The 10th Emissions Reduction Fund (ERF) auction purchased 1.7 million Australian Carbon Credit Units (ACCUs) at an average price of $16.14/t, an increase from record low levels of abatement contracted at Auction 9 (59,000 ACCUs) in July 2019.
While volumes have increased, contracting remains well below earlier auction rounds, with Auctions 1-4 purchasing an average of 44 million ACCUs. The last three ERF auctions have contracted an average of 1.6 million ACCUs, reflecting lower participation across the market due to the administrative complexity of the scheme and a low price environment. The Clean Energy Regulator remains unwilling to contract at higher prices, not accepting a number of higher priced bids at Auction 10.
As noted in our earlier update, the unwillingness of the Regulator to contract at higher prices has effectively collapsed the ERF market, with the low price ceiling failing to unlock higher cost abatement projects, while eroding market sentiment as bidders sit on the sidelines or wait for more favourable prices in the secondary market or via direct offtake agreements.
Should the low price environment continue under the second phase of the ERF/Carbon Solutions Fund scheme, modelling indicates that abatement contracting is likely to remain at low volumes (under 3 million ACCUs), with low average prices continuing to constrain the participation of abatement projects slightly higher up Australia’s abatement cost curve – particularly land sector activities like soil carbon and plantation forestry, as well as industrial projects such as source separated organics, commercial buildings, and wastewater.
At these contracting volumes, the ERF is unlikely to make a large contribution to Australia’s national emissions reduction abatement task, with a re-working of the scheme needed to better incentive industry participation. Just 190,381 ACCUs were surrendered by large emitting companies under the safeguard mechanism over FY18-19 (1.3% of covered emissions), with industry emissions continuing to increase in line with our earlier outlook for Q3 FY19-20.
The RepuTex Team
Australian Energy Markets