The gulf between Australia’s incoming fixed carbon price and the floating international price is set to widen as Europe’s economic troubles and regulatory uncertainty undermine carbon markets.
The value of European Union Emission Allowances (EUAs) has halved since June and touched a record low of €6.38 ($7.85) a tonne of carbon dioxide on January 4.
The value of Certified Emission Reductions units, mandated under the United Nation’s Clean Development Mechanism - tradeable internationally but mostly sold as offsets to liable parties in Europe - fell to a record €3.28 a tonne on Monday.
On Tuesday, French bank Societe Generale cut its forecast for European Union permit prices in 2012 by 28 per cent to €8.90 a tonne, on lower emissions because of worsening economic conditions and faster than expected deployment of renewable energy.
SocGen’s Paris analyst, Emmanuel Fages, said if European regulators failed to set tight limits in the carbon market after 2020, when the continent’s emissions trading scheme enters its fourth phase, ”prices in an oversupplied market could rapidly fall further from present levels to values close to zero”.
From July 1, Australia’s biggest emitters will be liable to pay a carbon price of $23 a tonne, rising by 2.5 per cent a year until 2015, when it will float subject to a floor price of $15 a tonne, itself rising for another three years until it is reviewed.
Deutsche Bank analyst Tim Jordan said ”clearly there’s parts of business that would like access to a carbon price of €6 a tonne, but that would defer the decarbonisation of the Australian economy”.
”There’ll be pressure on the government to consider a lower price but I think the Parliament has passed the legislation and parties would be unlikely to reopen debate by 1 July,” he said.
In November, Deutsche downgraded its forecasts for the price of European permits in 2012 to between €5 and €7 a tonne and predicted ”if there is a repeat of the distress in interbank lending markets that we saw in 2009 … we think prices could break below €5 a tonne for a time”.
Bloomberg New Energy Finance analyst Seb Henbest said there was ”not a lot of price support on the horizon” for international carbon prices. A mooted increase to Europe’s 2020 emissions reduction target from 20 to 30 per cent was the only thing that could boost the price.
But Mr Henbest said Europe would not be the main driver of international carbon prices indefinitely. At some point, Europe would exceed its so-called ”supplementarity” limits, which allow it to buy permits from overseas, mainly via CERs.
