On 4 March 2022, the Minister for Industry, Energy and Emissions Reduction, the Hon Angus Taylor MP announced changes to Emissions Reduction Fund (ERF) contracts.
See the latest news item published on 9 March 2022 for information on the consultation process, benefit sharing arrangements, and other eligibility criteria.
These changes are entirely consistent with the Government’s longstanding policy of supporting voluntary action to reduce emissions.
Chair of the Clean Energy Regulator, David Parker, said, “Australia’s carbon market is highly dynamic. The market embraced the optional delivery contracts with such enthusiasm that recent auctions have seen very little interest in fixed delivery contracts.”
“The Government has decided that existing ERF fixed delivery contracts can also evolve to meet the needs of this dynamic market,” Mr Parker said.
Holders of fixed delivery contracts will have the opportunity to exit their fixed contracts over time with the Commonwealth on payment of an exit-fee. Fixed delivery contract holders will then be able to sell their ACCUs for higher prices on the private market. This will provide an additional source of ACCU supply to the private market in a period of increasing demand.
Any committed ERF funding released back to the Clean Energy Regulator will remain available to support new ERF projects.
As a result of these changes, the ERF will deliver significantly more than the 213 million tonnes it is currently projected to contribute towards Australia’s 2030 Paris target.
Under the new arrangement, project proponents will be able to exit from their government fixed price contracts in six-month delivery windows. They will be required to pay an early-exit fee equal to existing damages provisions in their contracts.
The carbon market has seen a strong increase in demand for ACCUs which has resulted in material increases in ACCU prices. The price of ACCUs in the spot market has increased from $17 at the start of 2021 to near $50 on 3 March 2022 – approximately a 200% increase. Increases in private sector demand and tight liquidity in the ACCUs market have contributed to the run up in prices.
In recent years, the agency has taken steps to support and grow the private market for ACCUs. Reforms include introducing optional delivery contracts to de-risk investment in ERF projects, an accelerated program to develop new ERF methods to unlock additional ACCU supply, and piloting the Corporate Emissions Reduction Transparency (CERT) report to enhance transparency and accountability in companies’ net zero emissions planning. Work is also underway to implement an Australian Carbon Exchange.
Contract holders will need to be in compliance with their delivery obligations to take part in the exit arrangement.
The ERF plays an important role in the Government’s efforts to reduce Australia’s emissions and in incentivising priority technologies identified in the Low Emissions Technology Statement. The ERF has over 1,100 projects registered and has delivered over 106 million tonnes of abatement across Australia to date. In 2021, record abatement of over 17 million tonnes was delivered along with record project registrations under the ERF. Voluntary demand for ACCUs has already increased by more than 40% in the 2021-22 financial year relative to 2020-21.
For details of the transitional arrangements see the accompanying news item.
Background: Transition from Emissions Reduction Fund fixed delivery contracts
About the Emissions Reduction Fund (ERF) and Australian Carbon Credit Units (ACCUs)
The ERF is a voluntary scheme that supports individuals and organisations to reduce greenhouse gas emissions by investing in projects that involve new practices and technologies across all sectors of the Australian economy. ERF projects can earn Australian carbon credit units (ACCUs) that can be sold either to the Government through a carbon abatement contract, or buyers in the private market. The ERF is one of the world’s largest and most sophisticated offset programs underpinned by a robust Government administered framework to ensure the integrity of the abatement generated.
The Government allocated $2.55 billion to the ERF in 2014–15 and a further $2 billion through the Climate Solutions Fund in 2018–19 building on the ERF’s success and to support additional low-cost abatement. To date, the Government has committed around $2.5 billion through the ERF to emissions reduction projects across the agriculture and land sector, landfill and waste, energy efficiency, industry, and transport sectors. This includes $2.2 billion to projects that reduce emissions in rural and regional areas.
ERF contracts
A fixed delivery contract offered by the Clean Energy Regulator obligates the seller to deliver an agreed quantity of ACCUs. The Clean Energy Regulator purchases these ACCUs at the contracted price over a set delivery schedule for the duration of the contract. ACCUs delivered under this contract can be sourced from the nominated ERF project, other ERF projects or the private market.
Optional delivery contracts provide the seller the right, but not the obligation, to deliver up to a set number of ACCUs at a set price to the Commonwealth within a set timeframe. Optional delivery contracts allow for ACCUs from a project to be purchased by either the Commonwealth or other purchasers. After the introduction of optional delivery contracts in 2020, there has been little demand for fixed delivery contracts. Fixed delivery contracts will not be offered at the next ERF auction.
Optional delivery contracts will continue to be offered at ERF auctions. These contracts continue to be highly sought after as they de-risk investment in ERF projects while facilitating liquidity in the private market if contract holders choose to sell their carbon credits to others.
With innovations like optional delivery contracts under the ERF, the Government is increasingly playing the role of an enabler in the carbon market as the private sector steps up to purchase more abatement. The exit arrangement for fixed contracts supports that trend.
How the transition will work
The initiative will be open to all compliant fixed delivery contract holders who are in good standing with the Clean Energy Regulator. Initially, delivery milestones falling due from 4 March to 30 June 2022 will be offered an administrative option not to deliver those ACCUs to the agency on payment of an exit fee. Later delivery milestones will also be provided this opportunity in a staged manner.
Contract holders will be required to pay an exit fee to be released from their delivery obligations. The exit fee will be calculated by multiplying the contract price by the quantity of ACCUs to be released. This is similar to existing contractual clauses in carbon abatement contracts, but will occur in a streamlined fashion without the legal and likely reputational risks of non-delivery or default.