The Australian government’s flagship Emissions Reduction Fund (ERF), administered by the Clean Energy Regulator (CER), is facing potential challenges as surging prices for Australian Carbon Credit Units (ACCUs) could lead to project developers failing to meet contracted carbon abatement targets.
Through the ERF, the federal government has directly contracted the purchase of ACCUs, a form of carbon offset, from emissions reduction projects. These projects encompass activities such as avoiding land clearing, land revegetation, emissions reduction from landfill sites, and more recently, carbon capture and storage projects.
To date, the CER has entered into contracts to purchase approximately 230 million metric tons (mT) of emissions reductions through the ERF. The total contracted spend amounts to A$2.6 billion, with an average price paid to date of A$12 per metric ton (T). However, the increasing demand for offsets from corporate emitters has driven prices beyond A$40/T, raising concerns that project developers may prioritise higher market prices over fulfilling government contracts. As a result, up to 155 million mT of ACCUs are considered at risk of default.
Failure to meet contractual obligations with the CER incurs penalties known as “buyer’s market damages.” Defaulting projects would be required to compensate the CER by providing funds for offset purchases from alternate sources. The maximum offset price payable is equal to the contracted price, which is typically around A$12/T for most ERF contracts. Consequently, default charges would total approximately A$24/T, representing the loss of A$12/T that would have been received for fulfilling the contract and an additional A$12/T penalty. Despite ACCU prices trading above A$40/T, project developers would still generate a profit. The CER has confirmed that no projects have defaulted thus far.
The risk of default on government contracts due to soaring ACCU prices underscores the need for ongoing monitoring and adjustment of contractual arrangements. To maintain the integrity of the ERF, ensuring that contracted emissions reductions are met and penalties are enforced appropriately is essential. As ACCU prices continue to rise, finding a balance between market dynamics and contractual obligations will be crucial for the long-term success of the ERF and the achievement of Australia’s emission reduction targets.
