Electricity markets are showing Australia’s biggest polluters will have to pay for their carbon emissions regardless of who wins the September 7 election.
With Prime Minister Kevin Rudd seeking to reduce the cost of CO2 permits to an estimated A$6 ($5.48) a metric ton and his rival Tony Abbott vowing to scrap carbon prices altogether, power futures signal the cost of emissions will be about A$10 a ton by 2015, up from A$7 two months ago, according to Deutsche Bank AG and Westpac Banking Corp. (WBC)
While the buying and selling of United Nations carbon credits evaporates and Europe’s system founders under a glut of allowances, futures traders in Australia are betting some part of the system introduced by ex-Prime Minister Julia Gillard, making polluters pay for their greenhouse gases, will survive beyond the election. Though there’s little chance the 2014 fixed price — at A$25.40 a ton the highest in the world — will remain, that doesn’t mean companies such as BHP Billiton Ltd. (BHP)and EnergyAustralia Holdings Ltd. will end up paying nothing, according to Mark Schneider at Investec Plc. (INVP)
“There’s a whole raft of possibilities that quite legitimately don’t result in the abandonment of the carbon price in the next 12 months,” Schneider, the Sydney-based head of the power investment group at Investec, said in a phone interview. “No doubt it is going to be harder to remove the legislation than anticipated.”
‘Toxic tax’
Before Rudd ousted Gillard in a Labor Party leadership coup two months ago, the September election was a straightforward referendum on whether Abbott, the Liberal party leader, would succeed in repealing a law he calls the “toxic tax,” according to Hugh Bromley, a Sydney-based analyst at Bloomberg New Energy Finance. Now that Rudd is promising to move to a so-called cap and-trade system in 2014, a year ahead of schedule, there is a wider range of possible outcomes, Bromley said.
While Abbott is still the favorite to win enough votes in the lower house to become prime minister, he has a 25 percent chance of getting the Senate’s support to throw out the carbon price, New Energy Finance says.
Australia’s delay in seating new senators until July 2014 is also hurting Abbott’s plans. By the time they are in place, Australia will have already sold its first carbon permits and set a limit on emissions in preparation for the cap-and-trade system under mandates introduced by Gillard.
The rise in Australia’s implied carbon price over the last few months means traders are betting against repeal, Bromley said. He computes the change by comparing electricity futures that include carbon costs with those that don’t in New South Wales, Victoria and Queensland.
Futures comparison
Exchange-traded futures including emission costs are showing prices of A$47 to A$55 a megawatt for the year ended in July 2015, he said. Over-the counter contracts excluding carbon for the same period now trade for A$39 to A$48, depending on the region. The difference between those two contracts, after adjustments, averaged about A$10 in July after Rudd was reinstated.
“The electricity market seems to be pricing in some prospect of a carbon price,” Tim Jordan, a Sydney-based analyst at Deutsche Bank, said in an interview. The increase in prices in recent months suggests the Senate may block any attempt by Abbott to repeal the law or the possibility that flexible prices will replace the fixed rate, he said.
The implied carbon price of A$10 shows how electricity traders are discounting Gillard’s fixed price and the odds that carbon pricing will be intact by 2015, said Mike McKensey, the head of carbon trading at Westpac in Sydney.
Regulatory signals
“There is no doubt that carbon pricing has been influenced by changing political and regulatory signals over the last two years,” McKensey said in an e-mail.
Power markets aren’t giving clear indications about the outlook to more than 300 companies bound by the 2011 legislation, said Martijn Wilder, head of the climate-change practice at Baker & McKenzie Ltd. in Sydney. With competing ideas on the table for reducing Australia’s emissions by 5 percent before the end of the decade, most emitters are merely complying with the immediate requirements of Gillard’s law, he said.
“Australian companies are assuming there will be some form of carbon pricing,” Tony Wood, energy-program director at the Melbourne-based Grattan Institute, said in a phone interview. “That doesn’t mean you can put a number on it. The real frustration is that the form of that is not clear.”
Fixed price
The current fixed price of A$24.15 that Australian emitters pay for permits is four times the European rate and almost double California’s price, according to data compiled by Bloomberg. Gillard imposed the fixed levy for the three years starting in July 2012 to win support from the Greens Party for her minority government to start to lower the highest emissions per capital in the developed world.
The fixed rate is set to rise again in July 2014 to A$25.40 before Australia shifts to market pricing and links with the European market a year later. A glut in Europe, the largest emissions-trading system, has reduced the average price of permits to about 4.34 euros ($5.79) this year, or about A$6.34.
Prices are even lower in the United Nations’ so-called offset market, averaging 41 euro cents. The existing law would allow Australian emitters to use a combination of UN and EU permits for as much as half of their obligations in the trading system, which is scheduled to start in July 2015.
Early start
Rudd would give Australian emitters access to these lower-priced, imported permits even earlier. Since returning to office, he has appointed a new climate minister and drafted a bill that would reduce the cost of polluting to an estimated A$6 a ton by hastening the start of carbon trading to July 2014.
Santos Ltd. (STO), the Adelaide-based energy company building the $18.5 billion Gladstone liquefied natural gas project in Queensland state, said it supports a move to a market price as soon as possible.
“I do support having a price on carbon,” Santos Chief Executive Officer David Knox told reporters today. “The key thing for us is to make we move to a level playing field” with competitors in the LNG industry.
Rudd’s Labor party is trailing behind Abbott’s Liberal-National coalition by 4 percentage points, according to a Newspoll published in the Australian newspaper Aug. 12. That compares with a 14-point deficit when Gillard was leader.
Trading licenses
More than 100 companies have received licenses from the Australian Securities and Investments Commission to trade carbon. The list mainly includes banks such as Westpac and Deutsche Bank and carbon-trading specialists such as COzero.
Power generators are also starting to prepare for carbon trading. AGL Energy Ltd. (AGK), owner of the Loy Yang coal-fired power station in Victoria state, said it’s at the early stages of figuring out what would be required.
“We’ve never been a supporter of a carbon tax,” AGL Managing Director Michael Fraser said in a July 31 interview in Sydney. Still, power generators aren’t likely to know for months after the election what kind of system they will face, he said.
EnergyAustralia, the Australian unit of Hong Kong’s biggest electricity supplier, said its carbon-trading team has been in place for several years. Abbott’s threat to repeal carbon pricing and Rudd’s “knee-jerk” proposal are hurting investment, the Melbourne-based company said.
Investment constraint
“The government’s new policy on the ETS was developed on the run,” Clare Savage, the executive manager for strategy and corporate affairs, said in an e-mailed response to questions. “Uncertainty around carbon policy is constraining investment in the sector and more broadly across the economy.”
BHP Billiton, the world’s largest mining company, declined to comment, according to an official in the Singapore office, which has responsibility for Australia.
Most emitters aren’t thinking beyond the end of Gillard’s second year of fixed pricing, said Wilder of Baker & McKenzie.
“The long-term approach is pretty much on hold,” he said. “But there’s a general expectation that there will be some sort of carbon price and a general appreciation that it will be quite difficult to repeal the legislation.”
