With uncertainties clouding the future funding of Australia’s Emissions Reduction Fund (ERF), analysts on Wednesday said project developers face a gap in government demand for offsets of at least 9-12 months, which would slow the rate of emission reductions from the nation’s main climate policy tool.

The A$2.55 billion ($1.79 bln) ERF is expected to run out of cash by the end of this year, and comments from Finance Minister Mathias Cormann and a spokesperson for Environment Minister Greg Hunt earlier this week suggested this year’s budget would not include fresh funding.

Meanwhile, an anonymous government source told Fairfax Media that a decision on funds for an “ERF II” would be made within the next 18 months.

“The earliest point for the government to consider a new round of funding for the ERF will be the 2017-18 Federal Budget in May 2017, with any allocation to be formally made in July 2017, upon the commencement of the 2017-18 fiscal year,” analysts Reputex said in an update Wednesday.

“We believe that consideration of funding for ERF II is more likely to be wound into the government’s Direct Action Plan policy review process, to report in around 18 months (Nov. 2017), which would be in line with the government’s reported timeline to consider ERF II funding allocations.”

“This would imply a minimum nine-month funding gap for the ERF (November 2016 to July 2017), with a more likely scenario that funding may not be decided until Nov. 2017 (when the review reports), creating a 12-month gap in climate policy.”

SUPPLY DROUGHT

Last week the number of Australian Carbon Credit Units (ACCUs) issued to date surpassed 20 million, with 40% of that volume coming in 2015, indicating a sharp rise in emission cuts made via the offset market.

The government has contracted the purchase of around 93 million ACCUs so far, but if its demand for ACCUs falls away the number of new projects would plummet, effectively leaving Australia – the developed world’s biggest carbon emitter per capita – without its main weapon to fight climate change.

The Safeguard Mechanism, which commences on July 1 this year, could theoretically provide an alternative source of demand for ACCUs. It sets CO2 targets for companies emitting more than 100,000 tonnes of CO2 per year, and any emitter failing to meet the target can buy ACCUs as a make-good provision.

But analysts say the current targets under the mechanism are so lax that none of the covered entities will have to worry about missing targets unless the scheme is tightened considerably, which is unlikely to happen until the 2017 climate policy review.

CONFIDENCE

After nearly a decade of policy fights and crippling regulatory uncertainty for Australia’s GHG emitters and carbon market participants, the long-term certainty that was expected to come with the ERF now seems to have withered away, and companies are left holding out for the outcome of a review that is expected more than a year-and-a-half from now.

Observers hope for more clarity and a more effective policy to drive emission reductions after the review, but Reputex stressed the potential benefits for the government to communicate its longer-term ambitions long before that.

“At some point the government will need to address the risk of competition between the ERF and any compliance scheme, i.e. a more rigorous Safeguard Mechanism, for ACCUs. Compliance entities under the Safeguard scheme may ultimately have to out-compete the ERF to purchase ACCUs to use as offsets,” Hugh Grossman, Reputex’ managing director, told Carbon Pulse.

“Holding back a decision on funding for ERF II until after the 2017 policy review would therefore be logical, but it would create an extended demand gap in the local market, which would dry up new supply,” he said.

“This goes back to our key point, which is for a change in rhetoric. If the government can clearly articulate a more transparent vision of its Direct Action Plan, it would help to build confidence – even if the detail comes at the 2017 review. It would also draw a line in the sand from the politics of the former Abbott government.”

By Stian Reklev – stian@carbon-pulse.com

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