Carbon price to trade 30-40% under EU price: RepuTex

ANALYSIS from carbon and energy advisory firm RepuTex indicates that an early transition to an emissions trading scheme will see the local carbon price “go its own way” from July 1 2014, with prices trading 30-40% under European prices for at least two to three years.

Max Pichon

According to RepuTex, the early start to emissions trading would see the Australian carbon price open at $A6.50-7.50 in the 2015 financial year, approximately 35-40% under the European price, forecast to be approximately $12 by FY15.

Australian and European carbon prices would then be likely to converge in two to three years, around FY16-17.

"We anticipate that local Australian units will trade at a material discount to European Union allowance prices from FY15, before moving towards parity around FY16-17, at which point the Australian carbon price will be driven by European policy,” RepuTex executive director Hugh Grossman said.

"The price discrepancy will provide the market with a range of trading and speculative opportunities, which is part of the upside to a fully floating marketplace."

Many in the Australian market had assumed that the local carbon price would match prices in Europe from the commencement of trading – proposed to be July 1 2014, tying the Australian market to policy decisions made in Europe, where the price of carbon had experienced falls of almost 90% from a peak of more than 30 euros ($A42) in 2008 to a record low of 2.75 euros in April.

The EUA price is currently trading at just over €4.

Electricity, LNG to play a part in ETS

RepuTex believes local factors such as electricity generation and the LNG sector are expected to play a much bigger role in shaping the price of Australian carbon units, with the earlier start likely to send prices even lower than those in Europe.

"The assumption that the Australian carbon price will automatically match the price of EUAs overlooks the importance of domestic factors in shaping the Australian price – in particular the forecast shape of local electricity generation and LNG projects,” Grossman added.

According to RepuTex, the lower emissions in the Australian market are strongly attributed to the LNG sector, with new projects unlikely to be online by 2014 when the new carbon market would open.

"If we bring forward the ETS by one year, the Australian carbon market would look very different, particularly in the LNG industry where major projects such as Australia Pacific and Gladstone LNG, scheduled for a 2015 start, would be yet to come fully online,” he said.

“That would mean lower emissions in the Australian market and therefore lower demand for Australian companies to buy carbon permits.

"This lower demand for permits means the Australian market is unlikely to require any European permits in the early years – meaning the local price will trade well under its European equivalent.

"With the early ETS a possibility, the key watch for the local market now becomes the growth or decline of Australian emissions, particularly related to electricity generation and major LNG projects such as Arrow and Browse LNG, both of which may be at risk of delay due to competitive pressures in the US and China.

“These projects, along with the shape of electricity generation, will significantly impact the shape of Australia's emissions profile and therefore the Australian price spread against Europe.”