Industry, not farming, set to win from Direct Action

Farming may enjoy an initial windfall from the Emissions Reduction Fund, but industry's high emitters are set to supply the bulk - about 80% - of all abatement into the scheme by 2020.

New research from energy market analysts RepuTex indicates that high emitting companies are expected to provide the lion's share of greenhouse gas abatement under the government's new Emissions Reduction Fund, despite an expected lack of market transparency when the new scheme opens. 

Under the Emissions Reduction Fund the government will purchase emissions reductions bid into a reverse-price auction, with the fund to purchase up to $2.5 billion of abatement from high emitting industries and carbon farmers. 

While project developers under the Carbon Farming Initiative will be well positioned to participate in the scheme when the fund first commences, RepuTex analysis indicates that high emitting companies are forecast to supply up to 80 per cent of all emissions reductions by 2020. 

"The new ERF will provide a lifeline to carbon farmers, with waste and land-use activities expected to have an early advantage as they transition their projects from the previous carbon farming scheme" said Hugh Grossman, executive director of RepuTex. 

"However, as industry ramps up delivery of emissions reduction projects, high emitters will dominate supply due to the large availability of projects, and ability to quickly and cheaply reduce emissions" he said. 

According to RepuTex, emissions reductions at high emitting facilities are expected to be the most common form of all abatement under the ERF, along with commercial and industrial energy efficiency, with the Industrials, Energy, Materials and Property sectors well placed as new methods ramp up, specifically high electricity users.

"Given the size of their emissions, even a small efficiency improvement in operations at a power or oil and gas extraction facility will result in a large number of emissions reductions, and a significant number of credits being created," said Grossman. 

"Likewise high energy users such as commercial and industrial property companies stand to benefit, with energy efficiency providing a cheap and large source of abatement," he said. 

Under the Emissions Reduction Fund, companies will be able to register emissions reductions methods with the Clean Energy Regulator, then bid into the Fund to supply credits at a later point. The Fund will operate as a competitive tender process, whereby bids will be sealed, with the government purchasing the lowest priced bids first. 

Lack of transparency may lead to uncertainty

According to RepuTex, with no information on market prices expected to be released by the government prior to the first auction, companies will initially be in the dark on the price the regulator will pay for abatement, leading to some uncertainty in the market.

“While the Regulator has the authority to disclose a benchmark price prior to the first auction, we currently anticipate that the figure will remain in-confidence as the Regulator seeks to maximise the competitive nature of the auction process,” said Grossman.

“The lack of pricing transparency may see the ERF initially operate akin to a 'dark market', creating some uncertainty as companies attempt to undertake price discovery and bid, while in the dark on the limit they might bid up to.”

The government hopes that by removing any price disclosure, companies will be more competitive in their bidding – pushing the price paid by the government down.

However, according to RepuTex, the darker the market, the greater the potential opportunity may be for companies to profit from the scheme.

“The dark market may mean that we do not see an immediate influx of bidders into the ERF, as firms sit on the sidelines to see how prices form.”

“If that occurs, and supply is initially low, we are likely to see companies enter the market early and inflate their bids in order to take advantage of lower competition to secure more favourable contracts – and better returns,” said Grossman.

The Clean Energy Regulator is expected to hold the first auction for the Emissions Reduction Fund in February-March next year. 

RepuTex is Australia's largest provider of energy and emissions market analysis, with customers at over 150 of the region's leading Power, Energy, Metals, Mining, Government and Financials firms.