EU Carbon’s Record Low Lures Buyers in Australia: Energy

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EU Carbon’s Record Low Lures Buyers in Australia
Australia said in August it will open its doors to European allowances in 2015, when the nation shifts to cap and trade and EU emission prices are forecast to be higher, according to Bloomberg New Energy Finance. Photographer: Carla Gottgens/Bloomberg

An unprecedented slump in global carbon prices is luring polluters in Australia that seek to reduce emission costs and protect against the threat of their own market being scrapped.

More than 120 companies have applied for licenses to trade imported allowances, according to the Australian Securities and Investments Commission. The nation’s largest emitters, subject to a fixed rate of A$23 ($24) a metric ton, can buy European Union permits for one-third as much as prices fell today to an all-time low of 5.61 euros ($7.40). United Nations offsets also touched a record low of 57 euro cents.

Australia said in August it will open its doors to European allowances in 2015, when the nation shifts to cap and trade and EU emission prices are forecast to be higher, according to Bloomberg New Energy Finance. Companies have started buying imported permits in advance to protect against price swings and a 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 (UK) LLP, an energy-trading company in London. “The European market should be stronger than it is now in three years, particularly as the EU pushes back the introduction of new permits into the system.”

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, when more than 300 of the country’s largest emitters will be able to buy and sell domestic as well as imported carbon units.

Trailing Opposition

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.

New Opportunity

“This is an opportunity 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 46 to get the newly required Australian Financial Services License for companies offering trading services or advice on emission permits. ANZ Corp., UBS Corp. and Commonwealth Bank of Australia are among banks to get their licenses, and Deutsche Bank AG has applied, according to the Australian Securities and Investment Commission.

Climate Bridge will help Australian customers with spot trades as well as futures and options for EU allowances and UN credits. “We’re seeing lots of interest from people who want to take advantage of historic lows for EU prices,” said Sarah Chapman, Climate Bride’s head of trading. On the other hand, the low prices are leading some potential clients to wait and discouraging investment in low-carbon projects.

Natural Extension

Carbon trading is a “natural extension” but also 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 for delivery this month fell as low as 57 cents today on the ICE Futures Europe Exchange and traded at 61 cents at 3:38 p.m. in London.

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.”

Cheaper Than Ever

For now, EU prices are cheaper than ever. Allowances for December dropped to an all-time low today, down 39 percent from last month’s high of 9.10 euros.

They opened at 5.69 euros today in London. UniCredit SpA 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. A lack of progress at this week’s climate summit in Doha, where nations have been reluctant to pledge new reductions in greenhouse gases, are also weighing on prices.

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 domestic 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.

Regulatory Issues

Australian emitters waiting for regulatory issues to be resolved may miss the chance to buy permits at relatively low prices, said Geoff Rousel, managing director of commodities, carbon and energy at Westpac Institutional Bank in Sydney.

“Regulatory risk is a constant in all these markets around the world,” he said at a conference in Melbourne last month. “It’s a risk to do nothing.”

Most of Australia’s largest banks are buying and selling permits to accommodate clients, said Mike McKensey, a director in Rousel’s unit.

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.

Paying After 2015

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.

While Davis won’t rule out future revisions of Australia’s carbon market, the odds that it will be thrown out entirely are very low, 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.

“Regardless, there will always be a home for the European units that Australian entities hold,” Davis said.

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