Australia is likely to delay the next Emissions Reduction Fund (ERF) auction to allow industry to develop low-cost projects in a bid to put downward pressure on prices, analysts Reputex said Wednesday.
In the first auction, the Clean Energy Regulator bought over 47 million tonnes of CO2e cuts at an average price of A$13.95 ($10.81) each, primarily from land-based projects that had already launched under the Carbon Farming Initiative.
But as Australia is set to miss its 2020 target at those price levels, the regulator is now likely to sit back and wait for industry to develop methods and projects that can generate cuts at lower cost, a Reputex report said.
“Supply of abatement from industry will mean greater competition in the market, and downward pressure on the carbon price – which is positive for the government – so we anticipate that the Regulator will seek to support that industry involvement,” said Hugh Grossman, Reputex executive director.
The government had initially outlined quarterly ERF auctions, meaning the next would be due in July, but Reputex said it anticipated only one more auction to be held in 2015.
The firm’s modeling showed industry sectors – primarily cement, metals, power and property – set to secure 76% of the ERF’s remaining funds, amounting to A$1.43 billion.
The traditional carbon farming sectors, land-based projects and landfills, stand to earn the remaining $458 million over the next 12-18 months, Reputex predicted.
“With industry participating, we will see many lower cost industrial projects squeeze out and displace more expensive carbon farming projects such as savannah burning and reforestation activities,” Grossman said.
“For these types of carbon farming projects, operations will basically cease given that there is no other buyer for their carbon credits outside of the government. So if they do not out-compete industry for funding, it’s pretty much game over,” he added.
But while industrial participation might increase competition, Grossman said he expected many new projects to bid above the average price of the previous auction, meaning the price paid by the government might not fall by much, if at all.
“Our modelling indicates that many firms contracted at prices much closer to $20 than the $14 average price that was reported after auction one. We anticipate that trend will continue as industry joins the scheme”,” he said.
By Stian Reklev – firstname.lastname@example.org