Australia emissions continue rise as big polluters ignore Direct Action

The Clean Energy Regulator yesterday published the results of the third Emissions Reduction Fund (ERF) auction, with 50.47 million credits contracted at an average price of $10.23.

In line with our expectations, the average price of abatement fell from auction two ($12.25), with the anticipated “mega-project” volumes – i.e. Terra Carbon’s joint project with the Queensland government (under its Catchment Conservation Alliance) – dragging down the average price, but leaving plenty of opportunity for well-informed bidders higher up the bid stack.

Although the average price of abatement was heavily influenced by just one project, understanding the projected volume of the auction again proved to be critical to securing contracts well above average prices, in line with our high participation scenarios for auction three.

Interestingly, this auction may mark the bottom for ERF contract prices, with little abatement likely to be offered at prices sub-$10 in the next auction. Subsequently, depending on the emergence of more mega projects, we believe that there are prospects for a notable price rise at the next action.

While the ERF continues to support the land-sector, we note that Australia’s national emissions remain on a growth path, driven by high emitting companies, which have to date not participated in the ERF due to high economic barriers.

Australian emissions growth vs ERF ACCU delivery copyThis indicates stronger incentives are needed for the industrial sector to engage in the local offset market, with minor policy tweaks potentially able to more directly bring high emitting companies to the climate table.

Average price driven down by “mega projects”

In line with our pre-auction expectations, the average price of abatement fell from auction two, with anticipated “mega-project” volumes dragging down the average price.

The largest project, developed by Terra Carbon and the Queensland government under its Catchment Conservation Alliance, will supply 15 million credits – or 30 per cent of all credits purchased by the Regulator – while the ten largest projects together supplied over 75 per cent of all ACCUs contracted.

Subsequently, the average price of ACCU contracts disclosed by the Regulator, $10.23, is heavily influenced by just one large project, and is not representative of broader abatement value.

In line with our earlier Auction Outlook, this reflects the importance of proponents understanding the evolving ACCU supply pipeline for each auction, and the role of large projects in determining the shape of the auction bid stack.

As noted, large proponents can have a large influence on the shape of the bid stack, creating price plateaus. Subsequently, an understanding of the volume of key projects, and bidding behaviour, remains critical to determining overall auction outcomes and contracting above average price levels.

Price floor reached, but a price rebound ahead?

While the average price fell at auction three, analysis indicates that the majority of proponents again secured contracts well above the average price, with contracts entered into over a wide spread of prices. This suggests the Regulator continues to have an appetite for higher contract prices.

Moreover, the wide spread of prices – and the role of just one project heavily influencing the average price – reinforces that the average price of ACCU contracts is a poor measure of abatement value, and is largely utilised by the Regulator to deflate bidding.

At an average price of $10.23, we believe the ERF may now have arrived at a price trough, with little abatement likely to be offered at prices lower to this at the next auction. Notably, the lower number of contracts awarded (73 contracts, down from 144 at auction one and 129 at auction two) suggests that many of the early project developers remain on the sidelines of the ERF, with current prices not high enough to incentivise their participation.

The perception of a low average abatement price (which sits in contrast to the market reality where higher contract prices are entered into) – remains a risk for the Regulator, which may now seek higher prices in order to drive more participation in the market.

In this context, should the participation of mega projects recede, we believe there are prospects for a price rise at the next action, with more moderately sized participants potentially able to leverage market dynamics in order to secure higher contract prices. As noted, any price increase will remain a function of supply and the competitive nature of the next auction bid-stack, which will be heavily influenced by large projects.

The heavy influence of a few larger bidders may be the subject of market reform flagged by Regulator chair Chloe Munro, who yesterday indicated “We will consider adjusting the format for this [next] auction in order to pursue exceptional value in the context of our already strong portfolio and to maintain momentum into the future.”

Any such change may tilt the balance in favour of more moderately sized projects, which may be able to more meaningfully bid towards higher clearing prices at lower risk.

National emissions continue to outpace ERF abatement

While, in isolation, the ERF has been successful in contracting a large volume of credits, it still appears unable to curb Australia’s national emissions growth. The Department of Environment’s most recent estimates – released last weekend – find that Australia’s emission will rise to 577 Mt by 2020 – 3 per cent above 2000 levels.

This would bring the Government’s projection into alignment with RepuTex’s own projections that Australian emissions may grow 30 Mt from 547 Mt CO₂-e in 2014-15 without the ERF (assuming ACCUs represent 100% additional abatement).

