Environmental compliance news for business

COMPLY. IMPROVE. PROTECT.

Renewables-ERF link won't fix carbon credit supply crunch

Converting renewable energy certificates into carbon credits isn't a feasible way to ease a looming shortage of credits, according to a leading advisory service.

Carbon market experts expect a supply shortage will drive up Australian carbon credit prices in the near term.

To ease the price pressure – and underpin clean energy projects as the RET becomes irrelevant – some have suggested allowing large-scale generation certificates to be converted into carbon credits.

For those holding large-scale renewable certificates (LGCs) a swap into credits would soon make financial sense, if it was allowed.

The LGC price is falling because the RET target will be met, and consultancy Market Advisory Group (MAG) expects that by late 2021 an LGC will be worth less than a carbon credit.

However, MAG says the LGC-credits swapping concept faces several serious problems, in its latest monthly carbon market report.

ERF tests a major barrier

Firstly, projects can only create credits if they are new, as the Emissions Reduction Fund isn't intended to support projects already underway.

It would seem "entirely impossible" for a renewable energy project that is already registered and producing LGCs to satisfy the newness requirement, MAG points out.

Secondly, even new renewables projects where there hadn't yet been a final investment decision would probably still fall foul of another ERF requirement.

Projects aren't supposed to earn credits if they simply reflect business as usual and large-scale renewable energy generation is now mostly in that category, MAG says.

Thirdly, the government would be entering ERF contracts to buy LGC-derived credits even though the LGCs would have been created in any case.

It would therefore be paying for abatement that would still have shown up in the national greenhouse gas accounts even if it hadn't paid.

Not only would it be making unnecessary payments for these LGC-derived credits, any ERF contract money it spent on them would result in fewer funds being available to support other sources of carbon abatement.

The government would be "paying for abatement that would have occurred regardless", MAG director of analytics James Turnbull told Footprint.

The government would be taking already-achieved abatement "and then paying for it again and paying for it with money that could have been used to create additional emissions abatement through the ERF", he said.

The MAG report adds that converting LGCs (each of which represents a MWh of clean energy) into carbon credits (each representing a tonne of abatement) would be a complex undertaking.

Based on the average emissions intensity of each MWh in the National Electricity Market, it would currently take about 1.34 LGCs to deliver the equivalent amount of abatement to one carbon credit.

But the ratio would continually change as the grid decarbonises, MAG notes.

MAG argues that a better solution to a looming liquidity squeeze in the carbon market is to take steps to create more credits, through measures such as introducing new ERF methods.

As prices rise, the supply of credits available in the market will increase, including from projects that use the currently under-utilised ERF methods on energy efficiency, MAG adds.

"Our view is there will be supply if prices are appropriate," Turnbull said. "So if prices go up, you will have the supply that you need."

Did you miss...

Footprint News has ceased publication

Footprint News has ceased publishing. We will contact subscribers with credit balances on their subscription period to arrange a refund.
The Footprint team. more