Chapter 10
Markets for carbon permits
Permits auctions and trading
10.1 The auctioning of permits should mean that permits are allocated to
those who value them most and aid price discovery. Permits will be auctioned
monthly, a compromise between weekly auctions which would give more frequent
price information and quarterly or annual auctions which would provide more
depth as there would be more bidders at each auction.[1]
The Government is continuing to consult with industry over whether any deferred
payment arrangements will be allowed, but any such arrangements will be
limited. The first auction is expected in early 2010.[2]
In addition to the monthly auctions for the current vintage, there will be
annual 'advance auctions' of three future vintages. This is a balance between
the view that auctioning long-distant permits gives investors a stake in the
longevity and credibility of the scheme and concerns about complexity and
potential lack of liquidity in auctions of distant vintages.[3]
The only restriction on participation in auctions will be lodging of a security
deposit. The Government rejected some calls to prevent 'speculators' being able
to bid, as it wants the deepest possible market with fair access to all.[4]
10.2 'Ascending clock' auctions will be employed. This works as follows:
...the auctioneer announces the current price. Bidders indicate
the number of permits they are prepared to purchase at that price. If demand
exceeds supply, the auctioneer raises the price in the next round and bidders
resubmit their bids. This process continues until the number offered is equal
to or greater than demand. Bidders then pay the price from the previous round.[5]
10.3 The 'ascending clock' auction provides information on the aggregate
demand schedule. For the first couple of years, those receiving free permits
will also be able to sell them as part of the auctions, resulting in
'double-sided auctions'. These will only be allowed for a limited period to
avoid it hindering the development of a secondary market.[6]
Bidders will be restricted to a maximum purchase of 25 per cent of the permits
sold at any auction. With there being 16 auctions (monthly for a year plus the
advance auctions), this restricts purchases at any single auction to 1.6 per
cent of total permits of a given vintage. As the largest single entity is
expected to account for around 3½ per cent of emissions, it would be able to
meet its requirements over three auctions.[7]
It is important that the permits are tradable. This should
ensure that the emissions cap is produced with least cost to the Australian
economy. Permits will be designated as 'financial products' so the market for
them will come under the aegis of ASIC.
Upper limit on permit price
10.4 The ceiling will be $40 a tonne, rising by 5 per cent a year in real
terms, for the first five years. This will be implemented by the issuance of
additional permits as required. Its use is controversial as it increases the
risk that Australia will either not meet its emission reduction targets or
taxpayers will be forced to incur an uncertain cost of buying international
permits and makes it harder for the Australian scheme to be linked to overseas
schemes.[8]
10.5 Dr Betz, an expert of European emissions trading, also believes the
limit is too low:
...a price cap risks environmental integrity... It shifts the
risk to the taxpayer ... The risk might be even greater if the potential is there
that you can indirectly bank those credits into the future—what is currently
allowed under the scheme and which cannot really be prevented. So you will have
the circumstance of not having achieved your cap being imported into future
periods. The proposed $40 in the draft legislation, which is growing slightly,
might also be too low because we have seen international carbon prices at
around $60 and we have seen high volatility. So having a price above $40
internationally is not unlikely.[9]
Derivatives markets
It is anticipated that markets will develop, not just for the
permits themselves, but derivatives markets as well, which should aid in 'price
discovery', and so improve allocative efficiency.[10]
Already the Australian Stock Exchange is saying:
Once sufficient detail of the ETS is known, ASX will be able to introduce a futures market for emissions prior to the issuance of emission
permits to help industry participants manage risk. Development is well under
way.[11]
Committee
Comment
The Committee welcomes the development of derivatives markets
but expects that they will be subject to appropriate prudential supervision.
International linkages
10.6 As noted above, climate change is a global problem requiring a
global solution. A benefit normally attributed to emissions trading schemes is
the scope they provide for international trade in abatement. This allows
emissions reductions to be achieved at lower overall cost.
