The $2.55 billion Emissions Reduction Fund – the centrepiece of the Coalition's Direct Action climate policies – is set to run out of money at next month's auction.
With the federal government's own review of its climate policies not due until the end of the year, industry is worried the ERF will be in limbo for 18 months unless the Turnbull government tips more money into it in the May budget.
The dwindling funds of the ERF – which only has $440 million remaining and is expected to be exhausted in the auction on April 5 and 6 – is an embarrassing reminder for the Turnbull government that its climate policies will need to be significantly overhauled to have any chance of meeting 2020 and 2030 carbon reduction targets.
Only 17 new projects have registered for the fifth auction of the ERF, well down on the 28 before the previous auction in November last year and well below the average project registration rate of 90 ahead of the first three auctions.
Under the ERF, taxpayers' money is used for a range of schemes to reduce emissions, including paying farmers to grow trees, indigenous groups to burn savanna grassland, landfill projects and energy efficiency measures.Melbourne-based carbon consultancy RepuTex said the poor registration ahead of next month's auction was symptomatic of waning interest from industry about the scheme. So far big industry has steered clear.
"We believe low levels of participation reflect negative market sentiment, with a low average price of ACCUs [Australian Carbon Credit Units], and the commercial and administrative complexity of the scheme, creating a significant barrier to participation for many firms, particularly high emitting companies," RepuTex said in an summary for its clients.
RepuTex said there was a growing risk the 397 projects that have already been contracted to reduce 178 million tonnes of carbon from the atmosphere could be "economically stranded" unless more money was allocated to the ERF.
"Most registered projects appear to be economically stranded under the ERF with little incentive for further bidding in the low price environment," it said.
"Looking forward, this may limit ACCU crediting and issuance, potentially dampening of supply of domestic ACCUs for use as offsets."
The four previous auctions have allocated between $300 million and $600 million each time, so there is an expectation most of the $440 million remaining will be allocated in the April auction.
The fourth auction in November awarded 47 contracts, worth $367 million, to deliver 34.4 million tonnes of carbon abatement, at an average price of $10.69 per tonne.
Dwindling
Outgoing Clean Energy Regulator chair Chloe Munro admitted interest in the ERF had abated since the earlier auctions but the market was maturing to more sustainable levels.
"The rate at which projects were registered and contracted in the first two years of the scheme exceeded all expectations," she said.
"After these early blockbusters, we expect this auction to be smaller and more representative of business as usual."
The lower registration for the ERF in next month's auction is likely to push up the average price of carbon abatement.
Despite the Emissions Reduction Fund effectively being mothballed for more than a year, the energy sector is expecting it to remain the centrepiece of the Turnbull government's Direct Action climate programs given Prime Minister Malcolm Turnbull ruled out adopting any form of emissions intensity scheme, even if just for the electricity sector.
The discussion paper on Friday made no reference to an EIS, even though it has been backed by industry and big energy producers as a way to reduce carbon emissions and to provide investor certainty.
There are hopes the existing safeguard mechanism – which sets an emissions baseline for Australia's largest polluters – is tightened to force big polluters to change their behaviour. At the moment, companies can adjust their baselines if they exceed them, rather than face penalties.
But Energy Minister Josh Frydenberg foreshadowed in December there may not been any significant change out of the 2017 climate review being undertaken by his own department.
Mr Frydenberg has also been coy about whether any new funds will be allocated in the ERF in the May budget, with expectations it won't receive any new funds until the 2018 budget.
The Department of Environment and Energy's discussion paper said Australia was on track to beat its 2020 carbon reduction targets as well as towards the 2030 target of reduction emissions by 26 to 28 per cent on 2005 levels.
