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Carbon Trading Takes Another Step Toward Reality

Australia | Jul 23 2007

By Greg Peel

At midday today, the first trading in carbon emissions will occur on the Australian Climate Exchange, in a joint venture with the Australian Pacific Exchange based in Melbourne. The APX was established eight years ago and received a stock exchange licence in 2004.

The specific emission product traded will be the federal government-approved Greenhouse Friendly Voluntary Emission Reduction (VER) certificate. The contract will trade on a specification of 100 tonnes of carbon dioxide equivalent.

While each state in Australia has developed its own form of carbon offset certificates, and dollar values have been ascribed to those products to date, this move will allow the first official price discovery of what one assumes will become the precursor for a federal government mandated (as opposed to voluntary) carbon offset. The present government has announced it will introduce a cap-and-trade scheme for carbon emissions at some point in the future, although to date there has been no indication of a specific emission reduction target nor the process by which vital industries will receive concessions as carbon trading ramps up. Both of those factors will ultimately be crucial in determining a price for one tonne of carbon dioxide equivalent.

In issuing VERs, the government does not assume a carbon price. Hence a value can only be established when a carbon producer seeks to offset emissions by purchasing certificates from a carbon reducer. While there will be a finite number of VERs on issue as trading commences on the ACX, the supply side is effectively open-ended. The government will issue any number of VERs as it sees fit. However, there is an arduous process of certification. Those companies claiming to reduce the amount of carbon emitted must satisfy stringent evaluation. For that reason (and given the current rush underway for companies to acquire VERs, clogging up the system) the market will reach a price on carbon that reflects what is effectively a limited supply.

In speaking with FNArena, ACX managing director Tim Hanlin noted that the current VER is not necessarily the specific template for carbon certificates that may be created for a national mandated trading scheme. The ACX intends to “evolve” however, complying with what ever changes emerge. Hanlin did agree that any government would look closely at trading activity that was already occurring in determining the specifications of such a contract. In other words, the cart will likely lead the horse.

Hanlin suggested that the ACX has been created not on a whim, but in order to satisfy a need that industry has specifically flagged. While there will no doubt be those slow to move, there are no excuses for waiting around to find out just what scheme this government might come up with. And there is every chance it could be a new government setting the rules. Industry is keen to be active rather than passive in the development of an Australian trading scheme. The world has accepted climate change, and accepted that an international carbon trading scheme will one day exist. In the mean time, there is no pointing in receiving a cost shock some time next year. It is also beneficial from a public perspective to be seen to be doing the right thing.

Prior to the official establishment of a mandated system, the ACX contract will provide a price indicator for a tonne of carbon. There will be many factors that will ultimately affect that price as we move to a mandated system, including which government we’re dealing with, what level of emission reduction is set and what concessions are offered. Hanlin notes that in Europe – the most developed carbon trading region on the globe – voluntary certificates still trade actively alongside mandated certificates.

The ACX has made the first move to become the centre for the physical exchange of Australian carbon certificates, and intends to be a leader in the Pacific Rim. The Sydney Futures Exchange is ready to go with a futures contract over whatever carbon contract ultimately transpires. Financial dealers and brokers around the country are ready to whip the dust covers off their new carbon trading desks. There is little doubt that carbon trading will ultimately become big business in Australia, and around the globe.

The ACX will publish trading information on its website

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