Making the most of the carbon market opportunity

The Australian carbon market is now under way, officially at least. Yet, in reality, despite efforts from government and the “hard core” Australian carbon participants, there appears to be a lot of fence-sitting going on.

'Is there a market?' and 'Will there be one?' are just two of the many questions being raised by industry insiders.

Moreover, it's not unreasonable to question whether Europe's struggling carbon market will be a leadweight if we link our market to it, or whether if Tony Abbott is elected Prime Minister, he will undermine the industry.

With the Australian carbon market in its infancy, perhaps the most important question to ask is, how does Australia stand in comparison to international carbon markets?

As the chief executive officer of a global carbon trading platform, it is my job to have insight into the strengths and weaknesses of the international market. So here's my examination of Australia's position within this industry.

Strengths

Federal legislation and regulation is a massive benefit to underpin confidence; the bipartisan commitment to a 5 per cent reduction on 2000 level emissions by 2020 is proof that a low carbon economy is here to stay. UK targets are 20 per cent from 1990, so our modest target is easier to attain, but still needs a legislative ‘stick and carrot'.

NCOS (Nation Carbon Offset Standard) legislation on carbon neutrality means voluntary proponents must be legitimate and offset all their emissions, with the ACCC able to clamp down on cowboys and false claims across the carbon spectrum.

But most importantly, the first major step to reduce carbon is the Carbon Farming Initiative. This program is playing to our great strengths on the land and to our deep held desire to help farmers make a quid as well. By including Aboriginal and Torres Strait Islanders, the traditional land owners can take their share and the provision of a broad range of grants means initial capital challenges are theoretically overcome.

Weaknesses

Signing Kyoto meant there was little origination of carbon in Australia and many carbon experts left to go overseas. Thus, knowledge is restricted to government documents, often distorted media reports and a handful of long suffering carbon advocates. Not a big platform to build a large, liquid market on, and even more difficult when those people now have to spend more time and money getting approved to do what they have been doing already for years.

The Australian carbon market is somewhat being dampened by over regulation and government control. The cost of entering a regulated market is prohibitive and people will only do so if they see the high prospect of a return. If advisories are not properly licensed, which is expensive, time consuming and involves a lot of red tape, they will face severe penalties. The end result may be that many will ‘leave it alone'.

Opportunities

The most obvious opportunity that lies ahead for the Australian carbon market is in the voluntary escort, under the CFI or the international standards.

Carbon neutrality is becoming more common and many major companies and government organisations insist on it. Voluntary credits that are a lower cost to produce and buy are being created by hundreds of projects worldwide and a small number in Australia. CFI of course opens a myriad of options backed by grants and a market demand, and if this CFI program were to open up in the future to technology and renewable energy credits origination.

It is viable that Australia's largest export within the next decade could be carbon credits and not coal. There are hundreds of smaller opportunities in carbon footprinting, brokering, advisory, auditing and consulting, plus investment and fund opportunities. The EU link announced recently allows for import of EU credits which are relatively cheap today so an attractive mid-term investment for sale to regulated entities.

Threats

Politics is the main threat to the carbon market and for the market to really be able to flourish, the Federal Opposition must show its cards on carbon, or it will inherit a disaster. Australia is not the world leader, we have followed the EU and others with long standing legislation. Over regulation, methodology ‘constipation' in the CFI or failure to launch in the farming and indigenous sectors will mean dependence on foreign imported carbon legislations and experience.

Australia is the only country where carbon is legally a financial instrument, but carbon expertise is far more important than financial services history.

Consequently, every carbon exchange borne out of a stock exchange so far has failed. ASIC and the government need to 'fast track' experts to stimulate the market before they head to the next ‘gold rush' in California which starts next year. History could repeat itself again.

In summary, it is the dawn of a new era. The world must and will embrace a global low carbon economy led by carbon trading. For Australia to make the most of its ‘early mover' status requires collective commitment to the end game. We need to reduce our emissions by force or favour, motivate voluntary carbon neutrality and support the people who have devoted themselves to enabling this critical market place.

Wayne Sharpe is Chief Executive Officer of Carbon Trade Exchange.