Australia and its economy often bring to mind extraction industries such as oil and gas and mining. For example, Chevron, one of the largest oil and gas companies in the world, has recently moved forward with one of the largest natural gas projects in Australia’s history by giving a formal approval to the “Wheatstone” project off of the coast of Western Australia. The Wheatstone project involves liquified natural gas (LNG), a fuel derived by converting natural gas to a liquid so that it can be shipped to its export destination. This year has seen A$50 billion spent on energy projects in the state of Queensland alone, particularly in natural gas and coal extraction.
It is not only energy that increasingly powers the Australian economy, but mining as well. The largest mining company in the world, BHP Billiton, is headquartered in Melbourne and has invested billions of Australian dollars in mining projects in the country.
With resource-hungry China growing at 10 per cent each year and located quite close to Western Australia, Australians have a ready-made market for their extractive industries. Whilst some may feel that Australia’s economy has become overly tied to growth in China, the reality is that the economic connections between Australia and China are becoming ever closer and are driven by natural resources production and consumption.
Given that mining and oil and gas are large contributors to emissions of greenhouse gases, it would probably come as a surprise to many people that Australia has recently implemented one of the most innovative carbon mitigation programmes in the world. This involves a simple and direct tax on carbon emissions, and stands in marked contrast to a far more complex EU carbon scheme involving cap and trade. As part of their approach, the Australian Government has put in place the unique ‘Carbon Farming Initiative (CFI)’ as a major tool in driving the country toward a clean energy future, and in the process opened up a huge opportunity for investors.
Currently, EU carbon credits have dropped to an all-time low of only €5.90 (A$7.3 and US$7.8), down by nearly 50 per cent. This has pretty much destroyed the carbon credit market in Europe, as investors who invest in carbon credits are now looking at negative returns. Whilst Australia will eventually switch over to a cap and trade scheme in 2015, the Australian government hopes a floor price for the first three years will avoid the problem of collapsing carbon credit prices down the road.
In Australia by contrast, the Government’s Carbon Farming Initiative (CFI) is a government-backed project that offers farmers, landowners and investors the chance to earn money by producing carbon offsets for carbon emissions trading by guaranteeing a minimum buy back price of A$23 per tonne, which is over three times the price of what an investor receives for carbon credits in Europe. Furthermore, the government scheme effectively guarantees the minimum buy back price of A$23 per tonne for three years from July 2012 via 2.5 per cent annual ‘inflation’ uplifts. Beyond 2015, the government scheme also offers a firm pricing structure to ensure that carbon credits generated in Australia will continue to trade at a premium to world prices.
This unique Australian regulatory structure is designed to allow investors to receive guaranteed returns from investments in the carbon credits produced under the Australian Government’s CFI scheme. For those investors wishing to invest for only three years, from 2012 to 2015 – i.e. the time period during which the Australian government guarantees a minimum price of A$23 per tonne, the returns are estimated to be at least 30 per cent.
In a nutshell, where the Australian carbon credit investment differs from Europe’s is that the Australian government is guaranteeing to put a floor under the price of carbon credits for at least the initial three years of the programme. Yes, the Australian government may incur some short-term costs with this guarantee, but in the long-run they see this approach as critical to jumpstarting a robust carbon trading market and becoming a leading global trendsetter in carbon reductions.
Josh Cohn is a Partner with GreenWorld BVI, a boutique investment firm offering socially responsible alternative investments such as forestry, farmland, renewable energy and carbon credits. They can be found on the web at www.greenworldbvi.com and can be contacted at info@greenworldbvi.com.
