Preliminary talks on EU carbon price reform hit home in Australia

Preliminary talks held in Europe to reform the European Union Emissions Trading Scheme (EU ETS) will flow through to Australian carbon prices, with the timing and size of any reform crucial for the Australian carbon price and for Australian companies, according to carbon analytics firm RepuTex.

EU officials met last week to discuss preliminary proposals to remove excess permits from the EU ETS - a move which would restore EU carbon prices to higher levels.

However, debate continues regarding the impact of the EU market’s proposed reforms, particularly over how long the impact of that reform will last and what the reform will mean for Australian companies.

The EU carbon market is currently oversupplied by an estimated 1.2 billion cumulative permits through to 2020, with proposals to ‘backload’ either 1.2 billion, 900 million or 400 million permits from Phase 3 of the EU ETS, which commences in 2013.

According to RepuTex, backloading may lead to European allowance (EUA) prices recovering to €19 (AU$23.73) in 2015. However, whether the price recovery is short-lived or not will depend on whether permits are permanently removed, or reintroduced at the end of Phase 3.

“The European backloading measure may see prices recover to the €19 range; however, backloading does not mean permits are permanently cancelled,” said RepuTex Executive Director Hugh Grossman.

“Which scenario the EU Commission agrees to will be pivotal to EUA prices. If permits are cancelled permanently, we may see upward pressure on prices beyond €19, leading to higher abatement costs for companies in Australia.

“We’d also potentially see greater demand for domestic offsets under Australia’s Carbon Farming Initiative.

“Should permits be reintroduced into the EU ETS, we may ultimately see downward pressure on EUA prices towards 2018.”

The European Commission aims to reach a position towards the end of 2012; however, there is some uncertainty around the timetable for the backloading. The commission will conclude its consultation with stakeholders by November 2012, with representatives of the EU member states to discuss the proposal, negotiate further changes and vote towards the end of the year. The proposal will then move to the Council of Ministers and to the European Parliament itself.

According to RepuTex, the timing and size of the set-aside will be crucial in determining carbon costs in Australia.

“The larger and more permanent any European set-aside, the greater the impact of the EU price on Australian companies and local offset markets,” said Grossman.

“Combined with domestic policy scenarios regarding the Australian Government’s contracts for closure of brown coal generators, and further domestic linkages with schemes in New Zealand and South Korea, Australian carbon prices are set for an interesting ride.”