Australian Carbon Demand in 2015-16

In the September issue of Point Carbon’s Carbon Market Australia-New Zealand newsletter,  Cecile Langevin writes that

[Point Carbon] expect[s] the emitters covered in Australia’s emissions market will have 57 million fewer permits than they need in the year 2015-2016

and

the market price will be set by the international cost of U.N. Clean Development Mechanism (CDM) credits for the first two years, and then by EU Allowances (EUAs) the last three years of this decade.

Based on my rough calculations (below), the Australian market should demand 240-245 MtCO₂-e in 2015-16, and the government’s (official) projections are even higher, so I’m struggling to reconcile that with Point Carbon’s 57 million estimate.

The working: In 2015-16, any (post-abatement) demand for carbon units will need to be met by purchasing either Australian Carbon Units (ACUs, or ‘Australian permits’) from the federal government, Australian Carbon Credit Units produced under the Carbon Farming Initiative (ACCUs, or ‘domestic offsets’), Kyoto-Protocol-approved units (CDM or ‘international offsets’) from abroad, and/or European Union Allowances (EUAs, or ‘EU permits’).

In the (fiscal) year beforehand, 2014-15, any shortfall must be met by ACUs or ACCUs; as the supply of ACCUs is likely to be negligible (<1% of total demand), we can assume the entire shortfall is met by purchasing ACUs from the government. In the government’s Clean Energy Future plan, the Appendix C: Fiscal Tables project expected revenue from permit sales of $8,590 million; at a fixed price of $25.40, that equates to 338 million permits. (The tables contain no projection for 2015-16.)

So: in 2014-15, the government expects Australian emitters to buy 338 million permits (and perhaps a few more offsets). A year later, Point Carbon expects Australian emitters to buy 57 millions permits and offsets. Assuming I’m comparing apples with apples – as always, please alert me to any mistakes in the comments – that’s a pretty big discrepancy!

Which figure is more realistic? As I’m travelling through Germany at the moment I’ll make my life simple and calculate expected total demand for permits as Australia’s total projected emissions (624 MtCO₂-e in 2015, based on 2011 government modelling [PDF] – see Table 2.5) multiplied by proportion of those emissions covered by the ETS – 60% – for a total of ~376 MtCO₂-e.

That’s closer to the government’s figure, but we first need to subtract the free permits from total demand: assuming roughly equal levels of ‘assistance’ in 2015-16 as 2014-15 (based on the “Jobs & Competiveness” expenditures for the appendix C fiscal tables), that’s roughly 130 million permits, leaving uncovered demand of 240-245 MtCO₂-e. Which fits with neither the government’s nor Point Carbon’s sales projections.

Why is any of this important? Price dynamics.

It’s reasonable to assume international offsets will remain cheaper than international permits until at least 2015-16 (latest EUA price: 7.74€  CER credit: 1.49€), and prices in an unfettered market would normally gravitate toward the lowest-cost option. Langevin agrees, writing that

[emitters] are likely to first turn to the cheaper Kyoto credits to close that [emissions] gap, of which they’re allowed to buy some 45 million per year under the new rules.

The 45 million refers to the recently announced 12.5% limit on Kyoto/CDM units; if 45m is 12.5% of total demand, Point Carbon expects total demand to be ~360 MtCO₂-e, which is within the ballpark of my 376 MtCO₂-e estimate. So we all have similar expectations of total market demand (i.e. emissions). But Langevin writes that

when Australia moves to a floating price emissions market in mid-2015, the market price will be set by the international cost of U.N. Clean Development Mechanism (CDM) credits for the first two years, and then by EU Allowances (EUAs) the last three years of this decade

and if participants are only buying 57 million permits/credits/whatever, then, yes, 45m CERs will set the market price. But if they’re buying 240m or more, then, no: then the prevailing price will gravitate toward the EUA price, which is – I think – part of the point of linking the two schemes.

What am I missing?

Update on Monday, October 15, 2012 at 23:46 by MCJ

Updated with links & formatting I wasn’t able to do while travelling.

Update on Thursday, October 25, 2012 at 16:29 by MCJ

I’m now thinking what Point Carbon means is that the Australian firms covered by the ETS will, by 2015-16, have emissions that exceed the Australian ETS’ cap by 57 million. Since there aren’t enough Australian rights to emit (ACUs) going around, to avoid a fine these firms would have to a) abate; b) purchase foreign rights to emit (EUAs); c) purchase domestic (ACCU) or international (CDM) offsets.

Assuming abatement has already occurred, the analysis then becomes about the split of foreign permits and credits purchased, in the context of which the 57m makes more sense; it gels roughly with Treasury’s emissions paths (if you adjust for the new regulatory limits) or Climate Connect’s predictions.