Government documents show what happened when former energy minister Angus Taylor moved to scrap contracts for carbon credits.

Documents obtained under Freedom of Information (FOI) show a government regulator scrambling after Mr Taylor decided to effectively rip up decades-long contracts, which could have provided windfall profits of potentially billions of dollars to some private companies.

An Australian carbon credit unit (ACCU) represents one tonne of carbon emissions reduced or avoided, and is used to help farmers plant trees or avoid deforestation to create credits.

Prior to 2020, projects were required to sign up to a fixed Commonwealth contract to deliver carbon credits at $12 a tonne for a period of up to 10 years before they could sell on the open market.

In March 2020, the Clean Energy Regulator created a new optional contract for people who created ACCUs to sell them to the government's Emissions Reduction Fund.

This option to sell on the open market became hugely popular, and saw prices on the open, or spot, market hit $55.

That created a large gap between the $12 fixed price offered by the government and the price on the tradeable market, leading Mr Taylor to rip up the old arrangements and allow fixed contracts to sell on the market like optional ones (with the payment of an exit fee).

This change came just before serious allegations were raised about the integrity of Australia's carbon credits.

Reports say the government was warned the decision could kill any new carbon-farming projects for five years, with investment to “effectively cease”, stranding $500 million in recently announced projects from Telstra, BHP and Woodside. 

The government was also warned that its decision would flood the market with carbon credits until 2026, pusing down their prices and removing incentives to start projects. 

Additionally, the department told the Morrison Government that scrapping the carbon credit scheme could introduce the spectre of “sovereign risk which would result in reduced demand” due to the scale of the intervention.

More details are accessible here.