Australia is likely to exhaust its A$2.55 billion ($2 bln) Emissions Reduction Fund (ERF) within a year, meaning the nation’s main climate policy instruments risks collapse unless the government commits further funds or finds new buyers of offsets, market analysts Reputex said.

The Clean Energy Regulator, which administers the fund, spent a quarter of the ERF budget in the first auction, held last month.

In a new report released Wednesday, Reputex predicted the ERF would be fully committed in a year, leaving Australia without a mechanism to cut carbon emissions.

“This will create a significant policy gap, which will effectively collapse the domestic market,” managing director Hugh Grossman said.

“Unless the government commits additional funding, or establishes a new buyer for Australian carbon credits, the domestic carbon market will grind to a halt in 2016,” he added.

Environment Minister Greg Hunt recently said the ERF is designed to be the basis of Australia’s climate policy until 2050, although the government’s will to commit more funds in the pre-2020 period is uncertain and spending is set to rise dramatically after 2020, when Australia needs to meet tougher targets.

The issue might be forced as early as this year, as Australia in June will submit its INDC to the UN, outlining climate targets and strategies for the post-2020 period.

The INDC will be put under international scrutiny, and pressure is likely to be heavy on Minister Hunt at the Paris UN climate conference in December without a credible pathway to meeting targets.

The Reputex report said the government could create a secondary market for offsets by imposing strict rules for emitters in the ERF safeguard mechanism, set to be finalised later this year.

By setting ambitious caps for industry and energy, and forcing companies to buy offsets if they fail to meet targets, the market could survive without putting the entire  burden on the government, said Reputex.

But the draft mechanism, as published in March, would do little to create such a secondary market, it said.

“A secondary source to purchase local emissions reductions could be established via the government’s safeguard mechanism, however – as presently designed – baselines set at a high point of emissions over the past five years will do very little to support the offset market,” Grossman said.

“With few facilities liable to their baselines, we are unlikely to see any additional demand for companies to acquire carbon offsets, meaning the burden to support the ERF will stay with taxpayers unless the draft scheme is amended to address this gap.”

By Stian Reklev – stian@carbon-pulse.com