Change to Emissions Reduction Fund Fixed Delivery contracts

In the Australian Government’s Emissions Reduction Fund (ERF) scheme, eligible carbon abatement projects (such as soil carbon sequestration, revegetation, landfill gas emissions abatement, energy efficiency etc) earn one Australian Carbon Credit Unit (ACCU) for each tonne of carbon dioxide equivalent (CO2-e) abated.

A recent change to the ERF allows carbon abatement suppliers who were in fixed delivery contracts with the Federal Government to exit from their contracts. They can then sell their carbon credits on the open market to other buyers including emitters and corporates, rather than the government, and receive higher prices for them.

The increase in supply of carbon credits to the open market has resulted in prices dropping 36%, from $47 per ACCU prior to the change to around $30 after the change. This is delivering likely savings to emitters and others seeking to buy carbon credits as they can now buy them for a lower price.

The carbon market as a whole had not expected this change and many will be worse off.

Carbon abatement suppliers in optional delivery contracts will receive less for their abatement if they try to sell in the open market while prices remain at current depressed levels. Stakeholders who are developing or investing in carbon abatement projects are now seeing the low prices, volatility and regulatory risk in the carbon market and may have less confidence in moving forward with projects and investments.

The recent ERF change could also lead to higher costs for taxpayers. Carbon credit prices are now much higher than they were when the original contracts were signed between suppliers and the Federal Government. If the Federal Government were to buy new carbon credits to make up for the original cheap credits, in order to stay on track with their forecast 35% emission reduction by 2030, this will likely come at a much higher cost – with taxpayers footing the bill which could be between $600 million and $2.5 billion.