. Additionally, it is likely that actual project methods (and eligible activities) will commence being approved if they are assessed as being compliant with the new methodology standards for international carbon credit trading endorsed at COP 29. These may include carbon sequestration and storage, energy, waste, transport use and rural electrification, among other projects.
Direct climate finance
A major achievement of COP 29 was the agreement on the New Collective Quantified Goal (NCQG) for climate finance, setting a minimum commitment of US $300 billion annually from developed nations to support climate adaptation in developing countries by 2035, with an aspirational target of US $1.3 trillion per year.5 This level of funding provides an insight into the sheer scale of climate finance mechanisms available to developing countries.
The NCQG allows funding from diverse sources, including public, private, bilateral, and multilateral arrangements. Mobilising private finance will be essential to achieving these targets, creating new investment opportunities in renewable energy projects and emissions reduction initiatives. The framework also anticipates scaling voluntary carbon markets as a key funding mechanism.
The domestic context
The ACCU Scheme
The Australian Carbon Credit Unit (ACCU) Scheme provides financial incentives for businesses, landholders, and communities to undertake carbon abatement projects, such as reforestation, energy efficiency, and carbon capture. Australian businesses and investors are already actively partaking in the scheme.
How does it work?
Participants can earn one ACCU for every tonne of carbon dioxide equivalent abatement.
ACCUs are a tradable financial product, and can be either:
- Sold to the government under carbon abatement agreements, or
- Purchased by private entities for mandatory compliance (under the Safeguard Mechanism) or voluntary offsetting as businesses shift towards net-zero.
Voluntary targets are becoming more common as companies realise the need to restructure their operations to align with a net zero emissions future, and as they respond to a growing appetite from customers, suppliers and employees for companies they deal with to take committed action on climate change.
Approved Methodologies
Under the ACCU Scheme, projects must use an approved methodology, which sets out the rules for running the project, including qualifying project activities, carbon abatement measurement and monitoring and record keeping and reporting.
There are currently 30 approved methods, including beef cattle management, carbon capture and storage, sequestration of carbon in soil, plantation forestry, transport management, coal mine waste, and oil and gas fugitives. In December 2022, the Australian Government approved the recommendation of the Independent Review of Australian Carbon Credit Units to expand the scope of the methodology process.
While initially, the Government developed new methods, the process is now proponent-led, so that any individual or entity wishing to take part in the ACCU Scheme may propose methodologies (and supporting activities) for the generation of local carbon credits, and work to develop them with the Emissions Reduction Assurance Committee.
The proponent-led model aims to encourage more innovative approaches to carbon abatement, and to provide more flexibility to attract interest from private investors as the ACCU Scheme increases in scale in the coming years. The methodology changes are important, as the retirement of earlier methodologies such as Human-Induced Regeneration and Environmental Plantings left few nature-based methods that could be feasibly implemented at scale.
Private investment opportunities for Australian businesses
The ACCU Scheme – with its more flexible process for approving project methodologies across a broad range of abatement activities than other schemes globally – represents a viable investment opportunity for private sector businesses, as emissions reductions become a key focus of both government policy, and private sector leadership, advocacy and action.
While the integrity of carbon credits has been questioned (with some carbon credits being criticised for not representing real emissions reductions or some businesses reportedly purchasing fraudulent credits where these credits failed to secure any tangible emissions offset),6 there is a growing move towards voluntary emissions reductions. Market trends indicate that businesses are alive to the fact that the failure to transition towards lower carbon emissions may impact earnings, with financiers and supply and customer chains increasingly turning away from heavy emitting industries. Those businesses that invest early in processes for decarbonising their operations and supply chains may gain a competitive advantage and find themselves better placed to comply with the incoming Mandatory Climate Reporting legislation.7
Further, reforms to the Safeguard Mechanism introduced on 1 July 2023 now impose stricter requirements for mandatory emissions reductions. The Safeguard Mechanism, which applies to facilities that emit more than 100,000 tonnes of carbon dioxide equivalent each year (currently 219 facilities), now sets lower emissions “baselines” that facilities must meet, which are to be incrementally reduced each year.8 In real terms, this will require heavy emitting industries to reduce their greenhouse gas emissions by an average of 4.9% each year to 2030.9
Carbon credits under the ACCU Scheme should therefore be in higher demand to meet both voluntary and mandatory emissions reduction targets. It has been estimated that this will drive an increase in price for ACCUs traded on the market, which could double to around AU $75 (in real dollars) before 2035.10
The revenue opportunity may prove very attractive for investors, underpinning new growth in carbon projects in Australia.
