Monday, May 11, 2009

The dangers of a carbon licence to spill

Paddy Manning

The Age, May 11, 2009

Analysts were bemused with the drop in the starting price of the revised carbon scheme.

SALE of the century! Pollution permits, half-price, for one year only. At $10 a tonne — a figure plucked from the smog — the Rudd Government has undercut the emerging market for carbon credits.

Analysts were bemused after the Federal Government dropped the starting price under its revised carbon pollution reduction scheme (CPRS) last week, with one calling the figure "completely arbitrary".

A spokesman for Climate Change Minister Penny Wong said the fixed price of $10 "was developed in response to the difficult economic circumstances, and was accompanied by a clear signal to businesses and investors that the move to full market trading would occur on 1 July 2012".

What is the impact for investors? Not much, despite the sharp discount to the anticipated price in Australia, of about $20-$25 a tonne. The effect is temporary, and at least some price signal will come into play. In the US, by contrast, Democrats preparing the emissions trading legislation are proposing industry be given its permits free.

Sydney-based analyst for Citigroup Elaine Prior says Australia's proposed capped price for one year is "not very material, in the context of making an investment decision that will earn returns over a good many years".

The carbon credit market in Australia is still new, with only two significant trades to date. Last year, AGL Energy and Westpac did the first trade in so-called Australian emissions units, at $19 a tonne, but the transaction was pretty much symbolic as the units don't exist yet.

Last month Brisbane-based Arcadia Energy Trading did the first Australian trade in certified emissions reduction units, which are credits generated by carbon reduction projects in developing countries, and traded on Europe's Climate Exchange. Arcadia effectively sold Victoria's Loy Yang Power the right to emit 100,000 tonnes of carbon in late 2011, indicating generators were beginning to de-risk in anticipation of the introduction of the CPRS.

The exact price was not disclosed but Anthony Rohan, Arcadia's manager of commodity trading, said the deal was done "at market".

Europe, with the biggest ETS, has the deepest and most liquid carbon market and this week certified emissions reduction units were trading for about €12 ($A21.30) a tonne.

Rohan says the $10 cap "doesn't reflect any underlying commodity price. It is a response to pressure from industry to ease the cost of the (scheme) on industrial and commercial businesses — predominantly from the mining sector."

Companies that had bought contracts for electricity to be supplied from July 2010 on will feel a financial effect.

The value of 2010-11 contracts dropped sharply from Friday, May 1, to the following Monday. In NSW, contracts for electricity supply in 2010-11 were trading at about $53 before the announcement and fell quickly to $47 last week, an 11 per cent drop. In Victoria, the same contracts were trading at about $55 and fell by 10 per cent to about $50.

Anyone who bought those contracts immediately before the announcement lost money — but the big energy retailers have plenty of ways of laying off their exposure.

The cheaper power in 2010-11 reflects certainty of no ETS in the next financial year. Buyers will wade into that market, and uncertainty over the ETS will be reflected in a higher price, and less liquidity, for contracts from 2011-12 on.

There will be no more Australian buyers for carbon credits deliverable in 2010-11. For now, says Rohan, "there's no commercial reason to purchase CERs or any other market-tradeable mechanism".

Although emissions cuts are urgent, a year is not long, and the growth slump from the global financial crisis has bought us a year or two in terms of overall emissions.

Rob Fowler, emissions trading specialist for consultants Booz and Co, says if the CPRS legislation is passed this year, "companies won't wait" to invest in cleaner energy.

Prior agrees: "The key really is not so much the start date, but when the regulation is passed so that (investors) know and can make decisions."

A year's delay definitely has an environmental impact. Within a day of the announcement, Bluescope Steel shelved plans to build a $1 billion-plus co-generation plant to lower greenhouse gas emissions from its blast furnaces at Port Kembla, partly citing the CPRS revision.

The plant would have used surplus gas from iron and steel making operations to reduce the need for coal-fired electricity and save 800,000 tonnes of carbon dioxide emissions a year. That's a lot, given that Bluescope is one of the country's worst polluters. It emits 12.6 million tonnes a year.

But the worst result would be to delay passage of the CPRS legislation until next year, undermining our international negotiating position and further delaying certainty for investors.

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