Business builds its own carbon bridge

The world's oil giants add in their own prices on carbon while Europe's already established market rises on a possible supply fix.

International oil producers are bracing themselves for carbon costs that may surge to almost 10 times the current prices in Europe’s emission trading system, as governments around the world step up efforts to curb climate change.

Exxon Mobil, the biggest energy company by market value, is basing plans for future capital investments on the assumption that it will have to pay $US60 a tonne for carbon emissions. That is the most among 11 US and European companies that provided figures in a report released last week by CDP, a non-profit organisation that compiles environmental performance data for investors. Royal Dutch Shell and BP are planning on $US40, and Total anticipates a carbon cost of $US34, according to the New York-based group formerly known as the Carbon Disclosure Project.

Companies involved in extracting and processing hydrocarbons such as crude oil and natural gas must ensure that multibillion-dollar investments remain profitable for decades under even the strictest environmental rules, said Deborah Gordon, a senior associate at the Carnegie Endowment for International Peace’s energy and climate program.

Oil and gas companies face risks that regions currently without significant greenhouse-gas limits will impose costs or penalties in the future that may threaten the profitability of major capital investments such as offshore platforms or refineries. The fact that some countries are moving forward while others are regressing on carbon regulation is less significant than the overall uncertainty of what the regulatory environment will look like over the next 20 years.

Meanwhile, Australia’s $US9bn clean-energy fund is lobbying to stay in business to aid the nation’s fight to reduce greenhouse gas emissions. Prime Minister Tony Abbott’s government introduced legislation within weeks of his September 7 election victory to dismantle a carbon price, the fund and related agencies established by the previous Labor Party administration. The clean-energy fund is expected to survive to at least until July, when a new Senate is sworn in, as opposition parties join together to block the suite of bills shutting down several climate programs.

In a last-ditch appeal to stay open, the clean energy lender submitted a paper to lawmakers last week claiming it can contribute more than half the emission reductions that the government has promised by 2020.

In the airline industry, Europe may decide in the next five months to extend a freeze on emission limits for foreign flights as far as 2020, a European Union adviser said. EU lawmakers will consider the position of nations, including the UK, that are unwilling to have the bloc’s emission limits imposed on flights outside the region, Pierre Dechamps, an adviser for energy and climate change at the Bureau of European Policy Advisers, said December 5. The fact that policy-makers have yet to come to an agreement on the coverage of the aviation sector leaves the industry uncertain on its future compliance position. The UK seems more wary of reigniting the potential for a trade conflict, and if additional member states align with this stance, the commission’s proposal to include all emissions in EU airspace will face an uphill battle.

European Union governments are also stripping national targets out of draft EU legislation meant to boost clean fuels for cars, trucks and ships. EU transport ministers deleted the minimum number of publicly accessible electric-vehicle recharging points that the European Commission proposed in January to be established by 2020. The ministers also threw out proposed 2020 targets for the maximum distances between fuelling stations for cars that run on hydrogen or compressed natural gas, and for trucks powered by liquefied natural gas. With the first draft of the alternative fuels infrastructure directive being criticised as being too ambitious, the move is hardly surprising. The council’s recent decision to abandon public targets reflects growing national sensitivity to prescriptive pieces of EU legislation. 

Finally, in Asia, Japan gave its strongest signal yet that it wishes to keep nuclear power following the meltdown in Fukushima in 2011, shifting away from the previous government’s intention to phase out the technology.

“Nuclear is an important baseload power source we will continue to use with conditions that we will secure safety from the viewpoints of stable supply, reduction of cost, and global warming measures,” the Ministry of Economy, Trade and Industry said in draft policies posted on its website in Tokyo last week.

The nation last month backtracked on an ambitious goal to cut greenhouse gases, saying its new target assumes nuclear capacity will remain shut. It will review that goal after making final decisions on its energy policy, including the mix of generation technologies that will supply its electricity. 

The trade ministry’s basic energy plan will comprise a series of policies to replace a 2010 strategy envisioning nuclear supplying 53 per cent of the country’s power by 2030.

Japan also signed a bilateral carbon credit agreement with Costa Rica. The low-carbon projects in Costa Rica will generate credits that Japan may use to offset its own emissions. We expect the bilateral scheme to continue expanding, and be a key component in the country’s future climate policy.

EU carbon

European carbon advanced last week after a UK official said a plan to fix a surplus of permits in the market may start as soon as April. European Union Allowances for December 2013 finished the week 9.9 per cent up. EUAs for delivery in December ended last Friday’s session at €4.79/t on ICE Futures Europe exchange in London, compared with €4.36/t at the close of the previous week. Carbon allowances were on an upward track at the start of the week. 

The EU presidency said last Monday that EU ministers are scheduled to give their formal approval on December 16 to a draft law change that will enable delaying auctions of up to 900Mt carbon permits, a process known as backloading. Prices leaped on Thursday after Niall Mackenzie, head of industrial energy efficiency at the UK’s Department of Energy and Climate Change, said at a London conference that allowances will come out of the market possibly as early as April, certainly by May. Mackenzie added that the political deal over backloading “is done”. UN Certified Emission Reduction credits for December 2013 jumped €0.04/t last week to finish at €0.35/t.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles