Soaring EUA carbon price

The escalating cost of carbon on the international market makes the Government’s proposed Emission Trading Scheme look like an economic disaster waiting to happen.

The ETS, which was desperately seeking political support at print time, would be exposed to the volatility of the international price of carbon, which reached a high this year of $56 per tonne for EUAs and $45/tonne for CERs.

Catherine Beard, executive director of the Greenhouse Policy Coalition, says these secondary market CER’s are the units most Kiwi businesses will have to buy if the Emissions Trading Bill goes ahead.

“These sorts of prices are going to be a huge challenge for businesses to absorb and maintain profitability, and it is highly likely that many will fail if there is no price safety limit in the emissions trading system, or better protection for trade exposed industry,” she says. We will be at the mercy of the European carbon market, which is the highest priced carbon in the world and where the price is increasingly set by the price of oil and gas. Every business and household in the country will face a new set of volatile energy costs over which they have little control, says Beard.

“When the [energy] minister was assuring New Zealand that the impact of the emissions trading legislation would be ‘miniscule’ – he was basing his comments on the impact of $15/tonne carbon.”

The government has relied on advice that there would be plenty of low priced carbon units available on the international markets and that this would keep the price of carbon low. This hasn’t eventuated, says Beard.

Instead, carbon analysts are predicting that the EUA price will reach €40 ($75.00) this year, she says, and the CER price tends to follow the EUA lead, albeit at a slightly lower rate. “Analysts say these prices will be driven by higher than expected emissions in Europe in 2007, rising oil prices and the inclusion of aviation carbon emissions in the EU scheme from 2011 or 2012.

“Demand for CERs is keeping the price in an upwards direction, due to the continued uncertainty of the future of the market, a tightening of regulations at the United Nations and a shortage of skilled workers to perform validation and verification services, according to market analysts.”

Beard says it should be noted that even in Europe, less than half of the emissions are controlled by the emissions trading scheme and for a country like Ireland, only a third of its emissions fall under the ETS. Generous allocation of allowances to European industry has also shielded it from most of the impact of the charges through to 2013.

“New Zealand seems alone in the world in its determination to put a price on every tonne of emissions at the highest possible price. Unless we get some significant changes to the emissions trading Bill we risk losing industry to developing countries where there will be no price on carbon and lower levels of efficiency.”

 Other nations are taking a more circumspect approach to carbon pricing. “Australia is considering reducing the risk by having one way trading and capping the price of carbon.

“Carbon analysts predict if the US sets up a national cap and trade scheme they will not want to see a wealth transfer outside of the US – so they will have a domestic scheme which allows low cost off-sets (tree planting etc from voluntary markets) to keep their carbon price at a reasonable level.”