By: Gloria Gonzalez Ecosystem Marketplace

Australia drew the ire of the environmental community when it backed away from its carbon pricing program last year and established a nearly AU$2.6 billion Emissions Reduction Fund in its place. With the first auction coming up this week, critical issues still need to be resolved, including whether the funding will be sufficient to incentivize new emissions reduction projects. 

14 April, 2015 – To many environmental and business leaders, Australia had a solid climate policy in place, centered around the country’s carbon tax and a planned emissions trading system (ETS). But in scrapping the country’s carbon tax last year, these leaders now believe the government reversed the progress the country was making in contributing to an international solution to the climate challenge.

“It’s certainly been disappointing to see it unfold that way,” Simon Bradshaw, Climate Change Advocacy Coordinator for Oxfam Australia, said of the government’s abandonment of its carbon pricing program.

The Liberal Party of Australia, led by Prime Minister Tony Abbott, replaced the carbon tax with an Emissions Reduction Fund (ERF), which maintains the objective of helping achieve Australia’s emissions reduction target of 5% below 2000 levels by 2020. The government has provided nearly AU$2.6 billion to establish the ERF and plans to buy offsets from competing sellers in a reverse auction.

“Australia is firmly committed to our 2020 emissions reduction target,” a spokesperson for the Department of the Environment said. “It is ambitious and comparable to other developed countries’ targets.”

But officials from energy-intensive industries, local government, carbon offset project developers and other stakeholders believe that emissions reduction target is not strong enough as it stands, according to a poll conducted by the Carbon Market Institute (CMI), which assists Australian businesses in managing risks and opportunities in national and international carbon markets, in Australia in September 2014. Seventy-six percent of respondents supported Australia adopting a stronger 2020 emissions reduction target.

“The government really doesn’t care about climate change,” said Martijn Wilder, an Australia-based Partner with law firm Baker & McKenzie. “The government came up with this stupid Emissions Reduction Fund policy at a time when it was under a bit of pressure. It’s just an alternative to an emissions trading scheme and now they are sort of stuck with a bad policy.”

The first test of this new policy comes on Wednesday at 9:00 am Australian Eastern Standard Time when the first ERF auction – scheduled to last for two days – is set to begin.


The real uncertainty relates to the offset price the government will accept under the ERF. The regulator will apply a benchmark price – the maximum amount it will pay for emissions reductions – for each auction and only bids below the benchmark will be considered. Indeed, the lowest-cost projects will be selected at auction and proponents will not be able to see what others are bidding.

The AU$23 carbon tax incentivized significant pre-compliance offset purchases in 2012 – five million tonnes of carbon dioxide equivalent (MtCO2e) developed for the CFI, according to Ecosystem Marketplace’s State of the Voluntary Carbon Markets 2013 report. The AU$23 carbon tax meant that offsets priced at the regional average of $8.8 per tonne reported that year or $14.2 per tonne last year were a cost-effective compliance option. Now, without a set emissions cap and carbon price, the price could plummet.

If the bidding price of offsets sold at auction remains high, however, the AU$2.6 billion funding for the ERF could quickly be exhausted, given the volume of existing projects expected to bid in. The Clean Energy Regulator says additional funding will be considered in future budgets, but environmental experts such as Bradshaw are not optimistic that the fund will be replenished. They see the new policy as expensive compared to the cost-effective market solutions that would have been implemented under the previous policy.


Even prior to the legislated policy shift from carbon pricing to the ERF, Australia implemented changes impacting carbon offset projects. The country included improved forest management (IFM) within the national accounting submitted to the United Nations Framework Convention on Climate Change (UNFCCC). That meant that any offsets issued to voluntary IFM projects, such as the Tasmania forestry project developed under the Verified Carbon Standard (VCS) would, from January 1, 2013 and beyond, be double counted and so are no longer eligible to generate voluntary offsets, observed Jerry Seager, Chief Program Officer for the VCS.

Existing projects initially developed under the Carbon Farming Initiative – a legislated offsets scheme adopted in 2011 to allow farmers and land managers to earn carbon offsets by storing carbon or reducing greenhouse gas emissions on forest or agricultural land – were automatically registered under the ERF. Under the new ERF policy, the federal government will purchase Australian carbon credit units (ACCUs) from legacy CFI projects, which will allow existing participants to secure a return from eligible projects – if the offsets are competitive at auction.