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Australia scraps carbon tax a year earlier than planned

A proposal to replace Australia’s deeply unpopular tax on carbon emissions with a market-based trading system a year earlier than previously planned has been given a lukewarm response from industry

But Australian carbon dioxide (CO2) emission permits, initially expected to trade at deep discounts to EU Allowances (EUAs), will offer a range of trading and speculative opportunities for investors.

Prime minister Kevin Rudd has said that he wants the fixed price on carbon emissions to end on 30 June 2014, instead of 2015 as had been outline in the initial plan. A floating carbon price, or emissions trading scheme (ETS) that will be linked to the European carbon market will start the following day.

The move is expected to see a sharp decline in the cost of carbon from an estimated A$25.40 ($23.32) per tonne in July 2014 to around A$6/tonne, saving polluters billions of dollars in carbon costs. The carbon price is set now at A$24.15/tone.

The carbon tax was the centerpiece of former prime minister Julia Gillard’s strategy to cut carbon emissions. Rudd regained the leadership position after ousting Gillard in a party coup last month.“It will help in the short-term but the (oil and gas) industry would prefer it to be abolished,” Graeme Bethune, chief executive of Australian-based consultancy EnergyQuest, told Petroleum Economist.

The Australian Petroleum Production & Exploration Association (APPEA), an industry association, says carbon pricing is an unnecessary burden that harms the competitiveness of Australia’s liquefied natural gas (LNG) export industry.

Many analysts, though, say the additional cost associated with the policy is not enough to be a deal breaker for LNG projects. Moreover, most LNG plants will be compensated, as a trade-exposed industry, for around two thirds of their emissions.

Australian LNG producers also argue that domestic carbon pricing penalises gas as a clean energy source. APPEA estimates that for every tonne of CO2 associated with the production, export and consumption of Australian LNG, up to 9.5 tonnes are avoided in customer countries when the cleaner burning fuel is used in place of coal.

Rudd’s decision to kill off the tax, which narrowly passed into law with the support of the minority Greens party, is his most significant policy change since coming back to power. But regular policy changes threaten to undermine investment confidence in Australia’s capital-intensive industries, particularly LNG.

Businesses now face a period of limbo – at least until national elections expected in September – before it is clear whether Rudd’s latest proposal will actually be implemented.

Rudd’s new carbon plan is reliant on his centre-left Labor Party winning the election and getting support from the Greens. The latest polls show Rudd’s party neck and neck with the Liberal-National conservative opposition. But Rudd’s carbon plan, aimed at neutralising widespread opposition to the tax, could be his undoing.

Christine Milne, leader of the Greens, criticized Rudd for what she said was a shortsighted decision to sacrifice the environment in order to score political points with the electorate. Her party’s support was instrumental in allowing Labor to form a minority government after a poor showing in the 2010 elections.

Irking Milne, Rudd has proposed budget cuts of nearly A$4bn, which includes slashing environmental programmes, to balance state coffers if the carbon tax is abolished. Several clean technology schemes will face the axe, including investments in carbon capture and storage. 

At the other end of the spectrum, the opposition Liberal party has promised to scrap the carbon price altogether if it wins. Tony Abbott, leader of the opposition coalition, dismissed the ETS as a “so called market in the non-delivery of an invisible substance to no-one.”

But political analysts believe Rudd’s move, although it creates uncertainty, will make it tricky for Abbott to alter the carbon legislation by next February, when the auction of emissions permits is due to start.

Deep discounts

Because of the earlier start for the ETS, permits are expected to be priced at levels even less than than those in Europe as lower emissions in Australia trigger lower demand.

Melbourne-based carbon analysts RepuTex forecast permits will trade 30-40% lower than European prices for the first two to three years – with parity between the markets unlikely until later in the decade, when pricing will be driven by European policy.

According to RepuTex, the lower emissions in the Australian market can be attributed to the LNG sector, with new projects now unlikely to be online by 2014 when the new carbon market would open. "If we bring forward the ETS by one year, the Australian carbon market would look very different, particularly in the LNG industry where major projects such as Australia Pacific and Gladstone LNG, scheduled for a 2015 start, would be yet to come fully online,” Hugh Grossman, executive director at RepuTex said.

The early start to emissions trading would see the Australian carbon price open at A$6.50-7.50 for the financial year ending June 2015, around 35-40% under the European price, forecast to be about A$12 over the period, data from RepuTex shows. EUAs are now trading at just over €4 ($5.23).

"With the early ETS a possibility, the key thing to watch for the local market now becomes the growth or decline of Australian emissions, particularly related to electricity generation and major LNG projects such as Arrow and Browse LNG, both of which may be at risk of delay due to competitive pressures in the US and China,” added Grossman.

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