Australia: New exit policy for carbon contracts
On 4 March 2022, in response to a dramatic increase in the value of Australian Carbon Credit Units (ACCUs), the Clean Energy Regulator announced it will allow holders of existing fixed delivery contracts to be released from their obligations upon payment of an ‘exit fee’, enabling ACCUs to be sold on the open market.
While the ‘exit fee’ is similar to the damages payable for failing to deliver ACCUs to the Regulator under fixed delivery contracts, the new policy allows the holder to retain the ACCUs without breaching the contract.
The announcement of the new exit policy resulted in ACCU values plunging by approximately 30 percent, with an expected influx onto the open market.
What is the reason for the change?
Australia’s carbon market has seen ACCUs increase in value from approximately $17 in early 2021 to a recent high of over $50.
As it currently stands, most carbon projects are tied to fixed delivery contracts with the Regulator for the first 10 years of the project, where the fixed ACCU price is typically lower than the market price (generally less than $13).
This has left fixed contract holders with two unsatisfactory options – persist with the contract despite the low return or breach the contract and pay damages to enable ACCUs to be retained and sold on the open market.
More recently, the Regulator introduced ‘optional delivery contracts’, which allow ACCUs to be sold to either the Regulator or the open market. However, this flexibility was not afforded to the holders of existing fixed delivery contracts.
What does this change mean for existing fixed price contract holders?
The new exit policy is designed to allow a simpler process for fixed delivery contract holders to be released from contractual obligations and seek the benefit of the higher open market values. It requires a two-step process involving:
- an application to the Regulator for release from an ACCU delivery milestone within a specified ‘window’ before the delivery is due
- payment of the exit fee following approval of the application.
However, the new exit policy raises questions about how contractual arrangements between landowners, project proponents and carbon service providers are managed, where cost sharing has been structured having regard to fixed delivery contracts. The Regulator has indicated it will consult with relevant stakeholders, but the outcome remains uncertain.
This policy change and the resulting sharp decline in ACCU values is a timely reminder of the importance of ensuring risks associated with this evolving market are appropriately managed.
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