10.7 International linking also provides a mechanism for channelling carbon
financing to developing countries. This has helped to promote developing
country engagement on climate change, as well as their confidence and capacity
to develop more cleanly.
10.8 Mr Paul Curnow, a partner in the global climate change practice of the
international law firm of Baker and McKenzie told the committee:
Global warming is an international problem with global causes
and consequences. One tonne of CO2 emitted anywhere in the world has
the same cumulative effect as another tonne emitted somewhere else. Similarly,
one tonne of CO2 reduced anywhere in the world has the same
cumulative benefit as another tonne reduced anywhere else in the world.
This is why global action is imperative on climate change and
imperative in the context of Australian implementing its own scheme.
Allowing linking between schemes is the way in which
governments and businesses will be able to build up global action and, importantly,
this linking of schemes allows the global community and Australia to reduce emissions most efficiently and at least cost.[12]
10.9 Professor Garnaut argues strongly in favour of international carbon
trading:
It would be neither desirable nor feasible for each country
separately to pursue national emissions-reduction targets. It would not be
desirable because lower-cost abatement options would be forgone, and
higher-cost options accepted. It would not be feasible, for there would be no
financial incentive for developing countries to participate in strong
mitigation, and they would not do so. These are two fatal flaws.[13]
10.10 A contrary view was put by Professor McKibbin:
The reason you have international trade is, if your costs in
this country are higher than costs abroad, you pay people in other countries to
do the abatement and bring the permit to Australia. We can do the equivalent
here by having the government, through a central bank of carbon, provide the
short-term permit to cap the price and then, over time, adjust to reduce
emissions in the future that were temporarily injected into the economy in the
short term. I would rather do that domestically, through national institutions
and national monitoring and enforcement, than do it through international
institutions, which we do not even understand very well in terms of the CDM and
other mechanisms and which are not run in our jurisdiction. We are allowing
assets from offshore to affect the price of carbon in our economy, which can be
advantageous but which can also be very disruptive. I think that is an element
of uncertainty that we do not need. We can manage that, as we manage our
domestic interest rates, independently of the shocks that are occurring in the
rest of the world.[14]
10.11 The Government has identified development of international carbon
markets as a strategic priority.
An effective global carbon market will play a key role in
developing effective international solutions to climate change by fostering
least cost global abatement. Contributing to a robust international carbon
market should therefore be seen as a strategic priority for Australia.[15]
10.12 Unrestricted linking may also assist Australia to become a regional hub
for carbon trading.
Use of international units
10.13 The CPRS will not restrict firms' use of Kyoto units to meet scheme
obligations. This will have implications for the price of Australian carbon
pollution permits and the overall cost of the scheme. With unrestricted
linking, the price of an Australian permit will be set by international carbon
markets. Australia, being a relatively small emitter, is likely to be a price
taker; that is, Australia will have little impact on world prices for carbon.
10.14 Even with unrestricted international linking, most abatement will occur
domestically as there are very significant low cost abatement opportunities in Australia.
...the Treasury modelling indicates that over half of emissions
reductions occur domestically within Australia and not all of it is imported
from overseas.[16]
Where would Australia end up in such a scheme? We are looking
a long way forward to the middle of the century. That depends a lot on things
we do not know about the possible success of biosequestration in Australia. If that is very successful, that may turn out to be a relatively low cost way of
reducing emissions or absorbing emissions, and that might make us an exporter
of permits.[17]
10.15 Evidence from the finance sector and industry was strongly supportive of
the scope to purchase abatement internationally. For example:
International linking can reduce domestic abatement costs by
opening up more opportunities for abatement, which may not be available
domestically. It may also enhance price discovery through deeper and more
liquid markets providing a closer estimate of an international abatement price.[18]
10.16 In the White Paper, the Government:
..acknowledges the overwhelming support of stakeholders for
linking and recognises the benefits of linking in providing low-cost compliance
options for liable entities and in supporting an efficient global response to
climate change.[19]
10.17 This view was supported by Professor Garnaut:
I think international trading permits are going to be
absolutely essential to get the participation of any of the developing
countries. [20]
10.18 As linking reduces the price of pollution permits, some renewable energy
firms that stand to benefit from a higher domestic carbon price may be opposed
to international carbon trading. On the other hand, international carbon
trading creates market opportunities for such firms in developing countries.