As noted in earlier updates, while national emissions will not fall to minus five percent, Australia will be able to meet its international commitments under the Kyoto Protocol by utilising an ‘accounting benefit’ of approximately 130 million tonnes. While our international commitment may be met, any emissions increased from today will be added to Australia’s post-2020 emissions reduction task, and will compound the cost of action later.

In line with our initial outlook for the ERF, we continue to forecast 83 million ACCUs will be supplied prior to 2020 via the ERF, with 188 million ACCUs supplied to FY26. This indicates that while the ERF is strongly supporting the land sector (subject to the continuation of funding), national emissions remain on a growth path, driven by increasing emissions from high emitting companies.

Notably, these companies are yet to meaningfully participate in the ERF due to high economic barriers, suggesting that stronger incentives may be needed for the industrial sector to engage in the local offset market.

As noted in our earlier Market Update, even should current policy remain the same, we believe that the government may be able to restore certainty to the market by more clearly communicating its existing policy to the market – notably the start date (i.e. 2018) of a more robust compliance policy framework, and the long term objective of the safeguard scheme (i.e. to meet the 2030 target).

Should such information be communicated – even should the detail come at a later time – this may lead to increased voluntary participation from industry in the local offset market, suggesting that ‘rhetoric’ and certainty may be a larger impediment than ‘policy’ for the local market.

Remaining auctions and the ERF budget

In line with our earlier updates, with two thirds of the government’s $2.55bn ERF funding allocated, we continue to assume that there will be one more complete auction in November 2016, before the first funding trance of the ERF is severely depleted.

Potential remains for a fifth auction to be held in early 2017, however, we currently view this as a run-off event, with available funding likely to be far smaller than earlier auctions (should a fifth auction take place at all).

With no further funding for the ERF allocated at the 2016 Federal Budget, the risk of a ‘demand gap’ continues to loom for local project developers. To this end, we continue to highlight the need for stronger incentives for the industrial sector to participate in the local offset market, be it via compliance or voluntary policy.

Hugh Grossman is senior analyst at Reputex.

Comments

10 responses to “Australia emissions continue rise as big polluters ignore Direct Action”

  1. Zvyozdochka Avatar
    Zvyozdochka

    I hope someone proposes a Royal Commission into pricing polution. Srsly. I mean it.

    1. Alastair Leith Avatar
      Alastair Leith

      except RC’s are not usually very effective at justice or good advice. Look at the Victorian RC into bushfires, recommended burning off 5% of the state every year irrespective of location. just promotes fire tolerant species and destroys critical habitat. conservationists have notice very deleterious effects of prescribed burning. Costigan ‘bottom of the harbour’: goanna walked with a smirk on his face.

  2. Chris Fraser Avatar
    Chris Fraser

    Thank you for this report. Disturbing, but it highlights the weak points in our shameful system. The EU carbon units (that we were once linked to) requires persistence of sequestration to last over 100 years. Do ACCUs have this attribute guaranteed ?With our drying forest environment, we could lose the whole ‘mega-project’ in only one bushfire. What then, do we pretend nothing happened and count the burned ACCUs as still existing ?

    1. Coley Avatar
      Coley

      Mebbes a disaster on the scale of Alberta will concentrate a few political minds?
      I wouldn’t wish it on my worst enemy but this is a major disaster happening in a colder region of the Northern hemisphere, the scale of what could happen in Australia is beyond comprehension.

      1. Chris Fraser Avatar
        Chris Fraser

        I’m learning more about El Niño. Seems the continental North America is not getting the rain I thought it would.We’ll get rid of the LNP government eventually. Then they can go back to dancing on marble coffee tables.

        1. Coley Avatar
          Coley

          Snake oil salespeople the lot of them, mebbes the wind will change and destroy the tar oilfields?

  3. solarguy Avatar
    solarguy

    LNP= DISASTER, DON’T VOTE FOR THEM.
    SIMPLE !

  4. Les Johnston Avatar
    Les Johnston

    When the growth in land clearing is added to the growth in fossil fuel combustion carbon emissions, the COALition’s Direct Inaction scheme highlights the waste of tax payer funds arising from its use. Hopefully, this waste of public money will be brought to public focus soon. There is a fundamental flaw in Direct Inaction which must be exposed.

    1. Alastair Leith Avatar
      Alastair Leith

      Some might call it pork barreling, paying some farmers to not remove vegetation or plant trees while others are free to clear land. It’s a total joke of a policy.

  5. DogzOwn Avatar
    DogzOwn

    Do Coal-ition have any plan, with any chance of being enacted, to audit performance of winners of ERF largesse? Or are e meant to trust the bastards?

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