A decision by Angus Taylor to open up the market for carbon credits has made it cheaper for companies to pollute and has transferred billions in value to the private sector. By Mike Seccombe.
Angus Taylor’s $3.5 billion carbon blunder
Two weeks ago, on March 4, Angus Taylor announced major changes to one of the government’s key greenhouse gas initiatives. Effective immediately, anyone contracted by the government to deliver climate abatement through Australian Carbon Credit Units would be able to sell their credits on the open market.
The change sounds simple but the ramifications are enormous. Immediately, the value of these units tanked. The decision not only made it cheaper for big polluters to buy offsets against their emissions, but also ensured windfall gains for Australia’s carbon traders. By the estimation of Oliver Yates, a former chief executive of the Clean Energy Finance Corporation, Taylor’s intervention cost Australian taxpayers $3.5 billion.
For his part, Taylor, the minister for Industry, Energy and Emissions Reduction, said the changes had been made so that the carbon market operated in a more “orderly”, “transparent” and “equitable” way, and were “entirely consistent with the Coalition’s longstanding policy of supporting voluntary action to reduce emissions”.
It is not widely understood that Australia even has a carbon market. After all, the current government came to power with a promise to “axe the tax” – referring to the Gillard government’s emissions trading scheme.
But the Morrison government does place a price on carbon emissions. The difference is that taxpayers pay that price through the government’s Emissions Reduction Fund (ERF). Taylor’s recent announcement altered the way the ERF operates, by changing the rules that apply to Australian Carbon Credit Units (ACCUs).
Simply put, ACCUs are a means by which the government pays people not to emit greenhouse gases. ACCUs are issued by the government’s Clean Energy Regulator, and each unit represents one tonne of carbon dioxide, or carbon dioxide equivalent, either stored or avoided.
Farmers, for example, can contract not to cut down trees on their properties – instead leaving them growing and thereby storing carbon – and be awarded ACCUs equal to the amount stored. In most cases, the contract involves an agreed “fixed delivery price” that the government pays if the promised carbon savings are delivered.
Since 2013, Taylor noted, about 106 million ACCUs have been issued at an average price of about $12 each, set by the government and to be paid out of the ERF. Recently, however, the spot price of abating a tonne of greenhouse emissions had suddenly taken off, reaching almost $60 at the start of this year.
The ballooning price was facilitated by a secondary market that has developed for ACCUs, which was allowed by earlier changes made by the Morrison government. The steep rise in recent months was driven by a number of factors, among them the 2021 United Nations Climate Change Conference in Glasgow, public and investor pressure on companies to act on their emissions reduction promises, the dire warning of climate scientists, and the Morrison government’s own, belated promise to make Australia net zero by 2050.
There is also the prospect that Labor will win the coming election and alter the current, weak “Safeguard Mechanism” applying to large emitters, by progressively lowering the amount of carbon pollution they can produce, thus forcing them to invest in new, cleaner technology or go to the market and buy carbon credits.
The spiralling prices only added to concerns about the operations of the Emissions Reduction Fund, which has always been controversial because it has been hard to measure the effectiveness of the billions of dollars being spent by the government. Critics have complained, for example, that many landholders were getting credit for not cutting down trees that in many cases they were not going to cut anyway, or that projects that harvested gas from landfill sites did not need the incentive of subsidies because they were commercially viable even without them.
“There are now, I think, 38 different ways of earning credits, like energy efficiency, transport, technology changes … notably, carbon capture and storage (CCS),” says Polly Hemming, an adviser in the climate and energy team at The Australia Institute and a former bureaucrat who worked in the relevant area within Taylor’s department. “You can now earn carbon credits for storing a small amount of CO2 as part of a gas project.”
That change was the most contentious to come from a review of the ERF, commissioned by Taylor in 2019, to identify additional sources of abatement across the economy. The review was chaired by Grant King, a former head of the Business Council of Australia, who has a long history in the fossil fuel sector, including with Origin Energy and AGL gas. The review was released in May 2020.
King is a man with many hats. One of them is as chairman of a company called Green Collar, Australia’s biggest aggregator of ACCUs. It operates biosequestration projects across nearly 15 million hectares of land, primarily in association with family farmers, to get ACCUs. The Saturday Paper is not suggesting anything improper in King’s roles.
In a comment piece for The Australian following Taylor’s recent decision, Green Collar’s chief executive, James Schultz, lauded it as “unquestionably good news for landholders participating in carbon farming projects throughout Australia”.
