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Energy firms face carbon credit price shock, says Carbon Market Institute

Energy firms face carbon credit price shock, says Carbon Market Institute

Energy retailers and users may not be able to buy cheap offshore carbon credits to acquit their emissions liabilities under the proposed National Energy Guarantee because the supply could dry up after China launches its own emissions trading scheme later this year, the Carbon Market Institute warned.

Energy retailers and large users will be allowed to offset part of their carbon liability under the proposed NEG unveiled on Tuesday by buying carbon credits on domestic markets and international carbon trading markets when the emissions guarantee comes into force in 2020.

But Carbon Market Institute chief executive Peter Castellas said they might get a nasty surprise when they seek international carbon credits because Australia will be just one of more than 90 countries seeking to access international carbon markets to meet their obligations under a rapidly growing number of carbon pricing schemes around the world.

The Energy Security Board said in its letter to Energy Minister Josh Frydenberg outlining the NEG"the impact of this scheme should be a lower cost way to meet Australia's emission reduction targets", but Mr Castellas said the cost for compliance will be determined by the cost and availability of these units - effectively creating a carbon price.

"There is a common perception in Australia that cheap international units will be around forever," he said in an analysis for the Carbon Market Institute's members, which include large energy suppliers and users such as Origin Energy, Orica, South 32, Wesfarmers and Qantas.

"The future availability and price of international units is however, uncertain, and there is unlikely to be an endless supply of cheap international units in a post-2020 environment," the analysis said.

Price collapsed after GFC

Carbon credits in the largest emissions trading market in the European Union collapsed after the global financial crisis and the European debt crisis. But China's proposed ETS would roughly double the share of global emissions covered by carbon pricing schemes even if it is restricted to the Chinese power industry at the start.

Mr Castellas said more than 90 countries plan to access international markets to meet emissions targets, and the opportunity to buy cheap international credits could be shortlived.

"Australia would increasingly compete with demand from other countries hoping to access international units (in addition to soaking up their own domestic supply) to meet their (Paris) targets."

"The emergence of new net-buyers in the Indo-Pacific particularly China under its ETS (and globally), and the transition to the new market mechanisms post-2020 under the rules being written for Article 6 of the Paris Agreement, means that the opportunity to purchase high-quality, low-cost abatement is likely to be a short-term one."

Mr Castellas said to ensure Australian carbon liabilities can be met at manageable cost the government needs to take steps to develop the domestic carbon market and seek a seat at the table in Bonn to discuss carbon trading rules.

One way to develop the domestic market would be to put more money into the existing Emissions Reduction Fund to pay for the development of carbon credits via reafforestation and other techniques, he said.

Australia stepped away from explicit carbon pricing policies when the Abbott government axed Labor's carbon tax in 2014 but most climate policies have an implicit carbon price and the Turnbull government's emissions guarantee would mark a return to explicit carbon pricing because credits would be bought and sold, establishing a price.

Mr Castellas said Australia's emissions reduction targets would have to become more ambitious than the government's "floor" Paris pledge to reduce greenhouse gas emissions by 26-28 per cent by 2030.

He said international scrutiny of Australia's efforts would only increase along with the accelerating momentum towards climate change around the world.

At a recent climate policy meeting in Fiji Chinese officials had indicated that the country expects to hit peak greenhouse gas emissions in 2020-21, nine years earlier than the giant nation's commitment at the Paris international climate talks in 2015, and then reduce emissions by 65 per cent from the peak.

The Fiji meeting was a preparatory meeting for the United Nations Conference of the Parties (COPS) climate meeting in Bonn next month, at which each Paris signatory's progress on meeting its Paris climate agreement commitments will be put under the microscope.

Australian Financial Review

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