Tuesday, August 28, 2012

Credits Trader: Australia, EU ETS to Link in 2015

The Australian government today confirmed it will not enforce its carbon floor price when its emissions trading programme commences in 2015 as it moves to link with the EU Emissions Trading System (ETS).

Emitters in Australia are required to pay for every tonne of carbon dioxide they emit, currently at a fixed price of A$23 (US$23.87). It was originally proposed that from 1 July 2015, that price will be allowed to float within a band.

However, the Australian government and European Commission today announced that, from that date, Australian firms can use EU allowances (EUAs) for compliance and, by 1 July 2018, EU ETS participants will be permitted to use Australian allowances for compliance. To enable this linkage, the planned A$15 floor price will be scrapped.

And while Australian emitters can use international credits, such as EUAs, for 50% of their compliance from 2015, the cap on Kyoto credits – such as certified emission reductions (CERs) from Clean Development Mechanism projects – will be restricted to 12.5% of an emitter’s liability, said the government, from the previous 50%. “Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions,” said Australia’s climate minister Greg Combet.

“Starting today, Australian liable entities can purchase [EUAs] for future compliance in Australia,” he added. “These arrangements provide Australian businesses with access to a larger market for cost-effective emission reductions and provide European market participants with enhanced business opportunities.”

“This would be a significant achievement for both Europe and Australia,” said the EU’s climate commissioner, Connie Hedegaard. “It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international carbon market.”

“This is an impressive development – a first of its kind in having two major economies link their carbon pricing programmes,” said Dirk Forrister, Geneva-based president of lobby group the International Emissions Trading Association (IETA). “IETA members – and economists worldwide – have advocated the potential cost-savings benefits of linking for over a decade, so we are extremely pleased with this news, even as we continue studying the details.”

EUA prices were firmer this morning, up 2% at 8.30 GMT to €8.30 (US$10.42) for the benchmark December 2012 futures contract.

“It is a bit of much-needed positive news,” said one London-based trader.

“There might have been some knee-jerk buying this morning, but it’s too early in the day for the EU-Australia linkage to have a significant price impact,” countered Geoff Sinclair, head of carbon sales and trading at Standard Bank in London.

“If it remains in legislation, this might add around 100 million tonnes of demand to the EU scheme, although the extent to which it does will rely heavily on relative prices and exchange rates, so this doesn’t get the EU off the hook when it comes to the need for a set-aside [of EUAs to address massive oversupply in the EU ETS].

“At the same time, the linkage is likely to make the Australian scheme more palatable in terms of domestic politics, which is likely to boost investor confidence about its longevity,” he added.

“The removal of the floor price, the linking with the EU and the limit on the use of Kyoto units all impact the shape for the forward price curve from 2015 onwards,” said analysts at Westpac in Sydney. “Subject to the release of the actual legislation, the aggregate impact of these changes is that the EUA price will now become the primary influence on the [Australian carbon] price rather than the CER price.

“Further, the removal of the administrative complexity of hedging the price floor’s ‘top-up fee’ will presumably free up Australian liable entities to access cheap, cost-effective options in international markets sooner rather than later.”

The Australian government foresaw some kind of measure to require Australian emitters buying CERs below the floor price to pay a top-up fee – an administratively complex exercise, that is now unnecessary.

The Australian and EU authorities hope to agree on how to link their respective emissions registries, which track trades of allowances, by the middle of next year. However, the European Commission still needs to receive a mandate from member states to enter into negotiations for the two-way link.

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