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Understanding carbon abatement contracts

02 June 2022

Under the Emissions Reduction Fund (ERF), you can enter into a contractual arrangement to sell Australian carbon credit units (ACCUs) to the government if you are successful at an ERF auction. This is referred to as a carbon abatement contract (a contract).

When you enter into a contract, you are entering into a commercial arrangement with the Clean Energy Regulator on behalf of the Commonwealth of Australia, including rights and obligations enforceable through the courts—similar to other contractual arrangements entered into between parties. You are advised to seek your own legal advice about the contract before participating in an ERF auction.

Two types of contracts exist, Optional Delivery and Fixed Delivery. At Auction 14 only Optional Delivery contracts were offered.

Optional Delivery contract

An Optional Delivery contract provides the right, but not the obligation, to sell carbon abatement to the Commonwealth at an agreed price, within a set time. It allows contract holders to better manage their price and supply risks with a view to encouraging more carbon abatement projects as a result. Optional Delivery contracts may be used in negotiations with lenders or other parties to demonstrate what the Commonwealth will pay for abatement from a specified project, with no contractual barrier to seeking more lucrative contracts from other buyers.

The Optional Delivery contract has the following key features:

  • It provides the Seller with the right, but not the obligation, to sell Australian carbon credit units (ACCUs) to the Commonwealth at a set price within a set timeframe.
  • It provides security of a set price for ACCUs, which can be used to secure funding or other consents for project development.
  • Flexible duration of up to 10 years for eligible projects.
  • All ACCUs delivered under the Optional Delivery contract must be sourced from a single project that is identified at auction qualification.
  • The project must be new or uncontracted and cannot be connected to, or identified as part of, a portfolio of projects used to meet current contractual obligations already committed to by the applicant.
  • Where ACCUs are not delivered against a scheduled milestone the right to deliver the undelivered ACCUs by the end of that milestone will lapse,
    • Milestones may be extended to a later date in limited circumstances and only by mutual agreement.
  • An ERF project can only be the subject of an Optional Delivery contract once.

Fixed Delivery contract

Fixed Delivery contracts were not offered at Auction 14.

If you have a Fixed Delivery contract, you have agreed to provide a set number of ACCUs at a set price for the duration of the contract. The number of ACCUs you agreed to provide is called the ‘agreed quantity’, and these are scheduled to be delivered across the duration of the contract.

Each contract is tied to at least one ERF project, however each project can only be the subject of one contract at any one time.

It is up to you to ensure you can deliver the agreed quantity of ACCUs in accordance with the delivery schedule you have provided. When planning the agreed quantity and delivery schedule you should ensure that:

  • the number of ACCUs you have agreed to provide under the contract can be generated by your project, and delivered before the end of the contract, and
  • each date in the schedule allows sufficient time for you to undertake necessary audits and reporting, and to apply to the Clean Energy Regulator for ACCUs.

If your project cannot deliver the agreed quantity of ACCUs, you may source the difference from other projects you run or from the secondary market.

The fixed delivery contracts provide for payment of Buyer’s Market Damages (BMD, and referred to as an exit payment in the new exit arrangements) where scheduled deliveries do not occur in accordance with the Delivery Schedule. On 4 March 2022, changes were announced to Commonwealth Government administration of fixed delivery contracts to streamline the administration of BMD (the ‘exit arrangement’). Further details are available on Fixed delivery exit arrangements.

Delivery Schedules

A delivery schedule sets out the quantity of Kyoto Australian carbon credit units (ACCUs) that you will agree to deliver under an existing Fixed Delivery contract, or choose to deliver under an Optional Delivery contract, and on what dates you will deliver them within the contracts’ delivery period (the contract term).

To help you establish a contract delivery schedule, the Clean Energy Regulator has developed an interactive contract delivery schedule calculator. The calculator provides an indication of optimal management of key project timeframes, and helps you consider whether your allocated time for some project processes is achievable.

The results from the calculator should not be considered as assurance that your project will meet delivery milestones as required under contractual obligations and it is up to you to ensure you can deliver the agreed quantity of ACCUs in accordance with the delivery schedule agreed with the Clean Energy Regulator.

When planning the agreed quantity and delivery schedule you should ensure that:

  • the time it will take to set up your project and when it will start generating abatement
  • how much time you will need to allow for auditing and reporting on your project
  • the process to apply for ACCUs, including allowing up to three months for units to be issued by the Clean Energy Regulator, and
  • how many deliveries of ACCUs may be possible under a carbon abatement contract.

Parts of a carbon abatement contract

The four components to a carbon abatement contract: Code of common terms; Commercial terms; Delivery terms; Financial terms.

Code of Common Terms

The Code of Common Terms sets out the rights and obligations of the parties under the relevant contract. It is non-negotiable, and all participants for each auction must agree to the same terms.

You must agree to the Code of Common Terms when qualifying to participate in an auction.

Archived Code of Common Terms

This code of common terms differs from those in force for projects contracted at previous auctions. Refer to Auction results for the version in force for each auction.

Commercial terms

The commercial terms set out details about who you are, and the project(s) that you are bringing forward to the auction. The commercial terms also include any conditions precedent that must be met before abatement can be delivered through the contract.

Note, Optional Delivery contracts cannot be subject to any conditions precedent.

The information to support the commercial terms must be provided when qualifying to participate in an auction.

Delivery terms

The delivery terms set out when and how many ACCUs you will deliver, and the term (in years) of your contract. Delivery terms must be provided when registering to participate in an auction.

Should you not deliver in accordance with the Scheduled Delivery milestones for an Optional Delivery contract, the right to deliver ACCUs against outstanding milestones will lapse.

Financial terms

The financial terms set out the price per ACCU you will be paid for delivering abatement under contract. The price paid per ACCU is determined through the auction bidding process.

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