ANALYSIS - Low Prices, Downturn Could Alter Aussie CO2 Scheme
Date: 09-Mar-09
Country: UK/SINGAPORE
Author: Nina Chestney and David Fogarty
LONDON/SINGAPORE - Low international carbon prices and a global recession might force Australia to change its planned 2010 emissions trading scheme days before the government releases draft legislation.
Some analysts also question if low prices will drive Australian firms to clean up their operations or buy cheap UN carbon offsets under the Kyoto Protocol to meet their obligations.
The draft legislation is to be released on March 10 and is expected to enshrine the target of cutting emissions by least 5 percent by 2020 from 2000 levels.
The Australian government already faces intense pressure to change, delay or scrap its carbon scheme, with business groups saying a recession is the wrong time to introduce it. Greens want the scheme hardened to meet tougher emissions targets.
"There's a policy question for the government there about how much domestic abatement they want to see. That will come up as the legislation moves into the Senate," said Sean Lucy, head of the Carbon Solutions Group for nabCapital in Melbourne.
"Certainly Green parties will want to see more domestic action," he told Reuters.
The government's policy White Paper released in December said the Australian scheme will allow 100 percent of emissions obligations to be imported through the purchase of UN offsets called certified emissions reductions, or CERs.
Europe's emissions trading scheme, or EU ETS, allows only a small percentage overall.
The White Paper also estimated national emissions units will initially trade around A$23 (US$14.8 and 11.7 euros) a tonne.
But CER prices have fallen below this level, driven by a drop in demand because output from big compliance buyers has dropped due to the recession.
CHANGES?
EU emissions allowances have fallen from nearly 31 euros mid-last year to around 11 euros. CERs are trading just above 10 euros after hitting nearly 24 euros in mid-2008.
"What you could see changed are some of the variables in the (Australian) ETS design, maybe you'll see less CERs being allowed through," said Lucy.
"One of the policy challenges is if you have 100 percent CER imports, and prices are very low, you will unlikely see a lot of domestic abatement. You will see people going to the cheaper source where they can," he added.
A top carbon lawyer said the EU promoted more domestic emissions abatement than Australia's.
"The fact they are allowing Kyoto credits to form the basis of compliance will inevitably lead to most companies choosing to comply through Kyoto credits because they should be cheaper," said Giedre Kaminskaite-Salters, a senior adviser on climate and clean energy for law firm Norton Rose.
"Having this unlimited supply of Kyoto credits will depress the Australian allowance price and will create a more even price, which is likely to be well, well below the $40 price cap the Australian government has imposed," said Kaminskaite-Salters, who advised the Australian government on the design of their scheme.
NO PRICE CAP
The EU ETS model does not have a price cap and was better for incentivising domestic action, she said.
"And if you have limited access to Kyoto credits, that's likely to result in much more proactive domestic efforts rather than just simply relying on projects elsewhere," she said, referring to UN clean-energy projects in poorer nations that yield CERs.
Australia's climate change minister said on Friday she had no concerns about the fall in carbon prices and said the low price would not force changes to plans for carbon trading.
The government is trying to push the legislation through parliament within months but is gearing up for a fight in the Senate from the main opposition Liberal party, independents and Greens, the latter two groups holding the balance of power.
The Greens say the scheme's aim to cut emissions by 5 percent, or up to 15 percent if there is a broader global climate pact, is too weak and has called for harder targets.
Nicholas Howarth, of the Oxford University Centre for the Environment, said unrestricted linking meant Australia's domestic carbon price would always be capped by international CER prices and governed by market forces beyond Australia's control.
But low prices weren't necessarily a threat, some analysts said.
"I am a bit more sanguine about a low carbon price. In some ways, the market is doing what you would expect. If and when the economy recovers prices will bounce back up again," said William Blyth, Associate Fellow at Chatham House, referring to the EU ETS.
Brian Fisher, chief executive of Concept Economics in Canberra, Australia, said a low-start up price would encourage the government.
"The lower the start-up price, the less disruptive the scheme is going to be," said Fisher, who conducted an assessment of the White Paper for the Australian Senate.
(Editing by William Hardy)
