Australia changes carbon market rules to allow more private sales

Changes to how government buys carbon credits could see holders collectively benefit from a A$2.4bn windfall from sales on the open market instead.

The Australian government will turbocharge the country’s private carbon credit market by allowing entities that generate carbon credits to opt out of pre-agreed contracts with its Emissions Reduction Fund and sell their credits on the open market instead.

Australian Carbon Credit Units, each equivalent to one tonne of stored or abated carbon, are issued through the government’s Emissions Reduction Fund. Prior to 2020, ACCUs were issued under a fixed price contract.

Since 2020, the government has allowed optional contracts, where entities have a right but no obligation to sell ACCUs to the government at a fixed price, while also selling credits on the open market.

The changes announced this week mean that vendors will be able to buy out their fixed price contracts at the agreed fixed rate and then resell their credits on the open market, effectively allowing them to pocket the difference.

The spot market was trading at A$47 ($34.55; €31.34) per ACCU on March 3, according to the Carbon Market Institute, having increased dramatically from A$16.50 in January 2021 and peaking at almost A$60 earlier in 2022.

Australia’s Clean Energy Regulator said that more than 75 percent of the fixed price contracts had been signed at less than A$13 per ACCU, well below current market prices.

To try to avoid a crash in the spot price from a potential flood of new credits, the government will only allow contracts to be exited within six months of their scheduled delivery, theoretically providing for a staged release of up to 10 million ACCUs each year in the coming years.

The government said that around 110 million ACCUs are under contract for delivery at fixed prices. If all those are bought out at the average price, the government would save approximately A$1.3 billion while receiving the same amount in payments for the credits to release them – a potential total benefit of more than A$2.6 billion.

John Connor, chief executive of the Carbon Market Institute, expressed concern about how the changes would be received by investors and the wider community, given the lack of consultation over the surprise announcement.

“The changes, while coming with some guardrails, could deliver up to 100 million ACCUs at a value of up to $2.4 billion to corporate or other private buyers over the next decade, based on likely market prices required to facilitate exit. However, they come with no public consultation and are not linked to greater overall emission reduction commitments” he said in a statement.

“While we welcome that the release will be staged and that exit payments will be used for ‘emission reduction measures’, we are concerned about the message this sends to the market about the ability for government intervention without transparent and public consultation at any point in time, if market dynamics change.

“The government needs to be clear about the intended use and timing of how the exit payments will be recycled and should have linked this to stronger corporate investment requirements under strengthened safeguard mechanism responsibilities and stronger national emission reduction commitments.”

The government said the changes would allow the ERF to support a wider range of projects and deliver “significantly more” than the 213 million tonnes it is currently projected to contribute towards Australia’s 2030 Paris emissions reduction target.

In a statement, minister for industry, energy and emissions reduction Angus Taylor said: “These reforms will lead to more ACCUs becoming available to the market in an orderly and transparent way, which will help meet the increasing voluntary demand for domestic offsets. This will allow projects to take advantage of higher market prices over time.

“The changes build on the great success of the ERF, the world’s largest and most successful national carbon offset scheme, which is underpinned by a robust government administered framework to ensure the integrity of the abatement generated.

“Since 2013, more than 106 million tonnes of abatement has been credited and project registrations have surged from 944 at the beginning of 2020 to more than 1,100 today. The strong growth in private sector demand for ACCUs shows that the market recognizes and values their high quality and integrity.”