For the first time we appear to be seeing real bipartisan support for backloading, with conservative members of the European People’s Party (EPP), who previously blocked the reform, potentially supporting a new proposal that would limit any short term fix to a one-off intervention and introduce concessions to re-direct part of the revenue raised to fund industry abatement, much like the Australian policy model.

Under the previous proposal, 900m was to be withheld from the market from 2013-2015, with permits re-introduced to the market in 2019-2020. New draft text further amends the re-introduction of permits to take place in a ‘linear manner’, commencing after the last withholding of permits. Given the political delay in Europe, we anticipate that should backloading be agreed, any withheld permits would be unlikely to be withdrawn from the market this year, with a 2014-2016 timetable more likely – resulting in permits being re-introduced to the market in 2017. Should this occur, we expect EUA prices to fall sooner than previously expected (2019), meaning the short term price rise from backloading will be shorter than first anticipated. For Australian market participants, the price rise would be even shorter.

Should the bill succeed in committee on the 19^th of June, and then again in the EP in early July, we anticipate that EUA prices could climb above €6 in the short term, with potential for prices to reach €20-25 closer to 2017.

Domestically, there would be immediate implications for the Australian carbon price, however with or without backloading we continue to believe that while Europe will be a critical influence on the range of the Australian carbon price, local fundamentals will set prices in our market for the first two or three years of trading, particularly output from the energy sector, which we anticipate to be far lower than expected, reducing demand for premium priced EUAs.

We continue to anticipate that that the Australian market will not purchase EUAs in the first years of the flexible price period, meaning that the Australian price will trade at a material discount to EUA prices, even should backloading be passed.

With backloading potentially in play, we anticipate a starting price in Australia could reach A$5-7, climbing towards $A30 later in the decade – so initially well under European prices. As backloaded permits are re-introduced to the European market around 2017, this would result in domestic Australian units also falling.

To view our full ACU and EUA Price Outlook for June please click here.

The political optimism in Europe is no doubt real, however, as always there is a cautious reality – bullish recent prices are reminiscent of the price spike seen prior to the first backloading vote in April, where the EUA price rose 50% in three weeks before crashing on the failure of the vote. As a result, all eyes remain on the success of the vote in Parliament, and ultimately, the position taken by EU governments in early July, which is likely to be a close vote; however the vital signs appear to be improving.

The price of European carbon allowances (EUAs) hit an eight week high overnight as bipartisan support grows to repair the EU ETS via the ‘backloading’ of 900mt of allowances. EUA prices rose to €4.50 on Wednesday close, up 7% on the day and over 60% from an April 17 low of €2.75 immediately following the initial defeat of backloading in the European Parliament (EP).

To read our full commentary, please click here.

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Research was undertaken for Part II of RepuTex’s May-June Carbon Market Tracker series, titled “Australia to Control its Own Future? Local Fundamentals to Drive ACU Price, Not Europe”.  

In a note to its clients, RepuTex said that since FY12 emissions from the National Electricity Market (NEM) have fallen 8%, with a further fall of 5% forecast for NEM emisisons through to 2020, which will significantly lower demand for Australian companies to buy permits when the Australian market opens in 2015-16.

According to RepuTex, despite domestic emisisons continuing to trend upwards, lower demand from the power sector may depress Australian Carbon Unit prices and minimise demand for European CO2 allowances – driving a greater spread between the Australian and European carbon prices until far later in the decade.

Register to receive the full report via the link at the bottom of this page. 

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This is the first of a three part series of reports examining the potential shape of Australia’s Carbon Price Mechanism after the upcoming federal election in September. Following the failed outcome of ‘backloading’ reform in the EU ETS and a subsequent downgrade to Australia’s forecast carbon price, key industry groups have publicly supported the repeal of Australia’s ‘carbon tax’ in favour of an earlier transition to a market driven price. Strong industry support, combined with current Senate polling data, suggests that such an outcome is conceivable.

