MEDIA RELEASE – Removal of Floor Price to Stymie CFI Offsets

Posted on: 16.08.2012

Removal of Floor Price to Stymie CFI Offsets

RepuTex: Influx of international permits to reduce local supply

MELBOURNE – August 16, 2012. A study released today by carbon analytics firm RepuTex indicates that the removal of the Australian carbon price floor would constrain investment in Australia’s domestic carbon offset mechanism, the Carbon Farming Initiative (CFI), putting a dent into local supply.

According to RepuTex modelling, even with the floor price in place, the CFI is expected to deliver only 4 to 5 million tonnes of carbon offsets per year by 2020, more than three times less than the Government’s estimated 15.1 million tonnes of offsets by the same period.

Should the floor price be removed, investment in new projects will be further limited, with pre-existing projects likely to be the main source of offset supply.

“A key objective of the Australian carbon price floor is to underwrite demand for domestic Australian offsets such as those derived from the CFI, with supply of local credits to be bounded by the carbon price floor,” said RepuTex Executive Director, Hugh Grossman.

“Even with the compliance limit on the import of international emissions offsets known as CERs set at 50 per cent, it is likely Australia’s CFI will be constrained by the low price of CERs. We estimate 4.6 million offsets per year will be available from the CFI in 2020, as low CER prices will provide cost effective abatement up to the 50 per cent limit for CERs being used by liable entities to meet their total liability each year.”

“Once we remove that price floor, the CFI will effectively be undercut by cheaper permits imported from Asian markets,” said Mr Grossman.
Australia’s domestic abatement scheme is designed to facilitate the production of emissions reduction credits largely from the agriculture, forestry and waste management sectors. From 2015, Australian firms will have the option of purchasing abatement credits from the Australian CFI or internationally.

Australia’s carbon price is fixed for the period 2012-15, with a floor price starting at $15/tonne and rising with inflation currently planned to be in operation for the initial three years of the floating price period (2015-18). The operation of this floor price would partly shield the Australian carbon market from international price pressures, with international carbon credits presently trading at around AUD$3.50.

RepuTex estimates that by 2020, Australian firms will be required to purchase 155 million tonnes of emissions reductions annually. The Department of Climate Change and Energy Efficiency estimates around 10% (15.1 million tonnes) of these reductions will be supplied through the CFI, however RepuTex modelling now places this figure at just under 3% (4.6 million tonnes).

If the removal of the floor price were to be accompanied by a tighter restriction on the volume of CERs imported into Australia, or a tie up with global carbon markets, RepuTex notes that the picture would drastically change for the domestic CFI market.

“Should a tighter restriction on the volume of CERs imported into Australia be brought in, we would see much stronger price support for the CFI and a greater incentive to invest.

“At this point, the removal of the 2015-18 price floor would put the cost of generating offsets from domestic projects well above CER spot and futures prices, which will limit their appeal to compliance buyers. As we have seen in New Zealand, the value of domestic forestry units has effectively been capped by the price of CERs, which has resulted in low take up of those domestic units.

“If the Australian carbon price rises through a tighter limit on the use of international offsets we would see stronger domestic demand for CFI permits, which would drive supply of farming credits in the local market,” said Mr Grossman.

Hugh Grossman is experienced in all forms of media and available for interview. Copies of the full report are available upon request.

Media Enquiries
Adam Ford, Associate Director – Marketing
RepuTex Australia
Ph. (03) 9654 7099 | mob. 0425 320 533
Adam.ford@reputex.com

About RepuTex

RepuTex is Asia-Pacific’s foremost source of carbon market intelligence and a leader in the pricing of firm-level carbon liabilities.

The company supplies corporate, trading and capital markets firms with carbon market benchmarks and price information to assist customers make sound trading, reporting and business decisions.

RepuTex has offices in Melbourne and Hong Kong and has 15 analysts globally with backgrounds in energy, commodities, CDM and environmental markets.

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