Meagre offerings for government’s latest emissions auction, all eyes on open market

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The latest Emissions Reduction Fund auction has attracted another meagre offering – netting just 6.8 million tonnes of abatement – as prices for Australian Carbon Credit Units on the open market surged to new highs.

On Friday, the Clean Energy Regulator revealed the results of the 13 Emissions Reduction Fund auction, having secured contracts with 24 projects to pay $16.94 a tonne for the abatement they are expected to deliver.

While the combined value of the contracts awarded was $115.9 million, all of the contracts that the Regulator has entered into following the auction were for the ‘optional’ delivery of the abatement.

That means the abatement projects have the right, but not an obligation, to sell the ACCUs to the government at the agreed price and provides projects with an out if they are unable for some reason to deliver the abatement.

It also means that if they do deliver the abatement, then they can choose to sell the credits on the more lucrative corporate-driven open market, meaning the government auction process is now little more than an underwriting agreement.

Open market prices for ACCUs are than double that of the auction, and have jumped to more than $33 per ACCU. They are being sought by corporate emitters who are looking satisfy voluntary emissions reduction pledges through offsets.

The amount of emissions reductions that have been purchased under the Emissions Reduction Fund has decreased considerably since the early handful of auctions held after its establishment in 2015.

Having soaked up the available supply of cheap abatement projects, and with the Regulator showing a reluctance to increase the price it was willing to pay for each tonne of abatement, volumes have contracted substantially.

The first three auctions held in 2015 and 2016 – each contracted for more than 45 million tonnes of abatement, which is more than the last eight Emissions Reduction Fund auctions combined have been able to secure.

The fund, which is really the only visible mechanism for what amounts to the Coalition’s climate policy, has also faced criticism about the integrity of the emissions offsets being purchased.

The fund is heavily reliant on abatement generated by avoided land clearing projects, but questions have been raised around whether any actual reduction in emissions has been achieved.

The Coalition government allocated an additional $2 billion to the Climate Solutions Package in 2019, largely to boost the amount of abatement purchased by the ERF to help meet its 2030 emissions reduction target, but that funding boost has not flowed through to increased purchases of abatement.

According to carbon market analysts Reputex, ACCU spot prices climbed to $33.50 per tonne this week, with a surge in interest in the Australian issued offset units.

A partial explanation for why ACCU spot prices have surged above $33 per tonne – around double the price being offered by the Clean Energy Regulator – is the increased expectation that the Morrison government will announce a commitment to a zero emissions target before the COP26 talks in Glasglow.

Many large emitters will see a potential net zero emissions commitment as driving future demand for carbon offset units, and many would be looking to snap up available ACCUs now before prices surge event higher as demand for offsets grows.

Emissions units in the European Emissions Trading Scheme are currently trading at €58 per tonne ($A90 per tonne), while units in the New Zealand ETS have surged past NZ$65 per tonne (A$62 per tonne) – so local emitters could be jumping at the opportunity to accumulate Australian units at significantly lower prices.

Acknowledging that the secondary market – made up of industrial and corporate emitters – will come to dominate the market for ACCUs, the Clean Energy Regulator recently conceded that it would be happy to see the private market become the primary purchaser of carbon abatement.

The Regulator is currently working on a new corporate emissions reduction transparency (CERT) reporting scheme, that would allow big emitters to publicly disclose the amount of offsets they have acquired, alongside data on their greenhouse gas emissions.

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