In this first report, we analyse the likelihood of such a political outcome being achieved, with a focus on Senate races in South Australia, Queensland and Western Australia, which loom as the key drivers in determining the balance of power in the Senate. Parts two and three, which will be released in subsequent weeks, will examine the impact of an early transition to a market driven price on our forecast scenarios for the Australian carbon price, emissions levels and electricity prices. 

Download the full report for free via the link at the bottom of this page.

Key Findings:

• Should the Coalition win the 2013 federal election, it has said it will abolish the Carbon Price Mechanism (CPM) put in place by the Government under the Clean Energy Act 2011. To repeal the CPM, a Coalition Government would require a majority of 39 votes in the Senate, a difficult prospect in its own right given only half of the current Senate will be up for re-election.  
•  The Coalition’s ability to indirectly control the Senate is likely to come down to 3 key races in Western Australia, Queensland and South Australia, with the Coalition and/or conservative minority parties needing to win all 3 to achieve a cross bench majority.
• Current polling indicates that a weaker primary vote for the Labor Party will have a negative impact on the Greens, with the potential for a seat to be lost in Western Australia, and a prospective seat in Queensland likely to be at risk to the Katter Party.
• With independent Senator Nick Xenophon certain to be returned, the race for South Australia’s final Senate seat looms as a key battle between the Greens and the Liberal Party, with the winner potentially determining the Coalition’s ability to gain a Senate majority.
• RepuTex analysis indicates that an increased swing for Sen. Xenophon is likely to translate into a sizeable flow of preferences to the Greens – potentially enough to deliver a win for Greens Senator Sarah Hanson-Young for the final Senate seat in South Australia. This outcome would place a 40th Senate seat for the Coalition out of reach – and leave Sen. Xenophon with the 39th vote, and the Senate balance of power. 
• Such an outcome would make Sen. Xenophon a logical starting point for the Coalition to begin negotiations on the repeal of the Carbon Price Mechanism, without input from Labor or the Greens – however any negotiated outcome would be subject to Sen. Xenophon’s own demands on the shape of any substituting carbon mechanism.    

Wed, Apr 24, 2013 12:30 PM AEST
(SA 12.00pm, WA 10.30am)

The 30 minute session draws on RepuTex’s update to its Australian Carbon Price Outlook, and will be led by RepuTex’s Head of Energy and Carbon Research, Mr. Bret Harper.

To register free for this webinar, please CLICK HERE

AGENDA
1. INTRODUCTION
2. WHAT IS THE IMPACT OF STALLED EU ETS REFORM ON AUSTRALIA’S CARBON PRICE TRAJECTORY?
3. IS ‘BACKLOADING’ STILL A VIABLE SHORT TERM OPTION?
4. WHAT ARE THE SCENARIOS FOR LONGER TERM REFORM IN THE EU ETS?
5. WHAT DO THESE REFORM SCENARIOS MEAN FOR THE AUSTRALIAN CARBON MARKET?
6. WHAT ROLE WILL EUAS PLAY VERSUS CERS IN AUSTRALIA?

To register free for this webinar, please CLICK HERE

WHO SHOULD ATTEND?
This webinar will be vital for anyone who wishes to gain insight into the impact of the rapidly changing political landscape on future carbon price trends and other key market indicators for the Australian market. Sustainability and carbon specialists, corporate strategists and treasury professionals at liable entities, policy professionals and financial analysts in carbon-exposed sectors or anyone with a specific interest in the future of carbon policy are all encouraged to attend.

Q: What does the failed plan to temporarily remove 900 Mt of emissions allowances from the EU ETS mean for the Australian carbon price?

A: The failed vote in the EU ETS will flow through to the Australian market straight away when trading commences. We have seen price expectations in Australia drop from an average of A$14 from FY16 through to 2020 should the EU vote have passed, back to an average of A$2.70 now that reform has failed, with potential for prices to fall lower in the first year of trading.

Q: How could prices fall even lower?

