This article appears in Thomson Reuters Point Carbon “Carbon Market Australia-New Zealand” 1st February 2013 edition
By Sarah Chapman, Head of Business Development, Climate Bridge Pty Ltd
In 2013, the Australian carbon market will be dominated by two major external factors – the Australian general election, and the state of the international carbon market (particularly the EU ETS).
The general election has just been called for September 14th. If the Labor government holds power, the Carbon Price Mechanism will go ahead as legislated, with emissions trading starting in 2015. If the Opposition win, Tony Abbott has vowed to repeal the “carbon tax”. A repeal of the legislation would have to pass both houses, and electoral maths means the Coalition are very unlikely to gain control of the Senate. Abbott would likely have to use a “double dissolution”, a constitutional procedure involving complete dissolution and re-election of both houses. It would be an extraordinary political gamble to voluntarily give up power and go back to the electorate over an issue the Australian public is no longer particularly exercised about, but Abbott has been so clear in his intentions that he may have little choice but to try.
The Australian carbon market is highly exposed to the EU ETS, which is currently in a state of huge flux. From 2015, Australian companies can use up to 50% international allowances to meet their targets, of which up to a quarter can be green CERs or ERUs. The Australian Carbon Unit (CU) price is forecast to track the EUA price, which are currently trading at record lows – €3.79 (AUD$4.90) on 30th January. This is in sharp contrast to the floor price of AUD$15 which was scrapped in order to link with the EU. However, if efforts for structural reform in Europe are successful, the EUA price could shoot up to double digits overnight, dragging the CU price with it.
For Australian compliance buyers figuring out their hedging strategy, this uncertainty creates both challenges and opportunities. Many power generators and users hedge power 2-3 years out. Naturally they’ll want to hedge the carbon element of this in the same way, so we expect significant demand for forward purchasing in 2013 with expiry dates in 2015-6. Other companies are keen to cap their future exposure by taking advantage of record low prices in both the EUA and CER markets.
EUAs will be the unit of choice for most buyers in 2013, as they are effectively “Abbott proof”. The Liberals have claimed they will not compensate holders of Australian CUs if the scheme is scrapped and they become worthless, while an EUA will still have value in Europe. We expect to see Australian companies using international units for 100% of their hedging requirements, knowing that they can swap the extra 50% EUAs back to CUs in 2014/2015 once the political risk has passed. For this reason, we’d expect to see a spread opening up between EUAs and CUs. We also expect compliance buyers to make full use of their CER allowances – prices can’t go much lower.
The picture is quite different for Australian Carbon Credit Units (ACCUs – from Carbon Farming Initiative (CFI) projects), which are already eligible for compliance use. Demand greatly outstrips supply, and there is no likelihood of this changing even in the most optimistic supply scenario. Prices for 2013-5 will remain close to the fixed carbon price (AUD$23 in 2012-3). ACCU prices are not particularly affected by the election, as the CFI has bi-partisan support. However, development of new CFI projects is severely restricted by the low EUA price. Many potential CFI projects are not viable at such prices, so supply is likely to be limited beyond those that have already been constructed.
2013 will be a crucial formative year for the Australian carbon market as systems, expertise and common practices develop. By the end of the year much of the political uncertainty should be resolved and we should move to a more stable, more mature market.
Climate Bridge Pty Ltd is regulated by the Australian Securities and Investments Commission and holds Australian Financial Services Licence number 427102. Any advice provided is general advice intended for wholesale clients only.