Australia's carbon market landmark

Australian Carbon Credit Units

Last week was a landmark week for Australia's fledgling carbon markets with both a transaction in Australian Carbon Credit Units as well as the issue of the first free emission permits by the federal government.

The ACCU market exists under the Carbon Farming Initiative, a policy developed in order to provide the agricultural sector with an opportunity to take advantage of the substantial abatement opportunities which exist on the land. Creators of ACCUs must go through a strict accreditation and audit process with projects needing to adhere to clearly defined creation methodologies, many of which are still being finalised.

Demand for ACCUs will principally arise from liable entities under the carbon price that are able to surrender ACCUs against up to 5 per cent of their obligations during the fixed price period. Once the floating price regime begins, ACCUs may be surrendered against up to 100 per cent of one's obligations.

After an extensive wait, and with only four methodologies so far approved, last week brought with it the beginning of a new market. The ACCU trade, brokered by Nextgen, took the shape of a forward deal, with 10,000 to be delivered and settled in January 2013. The deal was agreed at $22.00, a discount of $1 below the fixed carbon price for financial year 2012/13.

The discount in the ACCU price reflects a range of factors, including the fact that paying the government $23.00 at the end of the financial year is a risk-free approach which doesn't require any funding. The $22.00 ACCU price therefore reflects a cost of carry discount, as well as a discount for a range of other potential risks including counterparty risk and regulatory risk, as well as the transaction costs involved in the trade of a new commodity.

While there is great hope being put on the CFI in terms of the opportunities it creates for the agricultural sector and for Australian-based abatement, progress in the ACCU market – at least in the year ahead – is likely to be incremental and measured, rather than rapid and unpredictable.

Large-scale Generation Certificates (LGCs)

By far the most significant issue confronting the nation's large-scale renewables market is the Climate Change Authority's RET Review. Across recent weeks, while the conceptual battle for the scheme's future has played out in the media, the spot market has experienced considerable price volatility in a context of thin liquidity.

It is fair to say that 2012 in the LGC market has not proceeded as the more optimistic market participants expected. Prices and liquidity have both been on the slide. In part this is the result of the pre-existing presence of a sizable surplus of LGCs. Yet it is also a reflection of the ongoing uncertainty surrounding the future of the scheme, to which there is currently no greater contributor than the RET Review.

Ahead of the deadline for submissions to the CCA's Issues Paper, the spot LGC market began a rapid, gap-laden decline which ultimately saw the market reach the low $33s, a drop of over 10 per cent in just over one month. Liquidity during this time remained thin. Across the last fortnight the market then made up most of that ground by trading back into the high $36s, before once again softening to the $35 mark.

With the uncertainty surrounding the future form of the LRET, there is little incentive now for participants to look too far ahead. This, of course, has implications not just for the spot LGC market and for several forward vintages, but also for new project development; the purpose of the expanded target.

The Climate Change Authority is presently developing a Discussion Paper in response to the submissions it has received to its Issues Paper. The timetable for the release of this document is during October. With the variety of contending views offered across a range of fundamental matters, the Discussion Paper should provide stakeholders with a good indication of which arguments the CCA has found compelling and which it has not.

Marco Stella is a Senior Broker, Environmental Markets and editor of The Green Room at Nextgen, a wholesale energy and environmental brokerage firm. www.nges.com.au. The content above is sourced from excerpts taken from The Green Room.