When it was put to him by The Saturday Paper that it also was good for the company, he said: “We have a gross revenue model where at least 70 per cent of the revenues flow straight back to the farm, and the balance, once the costs come out … whatever is left is where we make our money.”
Schultz dismissed the claim that Taylor’s move amounted to a transfer of wealth from taxpayers to private players in the carbon market.
“I think it’s a pretty big stretch to imagine that it would be a good idea for the Clean Energy Regulator to be actively trading on the carbon market,” he said. As things now stand, he said, the government would receive “real money – not theoretical arbitrage – that could be spent on climate change programs”.
Much of the expansion in the types of projects eligible for accreditation, including for the contentious practice of CCS, came out of the King review. But it did not recommend shifting ACCUs onto an open market.
At the time, companies such as Green Collar were working to broker deals between smaller players, largely farmers, and the government on ACCU prices. In return, they would get a cut of 25 or 30 per cent of the proceeds.
But with market prices rising dramatically, those who had locked themselves into these contracts at $12 were understandably not happy to see others getting vastly more on the open market. They began considering simply breaking their contracts.
This was not a problem while the price of ACCUs remained low enough. One major disincentive for breaking was that if they did, not only would they not get their money from the government but they would have to pay an equivalent amount in “damages provisions”.
Allowing for transaction costs, say market experts, it would not be worthwhile to break the contract, pay the penalty and risk the vagaries of a floating market unless the price was well above $30. But at the prices that existed before Taylor’s recent intervention – $40, $50, $60 – it suddenly was.
“So,” says John Connor, chief executive of the Carbon Market Institute, “we’ve got about $100 million worth of these fixed contracts, and the regulator is getting an increasing number of people saying they’re going to break their contracts … and there was a clear and present danger that we’d have this flood of 100 million ACCUs into the market.”
This explains Taylor’s announcement, made without prior consultation, that he was changing the rules for trading ACCUs. Those with fixed contracts would be given the option to sell into the private market, but only after paying the contractual damages provisions, and not all at once. Which is to say, in the face of a potential stampede, he moved to make for a slower exit.
“Project proponents will only be able to activate the option within six months of their next existing scheduled delivery window,” Taylor said.
“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.”
In Oliver Yates’s view, this is good news for the contractors and the aggregators, but not for the taxpayer.
“If I was the Commonwealth, I’d be sitting there thinking, ‘Great deal. I bought all this carbon, 100 million tonnes at $12, and now it’s worth $50,’ ” he says.
But much of that gain will not go to the government and taxpayers. Instead it will be shared by those who hold the contracts and the aggregators. “They can pay $24 and take their carbon back and then sell it on the market for $50.”
Yates questions why the government doesn’t simply keep all the benefit for itself.
“It wasn’t an option to deliver, it was a contractual obligation to deliver. If you didn’t have to deliver, it wouldn’t be a contract, it would be an option,” he says. “So effectively $3.5 billion of value gets transferred from the taxpayer to the private sector.”
His calculation is based on a $50 market price, and the price has fallen dramatically since the change was announced. But there is still a huge transferral of value here.
Under this model, the government doesn’t have to pay out the contracts and also receives the penalty payments for the broken contracts, which Taylor promises will be reinvested. But there was no detail of how the money would be spent, leading to concern it will generate more ACCUs of dubious integrity for climate non-solutions such as CCS.
“The government has a commitment to a gas-fired recovery, it’s also committed to net zero,” says Hemming. “The thing that is going to bridge the gap is if there are a lot of offsets at an affordable price for the gas industry.”
She cites as evidence a newspaper interview Grant King gave in January. In it, he appears to be firmly onside with Taylor’s vision of a gas-led recovery, and the need to generate more ACCUs to help it along.
King acknowledged the need to develop more renewable energy but also said it had to be “firmed” to guarantee supply.
“And I would contend that at the moment that is only going to be done through gas, but gas requires offsets,” he said.
“Almost invariably, when demand grows and prices go up, it’s a supply side issue. And maintaining supply of these credits both from geosequestration and particularly biosequestration is critical.”
This much is clear: carbon farmers and aggregators are winners from the change. So are polluters who want to buy ACCUs to offset their emissions – unless, of course, demand pushes up the price again, which Schultz thinks will happen.
The lingering question, though, is whether the extra liquidity in the market will buy real abatement, or simply give cover to fossil fuel interests and other dirty enterprises to continue with business as usual.
With Angus Taylor in charge, there’s always cause for concern.
This article was first published in the print edition of The Saturday Paper on March 19, 2022 as "Angus Taylor’s $3.5 billion carbon blunder".
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