Carbon market developments in the European Parliament overnight highlight the importance for Australian companies liable under the Carbon Pricing Mechanism (CPM) to understand policy developments in other jurisdictions, according to the Carbon Market Institute.
“Carbon is subject to higher levels of regulation than almost any other traded commodity,” says Carbon Market Institute chief executive officer Peter Castellas.
“Individual countries, and in this case the European Union, can determine the legislation and regulations that impact the carbon price and modify those regulations at any time,” Castellas says. “This will not be the last change.”
Castellas says this involves high levels of uncertainty for liable entities and elevates a need to develop appropriate risk management strategies.
“The evolving nature of the domestic and global carbon market means this uncertainty is likely to continue,” he says.
As the Australian Government investigates and considers linking the CPM with other countries’ schemes, Castellas says it is prudent to closely monitor developments in those countries as they evolve.
The European Parliament last night rejected a proposal to backload the surplus of European carbon allowances (EUAs). This proposal was intended as a temporary solution to address the impacts of the economic slow down in Europe over the last few years which has depressed the price of EUAs and diminished the incentive for polluters to cut their emissions.
According to many carbon market analysts, the impact of the backloading decision will mean a lower EU carbon price for some time.
From 2015, Australian liable entities can meet up to 50 per cent of their carbon price liability under the CPM by importing carbon allowances (EUAs) from the European emissions trading system (EU ETS) – initially via a one-way link from 2015 and then through full trading from 2018.
“The decision in Europe overnight presents Australian liable entities with a potential opportunity to reduce their cost of compliance during the flexible price phase of the scheme, which is scheduled to begin on 1 July 2015,” says Castellas.
If Australian liable entities hedge their exposure under the CPM by purchasing EUAs they can secure those at historically low prices, to surrender them during the flexible price phase of the CPM, rather than pay the full price of permits at that time.
“There are risks to this hedging strategy,” warns Castellas. “To purchase EUAs and have them registered in Australia, businesses need to be aware that the mechanism to transact between Australia and the EU ETS is still being formally developed and that there is a range of transaction and compliance risks,” he says.
“It is prudent to seek professional advice before initiating any trades in carbon. But perhaps the greatest risk to sourcing EUAs in the short term for later use in Australia is the possibility that the CPM may be repealed post the 14 September election,” says Castellas. “But, even under a repeal scenario there are still options to sell back into the European market,” he says.
“In any case, it would be useful for liable entities to know what options are available to assist in managing their carbon liability and develop a strategy accordingly.”
“It is important to recognise that the EU backloading developments have a significant impact on global carbon markets, but so do developments in other regions,” he says.
“On a positive side for the evolution of the carbon market are the developments in China, our largest trading partner, where China’s 12th Five Year Plan refers to the ‘step by step establishment of carbon emission trading markets’,” Castellas says.
China will introduce emissions trading pilots in a number of cities covering over 100 million people. It was announced last week that Shanghai and Shenzen are to start emissions trading trials before the end of June.
Castellas says the European backloading decision may not be all bad news for Australia.
“The potential for European carbon market service providers to see Australia as a viable place to expand their operations, even in the short term, could result in inward investment,” says Castellas.
“Similarly the developments in other markets such as China, California and South Korea could mean the level of professional services expertise and Australia company experience in managing carbon risks may be in demand as markets evolve, opening up new export market opportunities.”
For Australian liable entities who wish to understand the risks and opportunities related to domestic and international carbon markets, CMI is hosting a Liable Entity Carbon Summit on 20 May 2013 in Sydney. See www.carbonmarketinstitute.org.
About the Carbon Market Institute
The Carbon Market Institute is an independent membership-based not-for-profit organisation. Our aim is to assist Australian businesses in meeting the challenges and opportunities associated with the developing national and international carbon markets and thereby build capacity to grow in a low-carbon world.
Established with support from the Victorian Government, our Asia-Pacific wide membership represents a broad range of professionals, organisations and industry providers for whom carbon will have a direct impact on their businesses both in terms of liabilities and potential opportunities.
The Institute has a strong research program and provides market analysis, education and training, business networking and information services, and international engagement.
CMI incorporates and builds on the networks, partnerships and services developed by the former Asia-Pacific Emissions Trading Forum (AETF) which began operations in 1998. CMI commenced operation on 1 January 2011 with a mandate to assist Australian business with the implementation of climate-related markets, both in terms of managing risk and realising business opportunities.
CMI makes no representation and gives no advice in respect of any financial, investment, tax, legal or accounting matters in any jurisdiction. This is not financial advice and should not be regarded as a substitute for financial advice.