Regulatory policy

New carbon contract exit policy

On March 4, 2022, in response to a dramatic increase in the value of Australian carbon credit units (Accumulators), the clean energy regulator has announced that it will allow holders of existing fixed delivery contracts to be released from their obligations upon payment of an “exit tax”, allowing the sale of ACCUs on the Free market.

While the “exit fee” is similar to liquidated damages payable for failure to deliver ACCUs to the regulator under fixed delivery contracts, the new policy allows the holder to retain ACCUs without breaking the contract.

The announcement of the new exit policy caused ACCU values ​​to fall by around 30%, with an expected inflow into the open market.

What is the reason for the change?

The Australian carbon market has seen the value of ACCUs rise from around $17 in early 2021 to a recent high of over $50.

As it 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 usually below the market price (usually less than $13 ).

This left fixed contract holders with two unsatisfactory options – persist with the contract despite the poor performance or break the contract and pay damages to allow the ACCUs to be kept and sold on the open market.

More recently, the regulator has introduced “optional delivery contracts”, which allow ACCUs to be sold either to the regulator or on the open market. However, this flexibility was not granted to holders of existing fixed delivery contracts.

What does this change mean for holders of existing fixed price contracts?

The new Exit Policy is designed to allow a simpler process for holders of fixed delivery contracts to be released from their contractual obligations and seek the benefit of higher open market values. This requires a two-step process involving:

  • a request to the regulator for the release of an ACCU delivery stage within a specified “window” prior to the delivery deadline
  • payment of exit fees after approval of the request.

However, the new exit policy raises questions about the management of contractual arrangements between landowners, project developers and carbon service providers, where cost sharing has been structured taking into account fixed delivery contracts. The regulator has indicated that it will consult with affected stakeholders, but the outcome remains uncertain.

This change in policy and the resulting sharp decline in ACCU values ​​is a timely reminder of the importance of ensuring that the risks associated with this evolving market are appropriately managed.