Cool NRG is an Australian renewables company delivering abatement projects in
developing countries under the Kyoto Protocol's Clean Development Mechanism:
Cool nrg supports the international linking of the CPRS to
the CDM as outlined in the legislation. The linking allows Australian companies
to access bona fide and lowest cost emission reductions from developing
countries – reductions that contribute to sustainable development and the UN
adaptation fund.[21]
10.19 The committee heard some criticisms of international linking. Dr Richard Deniss used familiar 'mercantilist' arguments against importation of permits:
By relying on importation of permits, we will literally be
exporting jobs in the energy efficiency and abatement industry. There is an
idea that it is somehow costless to the Australian economy to continue to
pollute and just buy in lots of permits.
The fact is: if we instead worked harder to reduce emissions
here in Australia and indeed did not have to import so many permits from other
countries, by definition there would be far more jobs in the energy efficiency
and abatement industries here in Australia. Importing permits is exactly the
same thing as exporting jobs, an issue that does not seem to have been much
considered.[22]
10.20 Dr Betz, director of the University of New South Wales' Centre for
Energy and Environmental Markets, commented:
In the Marrakesh Accords, for example, it states that
domestic action shall thus constitute a significant element of the effort made
by each party. So my question is: when Australia is allowing unlimited use of
CDM and JI credits in their scheme, which is covering about 70 per cent of
emissions, how can they demonstrate that they do something domestically? It
might be interpreted by other countries that there is a lack of willingness by Australia to do its fair share of emissions reductions domestically.[23]
10.21 The Department of Climate Change gave evidence that prohibiting the use
of international units would be simple but would increase the carbon costs
under the CPRS:
It is very easy to prohibit any imports of permits, but you
have to understand that a consequence of that is that it drives up the cost of
abatement in Australia quite significantly.[24]
Credibility of international units
10.22 There is concern about the integrity of foreign schemes. A number of
witnesses referred to these concerns:
... clean development mechanism...there is a difficulty in
reliably establishing that the claimed offset is in fact a reduction compared
with what would have happened otherwise.[25]
10.23 Parties to the Kyoto Protocol have gone to considerable effort to create
administrative arrangements and technically sophisticated methodologies for
establishing the credibility of credits created under the Clean Development
Mechanism. Emissions estimation methodologies must be internationally approved
and all abatement credited must be audited by an accredited, independent third
party.
10.24 The committee recognises that efforts to improve the credibility of
international units are ongoing. The committee notes the Government's
conclusion in the White Paper that:
The use of Kyoto units in the Scheme is consistent with
Australia’s Kyoto Protocol obligations, and the Government considers that the
Kyoto Protocol establishes a robust and credible framework for mitigation.[26]
Sale of abatement
10.25 To reduce implementation risks, the export of Australian permits will
not be allowed. When allowed, exports of permits to international markets and
other countries will be achieved either:
- by allowing permit holders to convert a carbon pollution permit
into a Kyoto unit for subsequent sale and transfer to international markets
or
- by allowing the direct transfer of permits, where a bilateral
link with another country’s Scheme is established and there is an agreement
that a shadow transfer of international units will occur at the government level.
10.26 Export of pollution permits would only occur if the cost of abatement internationally
were higher than that in Australia. Given the low-cost abatement opportunities
likely to be available in developing countries, this situation seems unlikely.
This restriction is, therefore, unlikely to have material affect on the carbon
price in the CPRS.
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