Australia allows carbon credit suppliers to exit fixed delivery contracts with government

Holders of Australian Carbon Credit Unit, or ACCU, fixed delivery contracts purchased by the Australian government can now be released from their contractual obligations after paying an exit fee, a move that enables ACCU suppliers to sell their carbon credits at a much higher price in the spot market, the Australian government said March 4.

Australia's carbon market identifies eligible emission avoidance or reduction projects based on a list of recognized methods to generate tradable ACCUs. The ACCUs can be sold to the Clean Energy Regulator, or CER, under its Emission Reduction Fund scheme, or to commercial buyers in the spot market.

Australia's carbon market has seen a strong increase in demand for ACCUs since early 2021, leading to material increases in ACCU prices, the government said. ACCU spot market prices have surged about 200% to A$50/mtCO2e ($37/mtCO2e) March 3, from A$17/mtCO2e ($12.6/mtCO2e) at the start of 2021.

ACCU demand has grown steadily in the private sector amid tight supply leading to the run up in prices, according to the government.

Over 75% of the carbon abatement held by the government under the fixed delivery contracts is priced under A$13/mtCO2e ($9.6/mtCO2e), well below the current spot market prices, the government said.

Fixed delivery contract holders met their obligations with 13 million ACCUs supplied in 2021, according to the government.

ACCU fixed delivery contract holders were required to pay buyer's market damages (BMD) to the government for undelivered carbon abatement that were capped at the contractual price, prior to the announcement March 4.

Some ACCU suppliers chose to exit and pay the BMD, due to the large gap between the fixed contractual price and the surging spot market. Suppliers now will only have to pay an exit fee. The announcement did not provide details on the amount of the exit fees to be paid.

The government announcement aims to provide contract holders the option to exit in "a transparent and orderly process".

Contract holders whose fixed delivery milestones are due between March 4 and June 30 will be allowed to exit their contractual obligation on priority, followed by contract holders whose fixed delivery milestones become due between July 1 and Dec. 31.

The approach aims to reduce the effect on ACCU market prices, the government said, with a gradual exit of ACCU suppliers.