What happens if under the Emission Reduction Fund (ERF) you enter into a contract with the Clean Energy Regulator (the Regulator) promising to deliver a certain number of tonnes of abated carbon, but fall short of that target?  Will you be liable for that shortfall, and if so, what options will you have?  

The Commonwealth Government’s ERF is a $2.5 billion fund put aside by the Commonwealth to buy carbon credits from the private sector; the idea being to encourage proponents to invest in projects that will result in the abatement of carbon/greenhouse gases from the atmosphere.  There is no limit on the types of projects that can be approved. All sectors of the economy are covered, for example:

  • Industrial and electrical (i.e. reduced fuel use, more efficient electrical devices);
  • Agriculture and forestry (i.e. early season savannah burning, tree planting);
  • Mining (i.e. capture and flaring of pre-coal mine methane); and
  • Waste (i.e. recycling, capture of landfill methane).

Whatever your proposed project, once accredited by the Regulator, you will be required to abate a certain number tonnes of carbon/greenhouse gas over the lifetime of your project.  The Regulator generally requires projects to have a lifetime of seven years (note: for tree planting projects there must be a minimum of 25 years).  

It is critical that you understand your project in full, including an accurate assessment of the likely amount of carbon/greenhouse gas to be abated over the lifetime of your project.  As your project progresses, you will be accredited for the number of tonnes abated.  You will be accredited with Australian Carbon Credit Units (ACCU) which you can then sell to the Regulator (you can also sell ACCU’s privately on the secondary market).  

In selling your ACCU’s, you can enter into three different types of contracts with the Regulator:

  • Short term contracts (less than seven years);
  • Standard term contracts (seven to ten years); and
  • Immediate contracts which require the immediate delivery of a certain number of ACCU’s (the lesser of 15,000 ACCU’s or 10% of your projects lifetime estimate).

The next chance to enter into any such contracts will fall on 4-5 November this year, when the CER holds its second ACCU auction of 2015.  

The Regulator has a standard “Carbon abatement contract” for participants to enter into. There is a “code of common terms” which is non-negotiable, so it is vital that you understand your obligations under those common terms.  The fine print highlights the pitfalls and the liability that will apply should you be unable to deliver the agreed number of ACCU’s.  In short you will be required to deliver ACCU’s periodically via a set delivery schedule over the life of your short or standard contract.  If for any reason you experience a delivery failure, or you become aware of an impending delivery failure (and the failure is not outside of your control, i.e. is not a force majeure event) then you are required to give notice to the Regulator of the likely delivery failure, the reason for the failure and the anticipated delivery shortfall. 

You then have a 20 day negotiation period, during which you may negotiate a revised delivery schedule with the Regulator.  A revised delivery schedule does not change the total quantity of ACCU’s to be delivered, only the timetable for delivery of ACCU’s.  This means that you can try and make up for any delivery shortfall by producing extra ACCU’s, or obtaining further ACCU’s from secondary sources (i.e. purchasing from other entities, or producing excess ACCU’s from other projects that you may have).  You are not bound to supply ACCU’s from your single project.  

If at the end of your standard or short contract there is a delivery shortfall, then you will be liable to the Clean Energy Regulator for the Regulator’s “buyer’s market damages”.  The buyer’s market damages are, in essence, the average of the spot price that the Regulator would need to pay to offset your delivery shortfall, and is calculated by taking an average of three prices for the ACCU’s that you failed to deliver.  You may also be disqualified from entering into future carbon abatement contracts with the Regulator.

Takeaway Points

If you are unsure of the number of ACCU’s that you will be able to deliver, then perhaps a series of immediate contracts would be the wiser option for you to take (note: you are allowed to enter into ten immediate contracts over the lifetime of your project).  If you are, on the other hand, content with your forward estimates of the amount of carbon to be abated by your project, then a short or standard contract may be more suitable to you.  It would be prudent to allow a margin of error in your forward estimates to allow for any unpredictable events.

Either way, when entering into any contract with the Clean Energy Regulator, it is advisable to carefully examine the fine print in order to fully understand your obligations to the Regulator, and importantly, your liability should you be unable to deliver the agreed amount of ACCU’s during the lifetime of the contract.