The federal government announced changes to Emissions Reduction Fund (ERF) contracts on 4 March. Under the new arrangement, project proponents will be able to break fixed delivery contracts – on payment of an exit fee to the Commonwealth – and sell their Australian carbon credit units (ACCUs) in the private market.

Angus Taylor, minister for industry, energy and emissions reduction, said when announcing the changes that the average fixed-delivery price was around A$12 (US$9) per ACCU compared around A$50 in the private market. The ACCU spot price crashed to A$30 after the announcement. “These reforms will lead to more ACCUs becoming available to the market in an orderly and transparent way, which will help meet the increasing voluntary demand for domestic offsets,” Taylor insisted.

The Clean Energy Regulator (CER) introduced optional delivery contracts in March 2020. Prior to this, project proponents could only enter into fixed-delivery contracts with the Commonwealth. Optional-delivery contracts were quickly embraced to underwrite and de-risk projects while supplying ACCUs to meet secondary market needs.

Optional delivery contracts provide project proponents the right, but not the obligation, to sell ACCUs to the federal government at an agreed price within a set time.

The market has shown little interest in fixed delivery contracts since the introduction of optional delivery, and the CER did not offer these at the auction held in April this year.

Response to the decision has been mixed. Some media commentary painted the decision as a win for fossil fuel companies as it effectively makes it cheaper for them to acquire carbon offsets and also suggested it provides a windfall for carbon traders at the expense of taxpayers.

James Schultz, chief executive at GreenCollar, disputed this in an opinion piece in local media. “The biggest beneficiaries of this change are not big emitters and traders, they are overwhelmingly the family-owned farms that run so many of Australia’s carbon projects and built the foundation of the market we have today,” he wrote.

“It is also a myth that this disproportionately benefits project developers,” Schultz continued. “Most project arrangements see the significant majority of revenue flow directly back to the farming families that own the land and implement the project activities, while the costs of running and managing the project are covered by the project developer.”

However, the Carbon Market Institute (CMI) says Taylor’s decision further erodes confidence in the market, exacerbated by the fact there was no formal consultation and that the decision is the latest in a long list of government interventions. For example, Taylor announced additional veto power on certain carbon projects and new requirements about buying carbon offsets with specific certifications in the last year.

“Anecdotally, we are hearing from a lot of corporates in the voluntary space that this market volatility has increased regulatory risk – it has increased the risk of investing in a scheme where the government can make decisions without consultation,” says Brad Kerin, general manager and company secretary at CMI.