NAB has predicted that the carbon credit market will scale up as government policy and institutional financing propel longer-term investment certainty.

Australia’s carbon market is on track to follow renewables’ path to scale and unlock institutional lending pathways and project financing, NAB has predicted.

“The carbon market will evolve into an infrastructure-type market which will be very similar to renewables in the way it is financed,” Raphael Wood, co-managing director of carbon asset and investment manager Silva Capital, told NAB.

“We are probably five years away from the carbon market getting to that point though, and another five to ten years away for the nature repair market.”

Carbon offset providers said that regulatory reforms such as the Safeguard Mechanism had provided the market with longer-term certainty regarding Australian Carbon Credit Units (ACCUs). ACCUs, which each represent one tonne of CO2 avoided or removed from the atmosphere, could be used by large emitters to reach their climate targets.

Wood said that the reformed Safeguard Mechanism, which required Australia’s heaviest emitters to reduce their emissions below a lower baseline level, had been the “sledgehammer” needed to drive corporate certainty in the Australian emissions trading market.

Carbon market participants have said that entities have had a growing appetite for long-term carbon offtakes.

“For emitters with significant Safeguard Mechanism obligations, who have a very clear line of sight on what they require until 2030, there’s an increasing willingness to enter into offtakes today,” Ben Guo, director at carbon developer Permagen, said.

For example, Silva Capital launched a $250 million carbon credits fund backed by BHP, Rio Tinto and Qantas, which were required to offset their excess emissions under the safeguard mechanism.

The 25-year fund had a seven-year lock-up period and aimed to develop and invest in agricultural properties to generate ACCUs through ‘environmental plantings’ which restored cleared land and biodiversity.

Marc Train, chief commercial officer at Corporate Carbon, said he would like to see the carbon market evolve towards project financing as it matured.

“Ideally, this market develops to a point where banks can take a proper project financing approach involving financing off the back of carbon offtakes rather than taking a balance sheet view, which is where we are today,” Train said.

“This, however, would require more certainty on methodologies, yields and outcomes.”

NAB said that, as the largest lender to agricultural businesses in Australia, the bank was largely funding carbon projects through mortgage lending secured by property. These loans were generally serviced through both agricultural and carbon cash flows.

The scheme had encouraged farmers and landholders to use sustainable agricultural and vegetation management to generate additional income streams via ACCUs, or to offset their own emissions, the bank said.

NAB found that carbon market participants believed that bank debt for carbon project development was generally not yet efficient or available at an institutional scale.

“Debt financing for carbon projects today is primarily made up of prepayment structures, where a counterparty provides an upfront payment to secure future ACCU supply at agreed prices. Equity financing is also used – whether at a project, corporate or fund level,” NAB said.

The bank also acknowledged that the integrity of the ACCU scheme had been called into question, with critics arguing that offset schemes could not undo the environmental damage inflicted by burning fossil fuels.

Some efforts have been made to tighten the scheme, NAB said. For example, the ACCU scheme had been amended to not count new carbon credits in ‘avoided deforestation’ projects after the government found it did not fit the requirement for ‘additionality,’ which meant that carbon abatement had to verifiably be additional to a business-as-usual scenario.

An independent review had found the ACCU scheme to be sound, but efforts to clarify governance and transparency would be ongoing, the bank noted.

NAB said that the carbon market had parallels to the renewable energy industry, including long project life, predictable revenue schemes from long-term offtakes and reputable counterparties. It predicted that the ACCU market would evolve towards renewable energy-style project financing over time.

“NAB is interested in supporting customers with greater choice in funding and risk management solutions for carbon projects. As we’ve seen through the bank’s global support for renewables energy generation, taking a project finance-style approach can be effective in achieving a step-change in industry output,” NAB’s global head of carbon trading, Ben Jackson, said.

“The advent of proponent-led methodologies in the ACCU Scheme is likely to lead to more innovative carbon project opportunities and we’re eager to continue evolving NAB’s capabilities in this sector to better service our customers and the Australian carbon market.”