Carbon credit price slump shows govt has too much market influence

The price of carbon credits, which reached as high as $55, has crashed over the past week from $47 a tonne to $32, in response to the government's decision to allow people to opt out of their fixed-in contracts and instead seek a high price on the private market.

It's left some landholders hitting pause on planned carbon projects due to a lack of market confidence.

The Clean Energy Regulator said the large difference between Emission Reduction Fund fixed-contract prices and secondary market prices was unsustainable.

The fixed contracts - which represent about 100 million credits - stipulated credits must be sold to the government and have an averaged price of $12 a credit.

However there is a clause that allows the contract to be broken simply by paying the government the value of the credit when the deal was struck - which in most cases was $12.

The CER was concerned that as the carbon price continued to grow, a massive wave of contracts would be broken all at once, leading to a surge in available carbon credits and a market crash.

"It was clear that some proponents had been considering using damage provisions in their contracts to sell their ACCUs at higher prices on the secondary market," an CER spokesperson said.

"If this occurred, the Commonwealth would be obliged to pursue recovering the debt from the damages provision in the contracts, including taking legal action."

To avoid that scenario, the CER will offer a "measured" and "orderly" exit, allowing a set number of contract holders the option to opt-out every six months for the next 10 years.

Carbon Market Institute chief executive John Connor said once the market broke the $24 threshold, there would always be more people considering breaking their contract.

"Now instead of 100 million in one hit, we could have five to six million every six months," Mr Connor said.

The long-effect of the move was a "market unknown", Mr Connor said. It could put downward pressure on the market for some time, but it would depend on the future demand for carbon credits.

"It's definitely rattled investor confidence, we've had tales of people stalling projects," Mr Connor said.

"Despite the drop, this may set a more solid floor of $24, with the upside of potential growth if demand increases."

Regen Farm Mutual director Andrew Ward said for many farmers, the short-term price of carbon was irrelevant, given project contracts ranged from 10 to 25 years and most landholders choosing to sit on credits for an extended period of time.

The real issue was the government's overt influence in the market.

"The problem isn't the price - if the demand's there, it will rise again - it's the confidence in the government that's the issue," Mr Ward said.

"It has real market influence and intervention, which is the antithesis of what a government should be doing."

With the government ruling out mandatory emission reduction requirements or a carbon price, Mr Ward said it was left as an "uneasy participant" in the market, encouraging participation through various programs, such as its Biodiversity + Carbon scheme.

"Nobody has confidence the government's market mechanisms aren't going to be trashed and re-tasked," Mr Ward said.

"There's a concern the government could turn around one day and say we're not doing that anymore - which is what they just did.

"If government has a role to play, it's to encourage farmers to be involved in shaping markets, not to become a participant themselves or provide catalyst funding to incentivise people to be involved."

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