Australia bought emission cuts totalling 47,333,140 tonnes of CO2e at an average price of A$13.95 ($10.82) from 144 projects at the first auction under the Emissions Reduction Fund (ERF), the Clean Energy Regulator announced Thursday.
The total value of the contracts resulting from the auction was A$660 million, the Regulator said, more than a quarter of the fund’s total budget.
The emission cuts will be delivered over the next 7-10 years, and only just over half will be delivered by 2020, meaning Australia is unlikely to meet its 2020 target unless prices go down substantially in future auctions or additional policies are introduced.
“On the present trajectory, the ERF budget would be eroded very quickly, so the medium-term sustainability of the scheme is a concern,” Hugh Grossman, executive director at market analysts Reputex said.
There is an expectation that auction prices may drop over the next couple of years, as emission-intensive industries finalise project methodologies, but it is unclear by how much prices will fall and how big the supply will be.
“The feeling is that a lot of potential projects are holding back to see what price signal is provided by the first auction, it’s interesting that the Regulator opted to contract for such a large volume, at a higher price, given the potential for new methodologies and new projects to participate in future auctions,” said one market observer who wished to remain anonymous as he was not mandated to speak to media.
The Regulator has set an undisclosed price ceiling, and has pledged to contract 80% of volume offered below that price.
“Industry will seek to identify the ‘highest’ clearing price, not the average price, which will give firms a better understanding of their abatement value. It is the ‘highest’ price which will ultimately determine whether industry participates in subsequent auctions,” Grossman said.
FORESTS AND LANDFILL
The vast majority of the projects that bid successfully into the first auction were avoided deforestation and landfill gas projects.
Data released by the Regulator showed that project developer Terra Carbon will be the biggest provider of emission cuts, contracting 20.7 million tonnes, most of which will come from protecting native forests.
Energy firms LMS Energy and EDL LFG will cut a total of 11.7 million tonnes from landfill gas projects.
“The results show that, despite the rhetoric of moving away from carbon trading, Abbott government’s policies are caught up in the problems of offsetting,” said Declan Kuch, a research fellow at the University of New South Wales.
“The fact that some 44% of the contracts have been awarded to ‘avoided native deforestation’ projects in New South Wales, a state with longstanding laws preventing native vegetation clearing, is concerning,” he said.
Meanwhile, other project types that have been successful under the previous Carbon Farming Initiative failed to make an impact at the ERF auctions.
“Very few savannah burning projects got through which will obviously be of concern to the indigenous communities,” said Elisa de Wit with lawfirm Norton Rose Fulbright, referring to the remote areas home to Aboriginal communities that can be at risk from raging wildfires.
“I think the cost structure for savannah burning projects is probably higher than what the benchmark price was set at. Not achieving a result at the auction will mean they have no buyer for their credits and may struggle to keep the projects going,” she told Carbon Pulse.
Updated with comments throughout.
By Stian Reklev – stian@carbon-pulse.com
