Głowacki Law Firm

Will the Australia’s carbon price floor influence on the prices for international units?
Monday, 27 February 2012 07:01
Depending on the method adopted for carbon pricing mechanism, the investors and covered entities will potentially have difficult mathematic formulas to analyse.
After the UK initiative of subjecting supplies of fossil fuels used in most forms of electricity generation either to the Carbon Change Levy (CCL) or fuel duty (see: ‘Carbon price floor – managed or marketable price for carbon?’) the Australia’s carbon pricing mechanism represents the another example of implementing carbon price floor – with different methods however.

THE METHOD FOR CARBON PRICE FLOOR

According to the document ‘Price floor for Australia’s carbon pricing mechanism, Implementing a surrender charge for international units’ published in December 2011 (available at www.climatechange.gov.au), hereinafter referred to as ‘Discussion Paper’, the price floor is intended to help reduce downside carbon price risk for investors in low emission technologies. The said carbon pricing mechanism will include a price ceiling and price floor for the first three years of the flexible price period (2015-16, 2016-17 and 2017-18).

It is planned that the implementation of the price floor will be technically done by combining a minimum auction reserve price for domestic carbon units with a surrender charge for international units.

For particulars as regards minimum auction reserve price for domestic Australia’s carbon see point 5 in ‘Australian carbon auctions design – improvement of the EUETS auctioning model or regression?’
Further remarks here relate solely to a second measure mentioned above, i.e. a surrender charge for international units.

‘International units’ in this context may mean CERs for instance but also theoretically EUAs if some form of linking takes place. Any future international units creatively designed in the course of international negotiations following Durban conference are also potentially at issue.

The Australia’s Government in the above document explains that the surrender charge will be based on the difference between the estimated international price for a unit class and the floor price, such that:
• If the price for a class of eligible international unit is equal to or above the floor price the charge will be equal to zero.
• If the price for a class of eligible international unit is below the floor price, the charge will be set at a level in regulations so that it is equal to the difference between the floor price and the estimated price for that class of unit.

As the reader can guess the issue is not simple and when it comes to details, the technical difficulties associated with the practical implementation of each of identified pathways are huge in my opinion.

OPTIONS – THE CATALOGUE STILL OPEN

As follows from the Discussion Paper four basic options for implementing the surrender charge on international units there were identified so far. They are outlined below, for the details, however, readers should refer to the original document. Moreover, the Australia’s Department of Climate Change and Energy Efficiency continues to consult with stakeholders on the these options and stakeholders are still encouraged to make submissions on their views (the deadline for all submissions lapses on 9 February 2012). There may occur, therefore, further options in near future.


The first of the said options sets a surrender charge for a given class of international units based on the actual price paid for that unit. The Discussion Paper gives an example of a person which  surrendered an international unit purchased for $14, he/she would pay an additional $1 charge if the floor price was $15 on the day the unit was surrendered.


 

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