News: Market Update: IN BRIEF
1. Carbon Price to Enter New Zealand: MARKET REVIEW
After extensive debate and policy setbacks, the New Zealand Government is pressing ahead with an Emissions Trading Scheme (ETS) which was effectively implemented for the forestry sector in 2008. This ETS is being introduced through a staged process, with heavy industries, power generators and transport joining the scheme from July 2010 whilst the entry of agriculture has been delayed until 2015.
The scheme will have a ‘transition’ phase for the first two and a half years during which the price of domestic permits (NZU) will be fixed at NZ$25/tCO2-e. Another important feature of this transition period is that participants will only be required to surrender one permit for every two tonnes of emissions.
Similar to the proposed Australian CPRS, emissions intensive trade exposed (EITE) industries will be receiving free allocation based on an output intensity basis and will be made to eligible industrial activities at either 60% or 90% of the emissions baseline, phasing out at 1.3% per annum from 2013. For agriculture, the level of assistance will comprise 90% of the emissions baseline. The stationary energy, liquid fossil fuels and waste sectors will receive no free allocation. As well as facing direct permit costs, many firms including those from non-ETS sectors, will face significant cost pressures arising from higher energy and supply chain costs. The New Zealand Treasury forecasts that the immediate impact of New Zealand’s ETS will reveal a 5% increase in the price of electricity, and four cents per litre increase in the price of petrol. These increases are expected to double from January 2013 with total increases of 10% in electricity and eight cents per litre for petrol, solely from the ETS. Such price hikes could potentially erode company value.
For instance, Fonterra has indicated that the ETS will cost the company NZ$38 million in 2011, rising to NZ$107million in 2015. This has cost increase implications for Fonterra’s downstream customers. Around 34% of such expenses will result from higher energy prices and there are concerns that the ETS could affect Fonterra's competitiveness within the international dairy market, a number of its rivals are not subject to carbon pricing.
Companies capitalising on the opportunities of the NZ ETS include Westpac NZ which aims to package and sell carbon credits on the behalf of forest-owners. Although the market remains quiet with prices currently quoted in the NZ$17-18 range, the demand for domestic offsets is set to escalate post July.
Aside from establishing carbon emissions baselines and preparing mandatory reports for submission in December 2010, NZ ETS companies also need to configure their carbon trading and hedging strategies. NZ ETS liable parties can use international offsets such as CERs and ERUs. During the transition period, given the cap price of NZ$25 has created a floor for NZUs, there may not be a requirement for companies to consider the more expensive CERs. However given the CER curve is in backwardation, more astute companies, particularly power generators with long term hedging strategies, would be well placed to purchase cheaper CER vintages and bank them for future compliance needs.
Given the higher energy costs, it is a necessity for all companies to measure the carbon emissions embedded within their supply chain and evaluate likely cost price increases for key inputs such as raw materials and transport. More proactive supply chain carbon risk management is required when considering supply chain contract negotiations and cost pass through capacity. To gain competitive advantage, best practice companies also need to determine the relevant industry benchmark and measure their performance and liability.
2. Tougher Emissions Reduction Targets and Caps for EU ETS
The EU member states are considering an increase in their mid-term emissions reduction target and as a result toughening the EU emissions trading scheme (EU ETS). This proposal would deepen EU’s current 20% under 1990 level target to 30% by 2020. This comes despite a lack of regulatory progress in other developed nations such as the US and Australia. As part of this proposal, the European Commission would consider imposing a carbon tax of €30/tCO2-e for sectors not covered under the EU ETS such as transport or agriculture. The Commission is advocating for the introduction of a ‘multiplier’ for the surrender of international offsets such as CERs for the purposes of compliance under the EU ETS. This could mean that for every tonne of CO2-e emitted by an installation under the cap, two offset credits would need to be surrendered. Analysts expect a tougher ETS cap to result in higher carbon (EUA) prices. The EU Commission’s final report is expected to be released by the end of May 2010.
3. EMERGING MARKETS – China, India, Brazil & South Africa to Recast Climate Equity Debate in June
The ‘BASIC’ group of India, China, Brazil and South Africa will hold a special meeting in June to discuss climate equity issues. This comes in light of developed countries calling to remove the principle of ‘historical responsibility’ embedded in the current UNFCCC (UN Framework Convention on Climate Change).
The UNFCC at present recognises the fact that developed countries have been primarily responsible for global greenhouse gas emissions. With a universally accepted cap on how much greenhouse gases (GHGs) can be emitted without raising global temperatures, the historical emissions restrict the current space available for developing economies to increase their GHGs to achieve economic growth. In this context, the embedded principle of historical responsibility puts pressure on the developed countries to either vacate the excess carbon budget they continue to occupy or to compensate the developing countries with technologies and funds to find a cleaner route to achieve higher economic goals.
4. GLOBAL - Ocean Acidification Rising at Unprecedented Rate: REPORT
Absorption of atmospheric carbon dioxide emissions by the oceans is negatively impacting its chemistry and ecosystems. Oceans generally absorb up to one third of carbon dioxide emissions and a recent study by the National Research Council in the US found that with absorption rates of more than 1 million tonnes of carbon dioxide an hour, oceans are becoming more acidic. According to James Barry, a senior scientist at the Monterey Bay Aquarium Research Institute in California, “Acidification is changing the chemistry of the oceans at a scale and magnitude greater than thought to occur on Earth for many millions of years and is expected to cause changes in the growth and survival of a wide variety of marine organisms, potentially leading to massive shifts in ocean ecosystems”.
With clear impacts already seen, concerns are also aggravated by the fact that surface water acidity levels are already higher in some areas, and that the ocean’s natural capacity to restore healthy pH levels is impaired given the rate of increasing atmospheric CO2 concentration levels.
In the National Research Council’s report summary, the Committee’s recommendations for an effective national ocean acidification program included an emphasis on quality research to address data gaps, and the development of tools to support it. It was suggested that the program involve robust communication and coordination at all levels and between various parties. Legislation and effective program management also play a pivotal role in reaching wider goals.
