In late February the Australian Government announced an additional $2 billion in funding for the Emissions Reduction Fund (ERF), rebranding the scheme the Climate Solutions Fund (CSF).

The additional funding tranche for the ERF could provide $200 million over 10 years, bringing total investment to $4.55 billion (bn) since the commencement of the scheme. Funding will be conditional on the return of the Government at the upcoming federal election, with the Australian Labor Party (ALP) proposing to scrap the framework should it form government.

Below we take a closer look at Australian Carbon Credit Unit (ACCU) pricing dynamics under ERF I, and model possible pathways for price formation under the CSF (ERF II). Specifically, we look at the role of the Clean Energy Regulator in collapsing the current ERF market, and simulate future ACCU price dynamics should the scheme’s benchmark (or celling) price be more efficiently deployed to unlock higher cost abatement projects.

Current ACCU price dynamics under the ERF

The first tranche of the ERF has contracted to purchase 193 million ACCUs via 477 contracts, with around $1.8 billion of the government’s $2.55 billion funding tranche currently committed (approximately $226 million remaining for future contracting).[1]

As shown in Figure