An unprecedented slump in global carbon prices is luring polluters in Australia seeking to reduce emission costs and protect against the threat of their own market being scrapped.
More than 100 companies have applied for licenses to trade imported allowances, according to the Australian Securities and Investments Commission. The nation’s largest polluters, subject to a fixed rate of A$23 ($24) a metric ton on their emissions, can buy EU permits for one-third as much after prices dropped to an all-time low yesterday of 5.68 euros ($7.44). United Nations offsets also touched a record low of 57 euro cents.
Australia linked its carbon markets with Europe’s in August, opening the door to EU permits before prices rebound and the country shifts to cap and trade in 2015, according to Bloomberg New Energy Finance. Companies are buying imported permits to protect against price swings and the pledge by Australia’s opposition party, favored to win next year’s elections, to scrap carbon trading immediately.
“It’s a very nice time for Australian compliance entities to make a natural hedge,” said John Davis, the Australian specialist at CF Partners LLP, an energy trading company in London. “The EU market should be stronger than it is now in three years.”
Prime Minister Julia Gillard has staked her political future on putting a price on greenhouse-gas emissions linked to climate change. The law she pushed through Parliament in November 2011 established a fixed rate starting July 1 and a transition three years later to cap and trade, giving more than 300 of the country’s largest emitters the chance to buy and sell domestic as well as imported carbon units.
Trailing in the polls behind opposition leader Tony Abbott and facing complaints from businesses that Australia’s carbon permits are the most expensive in the world, Gillard agreed to the program’s first overhaul in August. The revisions enabled Australian emitters to begin buying EU permits immediately for compliance after 2015. They also scrapped a complex and unpopular provision that would have set a carbon floor price at A$15, said Martijn Wilder, head of global environmental markets with Baker & McKenzie International in Sydney.
The changes triggered a “big rush” to supply imported carbon, Wilder said. While buyers will remain cautious as long as Abbott threatens to end carbon pricing, the link to overseas markets has made trading safer for Australian emitters.
“This is a fall-back option that didn’t exist three months ago,” said Alex Wyatt, chief executive officer for Melbourne-based Climate Bridge, Australia’s largest developer of emission credits under the UN’s Clean Development Mechanism.
Wyatt’s company was among the first to get the newly required Australian Financial Services License for companies offering trading services or advice on emission permits. Climate Bridge will help Australian customers with spot trades as well as futures and options for EU allowances and UN credits.
Carbon trading is a “natural extension” and a matter of survival, said Wyatt. Climate Bridge’s original business of creating UN credits known as CERs has been hit by the slump in prices. With the offset market wracked by an oversupply of credits and less-than-forecast demand, CERs traded below 60 euro cents on the ICE Futures Europe Exchange in London yesterday.
Opening Australia to European permits and getting rid of the floor price has revived the market, according to Phil Cohn, a director at Ramp Carbon, a Melbourne-based carbon developer with about 10 employees and a branch in Mexico City.
“Deals are coming together, and it’s really encouraging,” said Cohn who predicts Ramp will have its trading license by year end. “Before the government got rid of the floor price and allowed in EU permits, no-one was thinking about trading.”
COzero, a Sydney-based developer that started out creating CER credits, unveiled a platform last month for selling EU allowances and CERs in Australia.
“We are actively promoting these products and definitely seeing some interest,” said Nick Armstrong, the CEO of COzero. “You would be silly not to hedge.”
For now, EU prices are cheaper than ever. Allowances for December dropped to an all-time low yesterday, down 38 percent from last month’s high of 9.10 euros. UniCredit SpA (UCG) cut its forecast on Dec. 3 for EU permits to an average 5 euros in 2013, citing likely delays in plans to temporarily withhold supply.
By the time Australians can use EU supply, prices will be significantly higher, according to Bloomberg New Energy Finance. Prices will rise to 29 euros by 2015 as the bloc wins approval for “backloading” allowances. Australia’s carbon units will track EU prices starting in 2015, whereas CER prices will still trade for less than 1 euro, said Seb Henbest, a Sydney-based analyst for New Energy Finance.
“It’s a risk to do nothing,” said Geoff Rousel, managing director of commodities, carbon and energy at Westpac Institutional Bank in Sydney. Most of Australia’s largest banks are buying and selling permits to accommodate clients, Mike McKensey, a director in Rousel’s unit, said at a conference in Melbourne last month.
Banks and emitters have begun to trade EU and UN carbon units, according to Davis at CF Partners, who declined to name any clients, citing confidentiality.
He has sold contracts including options, futures and forward agreements, where the buyer and seller trade over the counter, with payments generally not due until 2015 or later. “The risk is small,” he said.
While Davis won’t rule out future revisions of Australia’s carbon market, the odds that it will be thrown out entirely are less than 10 percent, he said. Even if Abbott wins the next election, he is unlikely to have support for dismantling carbon trading altogether, Davis said.
The ruling Labor party’s primary vote was at 36 percent, with Abbott’s Liberal-National coalition at 43 percent, according to a Newspoll survey published in the Australian newspaper on Nov. 26. While the coalition has led in almost every poll for more than 18 months, Gillard’s minority government has closed the gap as voter concern waned about the impact of carbon pricing.
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