How to effectively hedge in the Australian carbon market for 2015? Considering the first domestic permit auction is planned for late 2014, assessing the possibilities and profitability for contracting international units seems to be crucial.
BIAS TOWARDS INTERNATIONAL UNITS
Interesting predictions on big emitters’ attitude in the Australian carbon market for 2015/16 – 2017/18 compliance years can be found in IETA ‘Submission on the price floor for Australia’s Carbon Pricing Mechanism’ of 9 February 2012.
IETA in its submission asserts that there can be observed a 100% bias towards international units in the first few years of the Australian scheme because domestic permits for 2015 are simply not available to anyone in the market until they begin to be issued by the Australian Government. Based on the Position Paper on Auction Design (released by Australian Department of Climate Change and Energy Efficiency) the first domestic permit auctions are slated for late 2014. Until then, according to IETA, the 100% bias for international units will remain.
The submission concerned also points out that the price assumptions will be in light of the minimum requirement to surrender domestic permits for at least 50% of the compliance obligation. That proportion of the company’s compliance obligation will be sourced from auctions, the secondary market, or provided for no cash cost to the company. With a reserve price in the auctions, it is reasonable to expect that prices for domestic permits will not go too far below that level, particularly as they are fully bankable and the Australian carbon market is structurally short.
It should be recalled that the number of eligible international emissions units surrendered for any of the first 5 flexible charge years (i.e. years beginning on 1 July 2015) must not exceed 50% of the person’s emissions number for the year (see: the Australian Clean Energy Act 2011 (Part 6 Simplified outline)).
However, for a fixed charge years (the financial years beginning on 1 July 2012, 1 July 2013 and 1 July 2014) eligible international emissions unit cannot be surrendered.
There are restrictions on the types of eligible international emissions units that can be surrendered. It is noteworthy, however, the Australian carbon market is based on different from EU ETS international unit eligibility rules.
Another important fact is that an eligible international emissions unit cannot be surrendered in relation to the first 3 flexible charge years (2015/16, 2016/2017, 2017/18) unless the person pays the charge imposed on that surrender. The said charge calculation method is currently consulted on by the Australian Government (cf.: Will the Australia’s carbon price floor influence on the prices for international units?)
Surrender charge for international units is designed to be the one of the two main technical components of the implementation of the price floor in the Australian carbon market (as the second will serve the minimum auction reserve price for domestic carbon units).
The core of the conception is that the surrender charge will be based on the difference between the estimated international price for a unit class and the floor price, such that:
• If the price for a class of eligible international unit is equal to or above the floor price the charge will be equal to zero.
• If the price for a class of eligible international unit is below the floor price, the charge will be set at a level in regulations so that it is equal to the difference between the floor price and the estimated price for that class of unit.
So, having this basic information gone through, it may be beneficial to indicate, at least cursorily, the uses of international units in the Australia scheme.