Europe looks like a model worth following

26 Mar 2008Archived News Energetics in the News

Published: - The Australian Financial Review - by Mark Lawson - Cheryl Bowler, Principal Consultant; Carbon Markets, Energetics Pty Ltd talks about the five different markets and the variation in prices.


As the Australian government and private sector lay the foundations for a carbon trading regime in Australia, the European Commission says that its own carbon trading scheme has shaken off initial problems to become a success.

Prices for phase two of the EU Emissions Trading System, which covers very large emitters (mainly power stations) in the 27-member union, are showing signs of stability backed by healthy trading.

In mid-March, the European system valued a tonne of carbon dioxide emitted at about EUR22 ($36) and climbing, up from the EUR19.70 in early February. This activity is better than the first phase, which an EU release describes as one of “learning by doing”.

In that three-year phase, which ended at the beginning of this year, prices collapsed from EUR30 a tonne in April last year to just EUR10c, well before the end of the trading period.

As is widely acknowledged, the collapse in the price was due to member governments handing out too many free allowances (one allowance gives the holder the right to emit one tonne of carbon dioxide equivalent) to its own emitters.

For phase two, which runs to the end of 2012, the allocation guidelines have been tightened.

Craig McBurnie, director of environmental markets at ABN Amro in Sydney, says that in the first phase, governments allocated perhaps 3 per cent more allowances than they should have, but in phase two the allocations are “7 per cent short”.

EU announcements from earlier this year say the union wants to tighten allocations further for trading after 2012, by pushing its member countries into adopting uniform methods for allocating allowances. Each country now allocates permits under its own, widely differing rules. Although the proposal was broadly accepted, most new member states from Eastern Europe expressed concern that the proposal may adversely affect their industries.

The EU ETS is a cap-and-trade system. It caps the overall level of emissions but, within that limit, allows participants in the system to buy and sell allowances as they require. At the end of the year, installations must surrender allowances equivalent to their emissions. Companies with allowances left over can sell the excess on the exchange.

Cheryl Bowler, principal consultant, carbon markets for the consultancy Energetics, says that there is no one market but five different markets trading the allowances, although there is little variation in price between the exchanges.

The European trade in carbon also features over-the-counter transactions, she says.

As well as buying allowances on the European market to meet their ETS obligations, companies can buy credits from UN-administered clean development mechanism (CDM) projects in developing countries.

European consultancy PointCarbon recently estimated that contracts worth EUR28 billion representing 1.6 billion tones of CO2 changed hands in the ETS last year, representing an increase of 80 per cent in trading volumes.

Most of the increase, however, was in forward contracts for the second phase of the scheme which started this year.

The growth in the secondary CDM market was even stronger, with volumes increasing more than nine-fold last year, to the equivalent of 350 million tones worth EUR5.7 billion.

Australia will be closely examining the trials and successes of the European system as it considers the design of its system, which the new Rudd government has declared it will set up, no later than 2010.

A recently released interim report by Ross Garnaut, a professor of economics and a senior government adviser, canvasses a number of policy options for reducing carbon options, including the design of a carbon trading system similar to that of the ETS.

There are no policy recommendations in the Garnaut Climate Change Review but, among other comments, it notes that an efficient Australian ETS should have as broad a coverage as possible, and that Australia would benefit from linking its market with others.

Other comments indicate that the final report will recommend strict controls over the allocation of emission permits.

In addition to the ETS there is a Chicago carbon exchange that relies on companies trading to meet voluntary emission targets and its turnover is tiny compared to that of the ETS. There is also an Australian Climate Exchange based in Sydney.

One major step towards an ETS in Australia will be taken in July when the top 700 or so emitters in Australia will be required to report their carbon emissions under the National Greenhouse and Energy Reporting Act.

Join the conversation