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Navigating Changes: Australia's Updated Carbon Abatement Contract Exit Rules and Market Impact

Last Friday, the Australian government announced critical updates to the Fixed Carbon Abatement Contract (CAC) exit rules, introducing measures that could significantly reshape market dynamics.

A Quick Timeline:

1️⃣ 2011 Onwards: Launch of the carbon markets with the government as the primary buyer of ACCUs through the Emissions Reduction Fund (ERF).

2️⃣ Carbon Abatement Contracts (CACs): Farms were locked into selling ACCUs at a fixed price of $12, providing stable cash flow.

3️⃣ 2019: the Government established the $2 billion Climate Solutions Fund to continue purchasing low cost-abatement credits and boost the supply of ACCUs.

4️⃣ Market Evolution: Rising demand from Voluntary Carbon Markets and growing net zero commitments drove ACCU prices up to nearly $60 in early 2022.

5️⃣ 2022 Changes: Project owners want to sell to the open market at these higher prices. As such, ERF modifications in March allowed ACCU project owners to exit their CACs by paying an exit fee, leading to a sharp 40% drop in ACCU prices due to a sudden supply increase.

Where does this leave us?

6️⃣ April 26, 2024 Update: New rules require ACCU contract holders to deliver at least 20% of their contracted volume to the government before exiting their CACs. The remainder (80%) can then be sold on the open market.

👉 Policy Intent: The government aims to continue securing ACCU supply for itself at the fixed CAC price (av. $12). This allows the government to maintain its Cost Containment Measure (CCM) which helps Safeguard facilities that exceed their baseline to buy ACCUs from the government at a $75 cap (2023-24).

Market Implications:

👉 This requirement is expected to reduce ACCU supply to the market by 3-4Mt over the next five years, potentially tightening the market further.

👉 Where a contract holder lacks sufficient ACCUs but want to exist their CAC, they must now secure enough ACCUs to meet the 20% delivery or face potential market damages, potentially increasing demand or prices.

Kakariki Guidebook - Carbon Abatement Contracts Timeline
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