Way clear for cap and trade mar­ket

The Weekend Australian - Review - - Clean En­ergy -

sur­plus CO credit al­lo­ca­tions. If emis­sions are be­low the cap, com­pa­nies can sell their sur­plus car­bon cred­its, damp­en­ing de­mand: if there is a net car­bon credit sur­plus, there is no in­cen­tive to re­duce emis­sions.

‘‘ In the first round of emis­sion cred­its al­lo­ca­tion, lots of coun­tries and busi­nesses said ‘ we need X amount of cred­its’, but in the end they didn’t need any­where near that many,’’ says Jonathan Field­send, funds man­ager at EEA Funds Man­age­ment in Lon­don, which ad­vises car­bon trader Trad­ing Emis­sions plc. ‘‘ As a re­sult, prices in the short- dated De­cem­ber 2007 EUAs have been a dis­as­ter, they have fallen away to very low lev­els. But in the next round, for emis­sions over the pe­riod 2008 to 2012, the EU was a lot tighter, and there­fore there are less per­mits avail­able, so car­bon prices have been go­ing up.’’

The most liq­uid con­tract on the ECX, the De­cem­ber 2008 EUAs, have moved from 17.5 euros at the start of the year to 22.97, a rise of 31 per cent. The De­cem­ber 2009 EUAs have gained 29 per cent, climb­ing from 18.05 euros to 23.30. ‘‘ It’s work­ing a lot bet­ter as far as ev­ery­one is con­cerned,’’ says Field­send.

De­spite not hav­ing signed the Ky­oto Pro­to­col, Aus­tralia had the first op­er­at­ing car­bon emis­sions trad­ing scheme in the world, in the NSW Green­house Gas Abate­ment Scheme which be­gan op­er­at­ing in Jan­uary 2003. The scheme is still the sec­ond- largest in the world be­hind the EU ETS.

Un­der the scheme, all elec­tric­ity re­tail­ers in NSW are obliged to off­set the emis­sions in­ten­sity of the elec­tric­ity they sell by a cer­tain per­cent­age. They do that, in ef­fect, by buy­ing off­sets in the form of NSW Green­house Abate­ment Cer­tifi­cates ( NGACs), which are cre­ated by gen­er­a­tors pro­duc­ing elec­tric­ity with a lower emis­sion in­ten­sity than the pool av­er­age; by com­pa­nies mod­i­fy­ing an ex­ist­ing emis­sion sit­u­a­tion ( for ex­am­ple, a fac­tory) in a way that re­duces emis­sions; by com­pa­nies re­duc­ing their en­ergy de­mand; by com­pa­nies do­ing en­ergy- ef­fi­cient projects; or by com­pa­nies ac­tu­ally ‘‘ se­ques­ter­ing’’ car­bon by re­mov­ing it from the at­mos­phere through plant­ing trees.

Par­tic­i­pants can trade the NGACs among them­selves and out­side par­ties — such as banks, or even re­tail in­vestors — can also trade them. But only com­pa­nies with as­sets in NSW are el­i­gi­ble.

More than 42 mil­lion NGACs have been is­sued, with power gen­er­a­tors the bulk of the mar­ket at 68 per cent of NGACs, fol­lowed by de­mand- side abate­ment ( DSA) at 27 per cent, with the re­main­der ac­counted for by car­bon se­ques­tra­tion and ‘‘ large- user’ par­tic­i­pants, who have on- site green­house emis­sions not di­rectly re­lated to elec­tric­ity con­sump­tion. At present, 185 par­tic­i­pants have been ac­cred­ited in the Green­house Gas Abate­ment Scheme.

The NSW scheme cred­its are not fun­gi­ble ( where one unit of com­mod­ity or cur­rency is equiv­a­lent to an­other, and may be sub­sti­tuted for the other with no loss of value) with the cred­its be­ing traded in Europe. The EU ETS is only open to coun­tries that have signed the Ky­oto Pro­to­col.

The US has no for­mal car­bon emis­sions trad­ing mar­ket, al­though some states ( for ex­am­ple Cal­i­for­nia) are in­ves­ti­gat­ing ‘‘ cap and trade’ mar­kets.

The US is no stranger to cap- and- trade mar­kets, hav­ing es­tab­lished one for sul­phur diox­ide, the key ‘‘ acid rain’ pol­lu­tant, in the mid- 1990s. Coal- fired power plants were al­lo­cated emis­sion rights by the US En­vi­ron­men­tal Pro­tec­tion Agency ( EPA), and trad­ing in these rights be­gan on the Chicago Board of Trade. Emis­sions of sul­phur diox­ide have dropped by more than 6.5 mil­lion tonnes from 1980 lev­els, ac­cord­ing to US EPA. By 2010, it es­ti­mates that sul­phur diox­ide emis­sions will fall to half 1980 lev­els.

The lessons learned in the sul­phur diox­ide trad­ing suc­cess story were ap­plied in the de­vel­op­ment of the Chicago Cli­mate Ex­change ( CCX), which opened for busi­ness in De­cem­ber 2003. The CCX is a self- reg­u­lated vol­un­tary pro­gram that al­lows its 250- plus par­tic­i­pants — com­pa­nies, in­sti­tu­tions and liq­uid­ity providers ( or spec­u­la­tors) — to trade green­house gas emis­sions through di­rect trad­ing and through cred­its from off­set providers, such as plan­ta­tion forestry com­pa­nies.

In 2005, con­tracts cov­er­ing 1.5 mil­lion tonnes of emis­sions were traded. That amount jumped to 10 mil­lion tonnes last year: by the end of April 2007, CCX vol­ume had al­ready ex­ceeded three­quar­ters of the 2006 vol­ume.

In the ab­sence of a na­tional car­bon emis­sions trad­ing mar­ket in Aus­tralia, some non- NSW par­tic­i­pants par­tic­i­pate on the CCX: for ex­am­ple, the City of Mel­bourne was the first mu­nic­i­pal en­tity out­side the US to join. Aus­tralian util­ity AGL En­ergy is also a mem­ber, as is Mel­bourne law firm Coady’s.

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