Series of setbacks for carbon pricing
It's just weeks since the Rudd government decided to replace the carbon tax with a floating price a year early; Europe continues to dither over how to revive its ailing carbon market; and now the United Nations' own market has all but halted.
Trading in UN Certified Emissions Reduction (CER) units froze for at least two days this week, according to the perhaps aptly named ICE Futures exchange.
At roughly 80¢ per tonne, the price barely meets the cost of verifying the projects. Under the Kyoto Protocol, richer nations can use the units generated in developing countries to meet part of their emissions cuts.
Australian companies won't be too upset by units trading at a 30th of the current carbon price of $24.15 a tonne. Under the proposed changes, they can meet 6.25 per cent of emissions compliance with the Certified Emissions Reduction units in the first year, and double that amount in later years. Those changes need to survive both the federal election and then probable opposition from the Greens in the Senate.
Unlike Europe, where stagnant economies and over-allocation of permits have sent prices down to about $6 a tonne, the UN market "is a victim of its own success", Rob Fowler, a representative for Australia for the International Emissions Trading Association, said. "The change it stimulated is massive."
About 6900 projects are producing CER credits, for a total supply of 2.2 billion tonnes as of last month, or about four times Australia's annual emissions. Supply will swell to 3.8 billion tonnes by 2020, Bloomberg New Energy Finance (BNEF) says.
Demand, though, is running at just 1.7 billion tonnes. The emergence of new emissions trading markets, such as in Australia, South Korea and China, may stoke demand, as might a global pact among airlines to cut their emissions. Even so, supply will be "far more than total demand", the head of Asia research at BNEF, Milo Sjardin, said.
"You need a large combination of demand centres to make a difference to CER prices," Mr Sjardin said.
BNEF predicts prices will barely budge for the rest of the decade. That is bad news for companies such as Melbourne's RAMP Carbon, which develops projects to curb emissions and reduce poverty in Africa and Mexico.
"These projects have been seriously impacted by these low prices," Phil Cohn, a RAMP director, said. RAMP has shifted its focus to Australia's Carbon Farming Initiative.. Even here, though, the prospect of a low carbon price - estimated by the government at $6 a tonne for next July - is frustrating.
"Without the price support from a functioning market, translating [plans] into action on the ground will be a challenge," Mr Cohn said.
Frequently Asked Questions about this Article…
The article reports that trading in UN CER units froze for at least two days on the ICE Futures exchange. For investors, a frozen market signals low liquidity and can make prices volatile or unreliable as a signal for investment in carbon projects or related companies.
CERs are trading at roughly $0.80 (80 cents) per tonne — a level the article says barely covers the cost of verifying projects. That makes many carbon-reduction projects less profitable and can force developers to shift focus or pause new activity.
CERs are trading at about a 30th of Australia’s carbon price of $24.15 per tonne mentioned in the article. Europe’s carbon price is also low but higher than CERs — around $6 per tonne — driven by stagnant economies and permit over-allocation.
Yes. The article says proposed changes would let Australian companies meet 6.25% of their emissions compliance with CER units in the first year and double that amount in later years (effectively about 12.5%). Those changes still need to survive political processes such as the federal election and possible Senate opposition.
The UN market expanded rapidly — about 6,900 projects are producing CERs, creating a supply of roughly 2.2 billion tonnes as of last month, and BNEF expects supply to reach 3.8 billion tonnes by 2020. Demand is only about 1.7 billion tonnes, so oversupply is pushing prices down and is likely to keep them weak unless demand centers grow significantly.
Bloomberg New Energy Finance (BNEF) predicts CER prices will barely budge for the rest of the decade, implying sustained low prices unless new, large sources of demand emerge.
The article highlights Melbourne-based RAMP Carbon as an example — director Phil Cohn says low CER prices have seriously impacted their projects, prompting a shift toward Australia’s Carbon Farming Initiative. Low prices are challenging for developers reliant on CER revenue.
The article suggests that new emissions trading markets (for example in Australia, South Korea and China) and a possible global agreement among airlines could boost demand. However, BNEF cautions that multiple large demand centres would be needed to meaningfully tighten the currently oversupplied CER market.
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