Australia buys 50.5m offsets at A$10.23 each in third ERF auction

Published 02:58 on May 5, 2016  /  Last updated at 17:29 on May 5, 2016  /  Asia Pacific, Australia  /  No Comments

Australia’s Clean Energy Regulator bought 50.47 million tonnes of CO2e reductions at an average cost of A$10.23 ($7.66) each in last week’s Emissions Reductions Fund (ERF) auction, which was heavily dominated by vegetation projects, it said Thursday.

Australia’s Clean Energy Regulator bought 50.47 million tonnes of CO2e reductions at an average cost of A$10.23 ($7.66) each in last week’s Emissions Reductions Fund (ERF) auction, which was heavily dominated by vegetation projects, it said Thursday.

The result means Australia has contracted to buy 143 million Australian Carbon Credit Units (ACCUs) over the three auctions held so far, spending A$1.7 billion of its A$2.55 billion budget.

ACCUs bought in the latest round will be delivered over the next decade and cost a total A$516 million.

The average price fell 16.5% from the November auction in line with market expectations, as increased competition drove lower bids from project developers.

However, the expected influx of low-cost industrial projects did not materialise. Vegetation projects accounted for 47.2 million of the contracted offsets, with landfill and waste a distant second at 1.6 million.

Energy efficiency projects from industry only accounted for 500,000 tonnes of the emission cuts, with agriculture and savannah burning making up the rest.

A total of 33 contractors bid successfully on behalf of 73 projects at the auction, the Clean Energy Regulator said.

WINNERS

Developer Terra Carbon was by far the biggest winner in the auction, contracting the sale of more than 32 million ACCUs from 30 projects – over 60% of all the offsets in the auction.

Paniri Ventures will sell 4.7 million ACCUs from two projects, Goldfields Carbon Group contracted 4 million from a single venture, and Corporate Carbon will sell 3.2 million from two different projects.

A large share of ACCUs picked up in this auction comes from projects designed to revegetate land in Queensland after the state’s previous Liberal government eased rules in 2012, sparking a land-clearing bonanza that has seen the state’s emissions soar to levels that threaten Australia’s chances to meet its climate targets.

One project, developed by Terra Carbon and the Queensland government under its Catchment Conservation Alliance joint venture, will deliver 15 million tonnes of CO2e cuts by establishing permanent forests on land in Queensland that has been cleared.

That project alone will deliver nearly a third of all the offsets contracted through the auction.

Another one, Corporate Carbon’s Climate Friendly Aggregation Project No. 2, will earn 3 million offsets in the same manner.

“This is not where Australia needs to go,” one market participant told Carbon Pulse, pointing out that while the ERF is generating significant emission cuts, it is doing little or nothing to address emissions from the country’s coal-dependent electricity sector.

That view was echoed by analysts Reputex in its initial reaction to the auction.

“The rate of annual emissions growth continues to outpace credits contracted by the ERF. This growth is driven by Australia’s largest emitting companies, which have to date not participated in the ERF due to the voluntary nature of the scheme, and the large up-front costs,” it said.

“While our international commitment may be met, any emissions increased from today will be added to Australia’s post-2020 emissions reduction task, and will compound the cost of action later.”

Elisa de Wit, a climate expert with lawfirm Norton Rose Fulbright, said the methodologies for heavy industry developed under the ERF so far were difficult to work with and provided little incentive for the sector to participate.

”Unless you can get huge scale, the economics just don’t stack up,” she told Carbon Pulse.

Meanwhile, the Climate Institute think-tank pointed out that the ERF, after spending two-thirds of its budget, has achieved less than 7% of the cuts necessary for Australia to meet its 2030 target.

PRICE REBOUND?

Despite questions lingering over the ERF’s overall ability to help drive lasting emission cuts in Australia, the Clean Energy Regulator was pleased with the price drop, which allowed it to buy a larger amount of emission cuts.

“It’s clear the market is maturing, and finding new opportunities to offer substantial volumes of abatement at lower costs,” said Chloe Munro, chair of the regulator.

“We purchased 77% of the volume of abatement offered below the benchmark price at this auction, in line with the variable volume threshold. This is comparable to the last auction when we accepted 72.3%.”

However, Reputex said the offset market might have hit a floor at current levels and that the price might bounce back in the next auction.

“There is likely to be little abatement offered at prices lower to this in the next auction,” it said.

“Subsequently, should the participation of mega projects recede, we may see prices rise from this floor at the next action. Notably, the lower number of contracts awarded suggests that many of the early project developers have lost interest in the ERF, with current prices not high enough to incentivise their participation.”

In the budget proposed this week, the government did not provide fresh funds for the ERF, meaning it will have to make do with its current budget.

With A$816 million in unspent funds, the Clean Energy Regulator is likely to be able to hold one more very large or two medium-sized auctions before the budget is depleted.

The full auction results are available here.

By Stian Reklev – stian@carbon-pulse.com

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