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Carbon Markets 101

Background

The Australian carbon market was established by the Carbon Farming Initiative Act 2011 (CFI Act). The CFI Act was amended to include the Emission Reduction Fund (ERF) and the Safeguard Mechanism (CFI ACT Amended 2014).

Generally, the methodologies, measurement, verification, and issuance of carbon credits are referred to as the “CFI”, and the original A$2.5 billion-dollar fund set aside to procure Australian Carbon Credit Units is referred to as the “ERF”.

To date, the demand within the Australian carbon market has been dominated by the ERF Auction and contracting procurement process through a ‘reverse auction’ for a ‘Carbon Abatement Contract’ (CAC) with up to a 10-year contract duration. The auction and the subsequent contracts awarded to successful bidders, has set the benchmark for pricing the long run marginal cost of abatement in the market.
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Carbon Market Summary – key points

  • Carbon projects reduce emissions and sequester carbon dioxide from the atmosphere and create direct, measurable positive impacts on the environment.
  • Vegetation projects are the main project type in Australia, protecting forests and reforesting degraded landscapes providing positive biodiversity, water quality and social outcomes.
  • Establishing a carbon project requires long term contracts for the sale of carbon credits, currently only provided by the government’s Emissions Reduction Fund (EMF).
  • Carbon Credits are traded around the world in nearly every major economy.
  • Australian Carbon Credit Units (ACCUs) are a financial product under the Corporations Act and are tradeable as per any commodity.
  • An ACCU represents 1 tonne of CO2 equivalent emissions (tCO2e) being offset.
  • Long term forward contracts for ACCUs are the primary purchasing method (currently almost solely by Government), with spot trading being relatively minor at present.
  • ACCU holdings are held in the Australian National Registry of Emissions Units (ANREU).
  • As a ‘regulated market’, returns are dictated by policy settings. Current carbon policy settings are as low as they could be, with any changes to policy adding demand and driving prices.

Methodologies

There are three main methodologies that can be applied:
Human Induced RegenerationIndustrial & Waste MethodsRevegetationSoil Carbon
For further information refer to the Clean Energy Regulator. 
CLEAN ENERGY REGULATOR

Terminology

Carbon Farming Initiative (CFI)
The methodologies, measurement, verification, and issuance of carbon credits.
The Carbon Farming Initiative was a voluntary carbon abatement scheme that ran between September 2011 up till December 2014 when it was integrated with the Emissions Reduction Fund.
Emission Reduction Fund (ERF)
The original A$2.5 billion-dollar fund set aside by the Federal Government to procure Australian Carbon Credit Units. 
The Emissions Reduction Fund is a voluntary scheme that aims to provide incentives for a range of organisations and individuals to adopt new practices and technologies to reduce their emissions.
Australian Carbon Credit Units (ACCU)
An ACCU is a unit issued by the Clean Energy Regulator (Regulator) by making an entry for the unit in an account in the electronic Australian National Registry of Emissions Units (Registry). Each ACCU issued represents one tonne of carbon dioxide equivalent (tCO2-e) stored or avoided by a project.
Carbon Abatement Contract (CAC)
Under the Emissions Reduction Fund, you can enter into a contractual arrangement to sell Kyoto Australian carbon credit units (ACCUs) to the government if you are successful at an Emissions Reduction Fund auction. This is referred to as a carbon abatement contract (a contract).
Two types of contract are available, Fixed Delivery and Optional Delivery.
Australian National Registry of Emissions Units (ANREU)
The Federal Government body which manages the Australian Carbon Credit Units.
Australian Integrated Carbon Financial Services
ACN: 159 166 846
Australian Financial Services Licence: 425 610
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