Australia is the latest country to get into this potentially rewarding asset class but the fluctuation in carbon credits suggests a cautious approach
Louis Beckerling – Updated on Sep 16, 2008 – SCMP
Energy suppliers are getting the message that they will no longer enjoy a free pass to pollute the atmosphere as a regulatory trend to put a price on the emission of carbon dioxide gathers momentum around the world. Markets are being left to establish what those prices should be so investors have a new and potentially rewarding asset class in which to invest. But the roller-coaster ride taken by the price of carbon credits traded since 2005 under the European Union Emissions Trading Scheme (ETS) suggests they should proceed with extreme caution.
The latest country planning to join the club of carbon trading nations in Europe is Australia, which aims to have an emissions trading system in place within two years. By the time it is up and running in 2010, notes financial consultancy Ernst & Young, the new market will have yielded a number of investment opportunities.
“With the scheme commencing in 2010, we expect a range of new products and services to emerge in the next few years,” says Ernst & Young in a report on the proposed scheme.
Also on the cards, it predicts, is the emergence of derivative investment products based on the carbon trading permits that will be required by polluters. Australia’s largest energy provider, Australian Gas Light (AGL), has already created such a derivative instrument. It did so by taking a punt on what price the market might place on an “Australian emissions unit” that forms the cornerstone of the proposed trading system and will be equivalent to one tonne of C02e or carbon dioxide emissions.
Just weeks after the government signalled its firm intention to push ahead with an emissions trading scheme by releasing a detailed timetable on March 17, AGL announced that its operating arm AGL Hydro Partnership had sold 10,000 tonnes of AETUs at a price of A$19 (HK$128) per tonne for settlement on February1, 2012.
The forward contract has been designed to achieve a number of outcomes, the group says. “First, we will be able to provide some certainty for customers that fall within AGL’s `Major Customer’ portfolio that wish to lock in retail energy pricing now. Second, by providing the opportunity for electricity market participants and other wholesale parties to access a carbon price, it may enable some additional liquidity to be restored in forward electricity contracts beyond July 2010.”
With much of the detail yet to emerge and the business lobby either opposed to the scheme or intent on having it delayed, there has been no trade in the exploratory contract.
But with the environmentally conscious Australian public solidly behind the government’s initiative and the latest study by the United Nations Environment Programme (Unep) providing encouraging signals to the environmental lobby that energy companies are accepting their responsibilities, there is little doubt that the government will push ahead with its plans.
Climate change concerns, growing support from world governments, rising oil prices and ongoing energy security concerns combined to fuel a record-setting year of investment in the renewable energy and energy efficiency industries in 2007, Unep says in a report released on July 1.
Executive director of Unep Achim Steiner says: “The clean energy industry is maturing and its backers remain bullish. These findings should empower governments – both north and south – to reach a deep and meaningful new agreement by the crucial climate convention meeting in Copenhagen in late 2009.”
The report titled Global Trends in Sustainable Energy Investment 2008 was prepared by Britain-based New Energy Finance for Unep’s Paris-based Sustainable Energy Finance Initiative and finds that more than US$148 billion in new funding entered the sustainable energy sector globally last year – up 60 per cent from 2006.
Wind energy again attracted the most investment (US$50.2 billion last year), but solar power grew most rapidly – attracting US$28.6 billion of new capital and growing at an average annual rate of 254 per cent since 2004, driven by the advent of larger project financings, it notes.
“Just as thousands were drawn to California and the Klondike in the late 1800s, the green energy gold rush is attracting legions of modern day prospectors in all parts of the globe,” says Unep’s Mr Steiner, who is also a United Nations undersecretary general. The “three pillars” outlined in the Australian government Green Paper published on July 8 and on which its climate change policy will be based, will be strategies to reduce Australia’s greenhouse gas emissions – to adapt to climate change that cannot be avoided and to help shape global solutions. It has committed to reducing Australia’s greenhouse emissions by 60 per cent by 2050 and says an emissions trading system is central to meeting that target.
Based on a formula yet to be calculated, a stock of carbon permits known as Australian Emissions Units (AEU) will be established with each unit registered with a unique ID number and equivalent to one tonne of CO2e. Controversially – given the experience in Europe – it has announced that qualifying big polluters will be allocated a certain number of permits free with the rest to be sold at quarterly auctions.
Commercial farmers will be off the hook at least until 2015 and the big polluters or Emissions Intensive Trade Exposed entities will be given “transitional assistance” yet to be spelled out in detail for the first 10 years after the scheme comes into operation in 2010.
Once permits have been acquired via auction or allocation, holders will be free to hold or sell permits on an emissions trading market likely to be operated by the Australian Stock Exchange.
In a presentation to potential players made in June (How the financial markets will service the forthcoming ETS), the exchange said the role of the market would be to provide liquidity, price discovery, risk transfer and the clearing and settlement of trades. It envisages the trade of ASX Emission Permit Futures in lots of 1,000 carbon emission permits, with each permit being an entitlement to emit one tonne of carbon dioxide equivalent gas.
Corporate Australia, not surprisingly, has expressed alarm at the prospect of a having to pay for emissions. Business-oriented think tank The Australia Institute warns that cost increases arising from the introduction of an emissions trading system may amount to US$1.4 billion a year.
But, with the voting public solidly behind the plan, business appears to be bracing itself for the introduction of the scheme.