Regulator to trial options contracts in an effort to revive faltering Emissions Reduction Fund | RenewEconomy

Regulator to trial options contracts in an effort to revive faltering Emissions Reduction Fund

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Clean Energy Regulator will pilot ‘options’ contracts under Emissions Reduction Fund, with aim of reviving collapsed carbon abatement market

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Emissions reductions projects will be offered ‘options’ contracts for the first time under the Emissions Reduction Fund, in a move that the Clean Energy Regulator hopes will reinvigorate the federal government’s flagship emissions reduction policy.

The Emissions Reduction Fund, administered by the CER is the sole initiative of the Morrison government designed to reduce greenhouse gas emissions and was provided with an injection of $2 billion of additional funds in the 2019 budget with an aim of purchasing 100 million tonnes in emissions reductions by 2030.

As reported by RenewEconomy in December, the regulator had been considering the use of ‘options’ contracts under the Emissions Reduction Fund as a way to provide a level of flexibility for emissions reduction project proponents and boost participation.

An options contract would provide a project with the right, but not an obligation, to sell emissions reductions to the government at an agreed price, while there no consequences if the project does not deliver the abatement, or chooses to sell the abatement elsewhere.

The Emissions Reduction Fund has suffered from a substantial decline in participation, which was due to the combined results of earlier rounds of emissions auctions exhausting the supply of the cheapest forms of emissions abatement, combined with a reluctance of the regulator to increase the price it was willing to pay for emissions reductions much beyond $15 per tonne.

The last auction run by the Regulator held mid last year, secured contracts with just three projects and just 59,000 tonnes of abatement over ten years, a long way short of the ultimate target of at least 100 million tonnes.

Market analysts have told RenewEconomy that they are cautiously optimistic about the introduction of options contracts into the Emissions Reduction Fund, as they should re-stimulate interest from project proponents in undertaking activities like revegetation and reforestation projects.

CER chair David Parker, said that the addition of options contracts to the Emissions Reduction Fund was a sign of the growing maturity of Australia’s carbon markets.

“I am very pleased to offer this new approach. The voluntary side of the carbon market is really starting to take off and these option contracts aim to help the market further evolve and mature,” Parker said.

The options contracts will provide emissions reductions projects the ability to sell abatement to the Clean Energy Regulator at an agreed price, but also provides the options for emissions reductions to be sold to third-parties is a better price is on offer, which may include offsets providers and industrial emitters under the Safeguard Mechanism.

CEO of the Carbon Markets Institute, John Connor, told RenewEconomy that the options contracts were a welcome evolution to the Emissions Reduction Fund, but said it remained important that the federal government worked to place effective limits on greenhouse gas emissions.

“This option will support broader participation, flexibility, and confidence for carbon farmers and project developers as Australia’s voluntary carbon market matures and expands. These changes will provide a backup to market participants, and for an increasing number of companies looking to meet their own carbon reduction targets in advance or instead of government policy,” Connor said.

“As the Government’s climate policy evolves this year with its development of a 2050 strategy our preference is to see greater business involvement in Australia’s carbon market through stronger, declining baselines for pollution reduction and trading under the Safeguard Mechanism.”

“Australia’s carbon market is driving millions of dollars of investment in regional Australia with benefits for employment, agricultural productivity and resilience but it can do much more with clearer policy and be integrated with broader decarbonisation of our economy towards net zero emissions by 2050.”

The options contracts may also protect proponents from the risk of being unable to deliver emissions reductions to the government in a situation where a project fails. In 2018, the Clean Energy Regulator was forced to cancel $24 million worth of emissions reduction contracts where projects had failed to achieve emissions reductions.

“If a Seller is able to source higher pricing in the future from another party, or the anticipated abatement does not occur, or the Seller no longer requires the Option contract with the Commonwealth, then the Seller may reduce or cease deliveries to the Commonwealth under the Option contract without penalty under the contract,” the CER’s new emissions reduction auction guidelines say.

The challenge that options contracts potentially raise for the government is that they do not guarantee that the emissions reductions will be delivered to government, as there is no penalty imposed on the projects for failing to do so.

At this stage, the CER will offer the options contracts on a pilot basis and will re-evaluate their use after the next emissions reduction auction to be held in a few months time.

“I want to work with industry and learn by doing from our experience with this auction so we can refine and improve the option contracts for future auctions,” Parker said.

The widescale use of the options contracts may put into question the ability of the Morrison government to deliver the 100 million tonnes of emissions abatement anticipated by 2030, and used in the government’s projections for meeting its 2030 targets under the Paris Agreement.

In light of the flexibility offered to projects, and the potential risk that no abatement is ultimately purchased by the Government, Clean Energy Regulator expects to offer options contracts at a discount to the prevailing price of emissions reductions.

“To maximise chances of being successful at the auction, bids must be competitive. I expect that bids for the option contracts will reflect the value of the more flexible contract offering,” Parker said.

It’s an expectation shared by a number of market participants, and may see the government’s contracts become a “back up” option for emissions reductions projects that may ultimately choose to sell their emissions reduction in the voluntary offset market.

The first options contracts will be offered at the next Emissions Reduction Fund auction, scheduled for late March.

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