The interplay of carbon offset, renewable energy certificate and electricity markets in Australia

Abstract

Having the world's first national renewable energy certificate (REC) market and a large and diverse (by project types) government-backed carbon offsets (ACCUs) market, Australia provides an interesting context to study the interplay of the offset, REC, and electricity market. We investigate the existence, extent, and direction of the connectedness in prices among these three markets in Australia during May 2018–June 2023 and back-test the implications of the results using a portfolio approach. Our results highlight: 1) an insignificant connectedness between the ACCU and REC markets, implying that the landfill gas offset projects, as a potential linking channel, do not appear to distort either pricing mechanism and that ACCU's and REC's are viable portfolio diversification assets; 2) that the national electricity market (NEM) is a net risk receiver from the ACCU and the REC markets, largely due to the regional electricity market (REM) in South Australia (SA); and 3) that the cost to effectively hedge the risk channeled from the SA market is very expensive, likely reflecting the high penetration of ‘new’ (wind and solar) renewable electricity in SA.