In the period from 1 July 2012 to 1 July 2015 the new Australian emission market won’t really be a fully-fledged cap-and-trade.
For the interplay of emission units’ demand and supply the investors will have to wait until the beginning of the so-called ‘flexible charge period’, because earlier (in ‘fixed charge years’), the amount of the fixed charge per carbon unit will be set by the regulator - at the level of $23.00 in 2012-13, $24.15 in 2013-14 and $25.40 in 2014-15.
Pollution caps restricting the total number of carbon units that are issued each year will be set only as of flexible charge years (i.e. as of 2015), hence the number of carbon units whose vintage year is a fixed charge year will be unlimited.
The adopted approach relates to fundamental issues, and it will have, consequently, many implications for particulars and practical functioning of the Australian scheme in its first years.
As effect many important features of the mature emission market in the ‘fixed charge period’ will be disabled. Among these shortcomings are:
No eligible international emissions units
Eligible international emissions units cannot be surrendered during the fixed charge period.
No possibility for banking
In the fixed charge period free carbon units issued by the regulator to liable entities will be transferable but must be surrendered only in the eligible financial year that corresponds to their vintage year and cannot be ‘banked’ for future use (if not surrendered, will be cancelled at the end of 1 February of the next financial year).
No possibility for borrowing
‘Borrowing‘ will not be allowed during the fixed charge years (a liable entity cannot surrender a carbon unit of a later vintage to meet its obligations for a fixed charge year).
What will be the consequences of the said restrictions for international emission trading? The Australian Government declares in the Commentary on Provisions of the ‘Exposure Draft of the Clean Energy Bill 2011’ of 28 July 2011 that ‘The Government has also stated that linking with the New Zealand and European Union schemes is in Australia‘s national interest.’
In the light of the above circumstances, this declaration for linking seems, however, not feasible before 2015. The inherent market mechanisms will be dysfunctional in the Australian model in the period from 1 July 2012 to 1 July 2015.
Price floor and price ceiling
A far-reaching caution towards market mechanisms in emissions abatement can be observed even in the fully-operational phase of the Australian cap-and-trade, that is in the flexible charge years.
In the first three of these flexible charge years the scope of the Australian emission market will be delineated by a price ceiling and price floor.
According to the above-mentioned Commentary on Provisions of the ‘Exposure Draft of the Clean Energy Bill 2011’ the price floor will operate by a minimum reserve auction price for carbon units and a surrender charge for eligible international emissions units. The level of the price floor will start at $15 and rise in real terms by 4 per cent per year.
The price ceiling on the other hand will operate by the regulator issuing fixed charge carbon units that will be similar to the fixed charge carbon units for the fixed charge period. The level of the price ceiling will be set in regulations at $20 above the international price in 2015-16 and will rise in real terms by 5 per cent per year. The amount of the price ceiling issued in 2016-17 and 2017-18 will rise by 5 per cent in real terms per year, allowing for 2.5 per cent inflation per year, which is the midpoint of the Reserve Bank of Australia‘s target range (that is, the carbon price for the preceding year × 1.05 × 1.025, rounded to nearest 5 cents).
Although it is difficult now to precisely address the impact of these provisions on the international emission market, within the national Australian industry the price ceiling will undoubtedly have an important role of limiting risks flowing from new environmental policies. It is envisioned that to provide liable entities with certainty over the level of the price ceiling, the regulator will publish its exact value in advance of each compliance year. This will allow liable entities to determine the maximum cost of compliance – something that is really lacking in the EUETS.