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According to , there will be a large discrepancy between the intended design of the ERF - to purchase abatement "at least cost" - and the way it will operate in practice.

"The Clean Energy Regulator has advised companies that the best strategy for success at an Emissions Reduction Auction is to bid the lowest price at which it is worth your while to undertake a project," RepuTex executive director Grossman said.

"However, analysis indicates that companies are actively seeking to bid the highest clearing price so that they can generate greater returns. Business typically sells at the highest price, not the lowest."

In some cases, Grossman said bids may be more than 15 times higher than the cost of creating the emissions reductions.

"Many projects have negative marginal abatement costs but rather than sell that abatement cheaply, companies will look to exploit their cost advantage to maximise their returns," he said.

"In some cases, companies may inflate their bid-price by 15 times the cost of creating emissions reductions and potentially much higher."

The report comes ahead of the first ERF auction on April 15 and findings indicate the government will pay more for abatement than previously expected.

According to RepuTex, up to 45 million Australian Carbon Credit Units (ACCUs) will likely be offered for sale to the regulator at the first ERF auction.

If this abatement is sold "at the lowest price", as advised by the regulator, the firm's analysis indicates it will cost approximately $250 million to purchase all emissions reductions.

However, should companies inflate their bids, the regulator will pay more than $800 million for the same amount of abatement, or more than three times the cost of actually creating the emissions reductions.

The Clean Energy Regulator is currently developing rules to limit the amount it pays for emissions reductions, and will not disclose a benchmark prior to the first auction, as it attempts to use ambiguity to maintain competitive bidding in the scheme.

These rules will keep companies guessing about market prices and the lack of market transparency may in fact work against the regulator, RepuTex said.

"With only one bid per project over a single round, with no information as to other bids available, proponents are provided with a clear incentive to overstate their bid, rather than be locked into a low price contract," Grossman said.

"So the opaque nature of the market may actually see bid prices rise."

As the expectation is that majority of bids will be inflated "as high as possible" regardless of the cost of each project, the notion that the government will buy abatement "from cheapest cost to higher cost" as initially envisaged will like go out the window.

"The underlying cost of a project is now irrelevant for companies. Regardless of the cost of a project, all companies will seek to bid the highest clearing price, which will float in line with supply volumes," Grossman said.

"This will create a false abatement cost curve, where low cost projects that would have been expected to be contracted first, will actually be bid far higher, making it impossible for the regulator to purchase the lowest cost abatement first."



Additionally, "bid-shading" will increase the average price of abatement across the ERF.

"As companies inflate their bids, analysis indicates that the average price of abatement will climb higher. This may create an opportunity for participating companies to exploit market conditions and identify the highest floating price, while the government will wind up paying more for each tonne of abatement that it purchases," Grossman said.