There is also the potential for international growth, as approved methodologies under the ACCU Scheme, if successfully operated, could be scaled up and presented for approval as an international project (with demand for credits from businesses worldwide) under the Article 6.4 Paris Agreement framework. Domestic carbon abatement projects could also feature in a scaled-up private sector finance contribution to meet the NCQG target.
United States
The opportunity for United States-focused partnerships could be significantly impacted by the return of the Trump Administration. Notably, President Trump issued an Executive Order on 20 January 2025 withdrawing the United States from the Paris Agreement with effect from 27 January 2025. While the full ramifications of the withdrawal will only be seen in the coming months, there should nevertheless still be considerable market impetus towards renewables investment globally, given mandatory and voluntary commitments from governments and private actors (as noted above).
China
China may represent a particular opportunity for private and public sector partnerships for Australian businesses in China. Last year, the Chinese Government relaunched its Certified Emission Reductions market, which underpins the Voluntary Carbon Market and is expected to drive trading activity and spur innovation among private sector entities as China seeks to reach its “30.60” decarbonisation target to peak emissions by 2030 and achieve carbon neutrality by 2060.11
Takeaways
Despite geopolitical headwinds, the push for net zero emissions continues to gain momentum both domestically and globally, with global energy transition investment exceeding US $2 trillion for the first time in 2024[12] Advances in carbon trading mechanisms, and the means for private entities to earn tradeable carbon credit units through eligible abatement activities, presents a flexible and potentially lucrative opportunity for Australian businesses to invest in carbon abatement projects and scale those projects up with international partners.
The imperative for businesses to reduce emissions should only become stronger in the long run – in terms of both mandatory and voluntary emissions reductions targets. This should inevitably drive up the price for carbon units earned from eligible projects, and will, along with greater flexibility in activities that can qualify for approval, incentivise the continued growth of a sustainable carbon market in Australia in coming years.
For more information, please contact James Delesclefs.
1Intergovernmental Panel on Climate Change, IPCC Sixth Assessment Report: Press Release (Web Page, 4 April 2022) https://www.ipcc.ch/2022/04/04/ipcc-ar6-wgiii-pressrelease
2Climate Change Authority, 2035 Emissions Reduction Targets (Web Page, 2024) https://www.climatechangeauthority.gov.au/2035-emissions-reduction-targets.
3Natural Resources Defense Council, The Paris Climate Agreement: Everything You Need to Know (Web Page) https://www.nrdc.org/stories/paris-climate-agreement-everything-you-need-know#sec-whatis.
4United Nations Framework Convention on Climate Change, Article 6 Is a Key Tool to Boost Climate Ambition (Web Page) https://unfccc.int/news/article-6-is-a-key-tool-to-boost-climate-ambition-patricia-espinosa.
5United Nations Conference on Trade and Development, Countries Agree $300 Billion 2035 New Climate Finance Goal: What Next? (Web Page) https://unctad.org/news/countries-agree-300-billion-2035-new-climate-finance-goal-what-next.
6The Guardian, Revealed: more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis shows (Web Page) https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe.
7Section 2M of the Corporations Act 2002 (Cth) with effect from 1 January 2025
8Parliamentary Library, Reforming Australia’s Safeguard Mechanism (Research Paper, 2024-25) https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/Research/Research_Papers/2024-25/Reforming_Australia_Safeguard_Mechanism.
9Department of Climate Change, Energy, the Environment and Water, Safeguard Mechanism (Web Page) https://www.dcceew.gov.au/climate-change/emissions-reporting/national-greenhouse-energy-reporting-scheme/safeguard-mechanism#toc_0.
10Ernst & Young, Australia’s Carbon Market Is Changing Gears: Are You Ready? (Web Page) https://www.ey.com/en_au/insights/sustainability/australia-s-carbon-market-is-changing-gears-are-you-ready.
11International Carbon Action Partnership, China Launches Domestic Offset Market to Align National ETS Goals (Web Page, 22 January 2024) https://icapcarbonaction.com/en/news/china-launches-domestic-offset-market-align-national-ets-goals.
12BloombergNEF
