Australia’s new Prime Minister, Kevin Rudd, has announced his intention to switch to an Emission Trading Scheme (ETS) earlier than July 2015, the current start date of the floating price period in Australia. This early switch to a cap-and-trade scheme is expected to start in July 2014.
The move will lower the price of carbon. Australian Carbon Units are expected to start trading at AU$ 9/t (€6.5/t), which would represent a 65% decrease compared to the fixed price of AU$ 25.40/t (€17.7/t) in July 2014, according to analysis by Thomson Reuters Point Carbon (TRPC).
According to Emil Dimantchev, analyst at TRPC, “Rudd’s decision reflects the new government’s preference for a lower, floating carbon price, following a period of turbulence in Australian parliament, which saw the recent departure of Prime Minister Julia Gillard and Climate Change minister Greg Combet, who had between them passed into law the controversial Carbon Pricing Mechanism (CPM).”
Under this CPM, carbon prices were to be fixed from July 2012 until July 2015, at which point they would be left floating. In the context of low international carbon prices (Kyoto credits and European Allowances currently trade at AU$ 0.79/t and AU$ 5.7/t, respectively) and strong industry opposition to the fixed carbon price, Rudd’s announcement on Monday revealed his decision to commence the ETS earlier than the current legislation anticipates.
“If Rudd makes the switch to an ETS the top priority of his term, legislative changes could occur relatively quickly, despite the tight time frame, although this is contingent on the next election date, which has yet to be set”, Cecile Langevin, senior analyst at TRPC, said.
“We believe the earliest start date for the ETS is July 2014, a full year earlier than originally planned, as the Government must decide on caps before starting the cap-and-trade,” according to Langevin. The Climate Change Authority (CCA) is currently setting the caps for the first five years of the ETS.
This projected start date will likely incentivise power producers to start purchasing compliance units to cover their emissions in the following years, in line with hedging strategies common in carbon markets.
“This hedging will concentrate power sector demand in the first year of the ETS, shortening the market in the first few years of the scheme,” Dimantchev added. According to Australia’s current UNFCCC emission reduction target, the country must reduce its emissions levels in 2000 by 5% in 2020. This represents a target of 538 million t of total emissions in 2020. Assuming a cap based on the UNFCCC target, Dimantchev added: “We expect the Australian market will demand 61 million t EUAs in fiscal year 2014-2015. This would make Australia a price taker, with Australian credits trading slightly below EUAs.”
Adapted from press release by Samuel Dodson
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