Australia to Cut Carbon-Revenue Forecast as EU Price Plunges

Australia will lower its expected revenue from selling carbon allowances after the European Union, its partner in a cap-and-trade system set to start in 2015, failed to win support for lifting record low prices.

European carbon permits fell the most on record following a vote yesterday in Strasbourg, France, to reject an emergency measure to reduce surplus allowances. Carbon for December fell 35 percent to 3.09 euros ($4.07) a metric ton on the ICE Futures Europe exchange, the lowest-ever settlement for the contract.

“We will continue with our plans to link with the European emissions trading scheme from 1 July, 2015,” Australia Climate Minister Greg Combet said today in an e-mailed statement. “But this year’s budget, as is usual practice by Treasury, will include a revised forecast for a carbon price in 2015-16.”

Prime Minister Julia Gillard’s government, which has scheduled the first auction of carbon permits in 2014, stands to collect less money than originally forecast as lower prices in Europe spill over to Australia. The nation is set to shift to a cap-and-trade system in 2015 that is integrated with the EU emissions market. For now, Australia’s fixed price on carbon is almost six times higher than the EU price.

“The European system to which the government has tied Australia’s electricity prices is now deeply unstable,” Australia Shadow Minister for Climate Action Greg Hunt said in an e-mailed statement today. “The Australian tax is completely out of line with the rest of the world.”

Fixed Price

Australia’s ruling Labor party set the price of carbon at A$23 ($23.85) a metric ton starting in July 2012 with the aim of reducing Australia’s reliance on coal. Gillard’s government amended the law in August 2012 to allow emitters to immediately begin buying EU permits in place of Australia’s own carbon allowances starting in 2015.

Companies will be able to use imported units from either the EU or United Nations offset market for as much as half of their emissions obligation in Australia.

“Australia is now tied to a severely oversupplied market, which is likely to take years to recover,” said Hugh Bromley, carbon-market analyst for Bloomberg New Energy Finance in Sydney. “The government will start auctioning carbon units in early 2014, and it’s possible that these allowances will sell for just two to three Australian dollars. A carbon price this low will encourage almost no reduction in domestic emissions and will certainly not meet the scheme’s objective to encourage investment in clean energy.”

Abbott’s Vow

The carbon price is Australia’s main tool for meeting its target for cutting greenhouse gases by 5 percent before 2020. The Australian Industry Group is pushing the government to immediately jettison the fixed rate in favor of market-based prices.

Opposition leader Tony Abbott has vowed to repeal the carbon price if his Liberal-National coalition wins the election set for Sept. 14. The latest Newspoll shows him with a 10 percentage-point lead over Gillard.

Abbott said he will introduce a so-called Direct Action Plan that would commit as much as A$750 million a year to reward entities that demonstrate the most cost-effective spending to cut emissions, opposition climate spokesman Hunt said in November 2012.

Gillard was forced in December to abandon a pledge to return the May 14 budget to surplus this year due to falling tax revenue.

Treasury Forecast

The Australian Treasury’s latest estimate for the country’s carbon price in the fiscal year beginning in 2015 is A$29 a ton. Without approval for the plan to limit the EU surplus, prices will be less than half that amount, Bromley said.

“In the budget in coming weeks, Treasury will model the carbon price in the usual way, and there will be a revised forecast for the financial year 2015-16 and a revised revenue forecast as a result,” Combet said in the statement. Expenditures tied to forecast carbon revenue are also set to fall, he said.

The European Parliament yesterday voted 334 to 315, with 63 abstentions, in favor of an amendment to prevent the European Commission’s proposal to alter the bloc’s emissions-trading law. The change was meant to pave the way for a measure to delay the sale of some permits over the next three years and reintroduce, or “backload,” them to the market in 2019 and 2020.

“With the chances of the current backloading proposal now shattered, Australia will likely have a very low carbon price when we transition to a flexible price,” Bromley said. However, the failed backloading vote will not affect Australia’s international commitments. Our reported national emissions should still fall by 5% below 2000 levels in 2020 because Australian companies will purchase cheap international abatement rather than reduce their onsite emissions.”

Financial Crisis

Europe’s rejection of backloading vote may be interpreted as a loss of confidence in cap-and-trade carbon markets, Bromley said. “But this is not why the proposal failed. The message from the European Parliament was to leave the market alone and minimize political interference.”

Europe’s backloading proposal was one of several under consideration to support emissions trading, Combet said. It will now be considered further by the Parliament’s environment committee in Europe, he said.

“The carbon market in Europe is just one of the markets that has been affected very seriously by the global financial crisis and by the financial crisis in Europe specifically, and so the low prices are a response to those influences.”

(Adds Treasury’s 2015 price estimate in 11th paragraph.)
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