Australia on Friday changed the rules guiding how much volume it will buy from the second Emissions Reduction Fund (ERF) auction, sparking concerns among observers that it was making the market less transparent and discouraging participation.
In the second auction, scheduled for Nov. 4-5, Australia will buy 50-100% of the emission reductions bid at below the price threshold set by the regulator, the Clean Energy Regulator said Friday.
In the first auction the regulator was obligated to buy 80% of the volume below the threshold, and ended up purchasing 47.3 million tonnes of CO2e cuts at an average price of A$13.95. But analysts have predicted the price will increase in future auctions and that the ERF budget may be spent already by next year.
“The variable volume threshold means we will have the flexibility to accept between 50 and 100 per cent of the volume of abatement offered at auction below the benchmark price. The threshold will be at the point where the bids represent best value for money,” Chloe Munro, the Clean Energy Regulator chair, said in a statement.
“We are in no rush to buy abatement at a high price,” she said.
She warned project developers to not try to maximise their profits, saying the best strategy for success at the auction would be to price “realistically”, ie. the lowest price at which it is worth committing to the project.
A total of 390 projects have been approved and registered in the ERF database as potential candidates to sell emission cuts in the November auction.
But the rule change was not welcomed by observers, who had already criticised the secrecy shrouding the regulator’s price threshold.
“The new rules produce a challenge in terms of auction strategy,” said Elisa de Wit, a carbon policy expert with lawfirm Norton Rose Fulbright.
She said the 80% rule had been enshrined in the Coalition’s ERF policy document, so even though the regulator had no legal obligation to stick to it, the change would have been unanticipated by the market.
“Will the rules change every time?” de Wit said.
Hugh Grossman, managing director with market analysts Reputex, was also unimpressed by Friday’s rule change.
“The variable threshold is another opaque layer being added to an already dark market,” he said.
“The regulator is simply looking to maintain an air of mystery over market prices going into ERF II and build downward pressure. But in reality the more opaque the market is, the less inviting it is – particularly for industry – which already views the ERF with some cynicism,” he told Carbon Pulse.
With no upfront information on what the regulator’s price threshold is or how many of the bids that come in below that threshold it will choose to buy, preparing bids will be a challenge for developers.
However, Grossman did not think the regulator would succeed in the attempt to keep prices down.
“We continue to anticipate a high benchmark price at auction two. The high end of our simulated ERF bid-stack still looks to have plenty of upside so that still suggests upside for proponents in line with their risk tolerance,” he said.
By Stian Reklev – email@example.com