Private companies have been gifted a multi-billion-dollar windfall, after being allowed to break long-standing government supply contracts to cash in on a booming market.
In a surprise move, Energy Minister Angus Taylor said companies contracted to supply Australian Carbon Credit Units (ACCUs) – equalling one tonne of carbon emissions reduced or avoided – to the government could instead trade them on the open market.
While the government pays $12 a tonne, the market has surged 200 per cent in just over a year and been as high as $55 a tonne.
"It's a very bad deal," said Professor Bruce Mountain from the Victoria Energy Policy Centre at Victoria University.
"Ministerial intervention, in a market he created, has completely up-ended that market.
Professor Mountain blamed the situation on what he called the government's "half-hearted" policies around abating carbon emissions.
That has now been topped with this surprise policy shift, allowing companies to get out of enforceable contracts.
"They created a 'get out of jail' clause … which the minister is making it ever more possible to exercise.
Professor Mountain has no links to companies affected by this announcement.
The biggest shock could still be coming. What governments will pay in future is likely to be the market price, which could make sourcing credits to abate emissions vastly more expensive.
"They're not going to source them at 12 bucks, they'll source under a much higher price," Professor Mountain said.
"This is a chaotic mess."
Government intervention
The changes are substantial.
In a press release, Minister Taylor said the moves would "increase liquidity, allow project proponents to take advantage of higher private market prices and ensure equitable treatment".
The last point is about the fact that, since March 2020, the Clean Energy Regulator devised "optional delivery contracts" where people who created ACCUs could sell them to the government's Emissions Reduction Fund but did not have to.
Previously, anyone undertaking carbon credit projects had to sign up to a fixed contract with the Commonwealth to deliver carbon credits for a period of up to 10 years before they could sell on the open market.
But prices on the open, or spot, market have rocketed since the government signed up to a target of net zero carbon emissions by 2050 at the COP26 conference.
A lack of units and a surge in interest saw the price hit $55, creating an increasingly large gap between the $12 fixed price offered by the government and the market.
The Clean Energy Regulator said the gap was so large that contracted companies might void their deals, pay a damages bill and still make big money.
"If a widespread disorderly exit from fixed delivery contracts occurred, this would cause a large volume of ACCUs to become available to the carbon market, leading to price volatility and investment uncertainty," the regulator said in making the announcement on March 4.
Minister Taylor did not respond to the ABC's requests for comment.
"Net zero by 2050 makes carbon emission credits scarce and hence valuable," Professor Mountain said.
The sudden rule change meant a flood of carbon credits could now enter the open market. The market price cratered, plunging more than 30 per cent.
Speaking on Wednesday, agriculture minister David Littleproud was asked about the decision by the energy minister – and how it had crashed the market.
"It's about making sure we get the market mechanisms right, and we'll be making some further announcements very soon around carbon farming, making sure we get that balance right and what that should look like, and giving certainty because it is evolving and we're world-leading," he said.
'Half delighted, half livid'
Carbon Market Institute chief executive John Connor runs an industry body that includes farmers, carbon project developers, banks and industries affected by the shift to net zero emissions. He described his members as "half delighted, half livid".
Many would have bought units when they were at or near $55, before the government's intervention flooded the market and depressed the price, while others have been released from having to sell their contracts to the government for $12.
There was no formal public consultation about the change, and it comes after recent government interventions, including a proposed additional veto power for the Agriculture Minister on certain carbon projects, and new requirements about buying units with specific certifications.
"We are concerned that continuing arbitrary changes in Australia's carbon market will challenge investor as well as community confidence in supporting carbon reduction or removal activities credited by the Government with ACCUs," Mr Connor said in response.
No 'break fee' mooted
Companies breaking their $12-a-unit contracts will have to pay some damages and an exit fee to the government. The fee will be used for emissions reduction projects.
Not only have companies been given the green light to break contracts, it was even mooted that companies could break the contracts without penalty, something confirmed by a Clean Energy Regulator spokesperson in response to questions from the ABC.
"A range of options were considered, including a 'no break fee' approach, but that would have amounted to a substantive change in legal rights," they said.
The regulator said the growing gap between the $12-a-tonne contracted price and the open market was "unsustainable", because some companies were mulling breaking their deals.
If that occurred, the Commonwealth would have been obliged to pursue the debt, potentially including legal action.
"A disorderly exit of this nature would inevitably lead to disputes over damages arrangements for each failed delivery," the spokesperson said.
Given the substantial windfall gifted to private companies by the shift, the ABC asked the regulator: "Why was the threat of breaking contracts given in to?"
"It wasn’t 'given in to'. It was a deliberate policy choice.," the spokesperson said.
"As far as we are aware, no proposal was put to the government by market participants to use the approach that was adopted."
Carbon farmers happy
For James Shultz, the shift was a surprise but not a shock.
"We didn't see the particular announcement coming," he said.
"But we'd certainly been talking, along with many people in the industry … about a need to address this issue. What we had was no insight into the actual policy that was announced."
Mr Shultz is the chief executive of GreenCollar, a company that works with landowners to develop and manage projects that abate carbon – like growing trees.
It describes itself as Australia's largest environmental markets investor and its boss was increasingly concerned about the widening gap between the price of a contracted unit and a market price more than four times higher.
"As the market's maturing, you sort of get these kinds of stresses," he said.
"We've got so much more demand and supply in this market. Trying to (make) moves that increase the liquidity of the supply out there in the market. It's ultimately a good thing."
Mr Shultz does not describe what has happened as a "windfall gain" even though it offers the potential for greater profits for landowners and companies like his that create units.
"The regulator is receiving a penalty payment, plus they're saving the money that they would have otherwise spent to procure the credit," he argued.
Incentive gone
Companies have two ways to reduce their carbon emissions to net zero. They can change what they do or buy credits to cover what they cannot or will not change.
Forcing down the price of credits means there is less incentive to spend money to cut processes or products that pollute, as it becomes cheaper to offset the emissions on the market.
Polly Hemming, an advisor on climate and energy with think-tank The Australia Institute, said that is why a high carbon credit price works to actually reduce emissions.
"Because the idea is that you make reductions, systemic reductions, within your operating model that are going to reduce emissions," she explained.
"And then, as a means of last resort, you purchase carbon credits, because you simply can't reduce your emissions any further."
But massively expanding the amount of credits available makes it cheaper to buy them.
"So it completely 'dis-incentivises' the idea that people are going to be reducing their emissions first.