A: In year one we are likely to see Australian companies swoop on cheap international offsets, meaning that the local carbon price could fall as low as A$1.50 until demand for domestic units catches up to the regulated supply.

From that point we expect the European price will drive the Australian market, however with slightly lower Australian emissions being forecast, that demand may not be as strong as the market previously expected, which will keep prices very low initially.

Q: Do low prices dampen the need for any Coalition Government to repeal the CPM?

A: At those low prices we would anticipate a return to coal generation in the Australian power sector, and along with that we would see wholesale electricity prices fall dramatically.

Renewable generation will stay well supported by the Renewable Energy Target, so to a certain degree, the need to repeal the carbon price in order to keep electricity prices in check is somewhat mitigated now.

While political will to repeal the carbon tax is likely to stay strong, the maintenance of the ETS would provide a good outcome for both industry and electricity consumers, and importantly, we would still expect Australia’s 5% emissions reduction target to be met, at very low cost.

Q: What is the likelihood of longer term reform being agreed to in Europe?

A: We have never viewed the recent EU vote as anything more than a temporary fix – it was always designed to be a stepping stone to broader structural reform in the EU ETS.

Now that the temporary solution has failed, all eyes turn to the EU Commission as it looks to lock down a new emissions reduction target through to 2030 – with the Commission favouring a 40% reduction target from 1990 levels.

Should that be agreed before 2015 – as was determined in Durban – we would see European carbon prices recover, and that recovery would flow though to Australia prior to the commencement of our carbon trading period, however we would not expect prices to rise too far straight away.

RepuTex will hold a webinar on this topic on Wednesday April 24.

To register or for further information, please >CLICK HERE

The European Commission aims to address oversupply in the EU ETS in the short-term before moving to structural long term reforms. The Commission’s proposed short-term fix is to backload 900 Mt CO2-e from the market, meaning the temporary removal of permits, before re-introducing this volume into the market at the end of Phase 3.

We continue to view backloading as a temporary fix – we expect EUA prices to rebound according to the magnitude of reform passed, however any rebound is likely to be short-lived if permits are later returned to the market. Backloading of 900 Mt CO2-e is likely to double EUA values, with prices rising above €10 in the short term before permits are returned to the market in 2019-20.

Impact of EU ETS reform on the Australian CPM

As noted in our April Carbon Price Outlook, the EU vote is being closely monitored by the Australian market, with implications for the Australian carbon price from FY16. Timing and the permanency of any EU ETS reform remains the key watch for Australian market participants, along with the uncertainty surrounding the continuation of the Australian CPM and the detail of the Coalition’s Direct Action policy. The operation of the Large-scale Renewable Energy Target (LRET) also shapes as an issue given potential for the removal of the CPM to spike LGC prices and impact renewable investment incentives unless changes are made to the structure of the penalty price.

Should EU ETS reform be passed, domestically we continue to anticipate that lower CPM emissions through to 2020 (RepuTex Australian Emissions Outlook Q3 FY12-13) will result in CERs shaping the market upon the commencement of trading, with the Australian compliance price to head below A$10 in FY16. EUA prices are expected to drive the market higher from FY17 once Australian emissions allowance demand can no longer be met via offsets. Based on the return of withheld EUAs in 2019-20 we continue to anticipate Australian prices to follow EUA’s down in 2019-20.

Likelihood of a positive vote next week?

Support for reform in the EU ETS has grown over the last month following a close but positive vote in a minor EU committee. That outcome, while encouraging for reform advocates, indicates that next week’s vote is far from a foregone conclusion, with potential for the number of absentees to decide the outcome.

Hungary, Ireland and Slovenia now support the proposal, making 16 nations in favour of backloading, controlling 214 of the 255 votes needed to pass the measure (41 more required). Romania (14), Bulgaria (10) and Portugal (12), which haven’t adopted official positions, look likely to back the plan.

A full market update will provided next week following the outcome of the vote. The update will be accompanied by a webinar on the same topic, to pre-register for that event please contact adam.ford@reputex.com   

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