Links to EU carbon scheme to save Australian emitters $2.5bn, says RepuTex

A new report from carbon analytics firm RepuTex indicates that last week’s announcement of plans to link Australian and European carbon pricing schemes is set to save liable Australian companies $2.5bn over five years.

According to RepuTex, European and international carbon units are forecast to trade through FY 2016-2020 at an average of AU$11.50 per tonne - well down on the AU$15 floor price. This lower carbon price will lead to notable savings for Australian companies.

“We forecast an average saving to firms of around 16%, or $2.5bn between 2015 and 2020, relative to the previous floor price scenario,” said RepuTex Associate Director of Research, Paul Bourke.

“Depending on policy measures taken in the EU, we anticipate Australian companies to take advantage of a more credible price trajectory than under the previous floor price.

“We expect European and international carbon units to trade between AU$17 and AU$7 over FY 2016-2020, with Australian buyers using cheap international permits to meet around 22% of their total liability over this period, before switching to European permits towards the latter part of the decade.”

RepuTex research shows power generators will gain the most from the EU link, with the sector set to register a net gain of up to $1.5bn over five years. Coal miners can expect a windfall of up to $560m over the same period and non-coal energy producers up to $230m.

Carbon price movements in Australia - and company liabilities - are expected to be strongly correlated with the outcome of carbon market policy decisions made in Europe. The EU, faced with sluggish economic growth across its member countries, is presently producing at a level significantly below its emissions cap, leading to an oversupply of European Union Allowances (EUAs) - CO₂ emission rights that allow industries that fall under the regulations of the European Emission Trading Scheme to pollute one tonne of CO₂. This oversupply equates to over 700 million tonnes of carbon, which has kept EUA prices subdued.

The EU has proposed setting aside - either temporarily or permanently - a number of EUAs with a view to allowing the price to recover over the short term. The size and nature of this set-aside are yet to be confirmed.

According to RepuTex, the timing and size of the set-aside will be crucial in determining the savings to Australian firms, as will the timing of the return of those permits (if at all) to the market.

“The larger and more permanent any European set-aside, the greater the compound impact of the new demand from Australia will be on EUA prices post-2015, once the schemes become linked,” said Bourke.

“We anticipate that permits set aside in the short term will be reintroduced to the EU market in 2018, but if this is pushed back to 2020 we should see stronger overall carbon prices and higher liabilities for Australian liable companies compared to the floor price scenario.

“If enough of a deficit is restored in Phase 3, we may also see Australian demand for EUAs support prices in Europe from FY 2016.”

RepuTex forecasts greenhouse gas emissions from Australia’s liable entities out to 2020, applying this data to forecast carbon market fundamentals and pricing in the Australian and European markets over the same period.

On the question of whether it was in Australian firms’ interest to look at buying up EUAs now, while the price remains near record lows, Bourke noted, “The current EUA price curve does not suggest there is an imminent need for Australian compliance buyers to lock in EUAs; however, policy measures to address the EU ETS oversupply are expected to shift expectations towards higher EUA prices in Phase 3, but it is not clear by how much or if they will be effective.”