MARKET UPDATE: Setting the ERF Benchmark Price

The key issue for many proponents in deciding whether to participate in the government’s Emissions Reduction Fund (ERF) will be the price that the Regulator is willing to pay for emission reductions, with the setting of the benchmark price to have significant implications for market contract prices and the supply of Australian Carbon Credit Units (ACCUs).

In establishing the parameters for setting the benchmark price, the Regulator has confirmed that the ERF will not seek to meet Australia’s 2020 emissions reduction target, but will simply seek to buy as much abatement as it can with the funds available, meaning that the scheme is likely to operate without a clear quantitative purchasing target.

In our Market Update for December we examine how the Regulator may set the benchmark price to achieve this end, and model the implications for ACCU supply and abatement prices.

Findings indicate that a high benchmark price will allow a de facto ‘market driven’ abatement price to form, determined in line with supply and demand. This would incentivise widespread participation from industry, with competition likely to create a large gap between the average price of abatement and the benchmark price.

Notably, over multiple auctions, the average bid price of purchased abatement is likely to converge on maximum price expectations as bidders seek out the clearing price, rather than reflect the underlying cost of abatement projects.

This means that a discriminatory price (pay-as-bid) auction runs the risk of not purchasing the lowest cost abatement – the primary goal – and may instead end up simply reflecting a more acceptable market price.

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