The world's first regulated carbon market—the New South Wales Greenhouse Gas Abatement Scheme—recently rounded the corner on its second compliance deadline. The Ecosystem Marketplace checks in on carbon trading down under. Those familiar with the world of carbon trading will tell you: Europe is king when it comes to developing regulated markets for trading carbon credits (see EU Emissions Trading Scheme turns One). The world's first regulated carbon market, however, arose in Australia. More than two years before the first trade ever took place in the European Union Emissions Trading Scheme, New South Wales (NSW) launched the NSW Greenhouse Gas Abatement Scheme on January 1, 2003. The scheme is still going strong, with the price of carbon credits doubling since its launch. Trade was especially brisk during the first few months of 2006 as companies collected the certificates they needed to present for the second compliance deadline on March 18th. Christopher Spangaro, general manager of the scheme, says he anticipates all of NSW's energy producers will have met their targets. In fact, the scheme has been considered such a success that the NSW government recently announced it would extend the program from its current end date of 2012 to 2020. But the program's architects are really waiting on a bigger prize: the launch of a national emissions trading scheme.
Starting From Scratch
In structuring the world's first regulated carbon market, the architects of the NSW Greenhouse Gas Abatement Scheme say they were driven by the desire to create a flexible, market driven system that would allow energy producers to choose from a suite of emissions solutions. Inspired by the US experience with trading sulphur dioxide, Kim Yeadon, a former state minister for the environment and the primary political architect of the scheme, says: "One of the good things about the system is that it didn't dictate outcomes for energy producers—it was the people on the ground who could choose how to gain the most efficient emissions abatement." The NSW Greenhouse Gas Abatement Scheme is a state-level program designed to reduce emissions from the energy sector through carbon trading. Under the scheme, NSW energy producers are bound to emit no greater then their share of the NSW per capita emissions target. The target was set at 8.65 tonnes of CO2 equivalent in 2003, decreasing by about 3% each year thereafter through to 2007, when it will remain at 7.27. The state's annual emissions target is apportioned to producers based on their share of the energy market. Energy producers exceeding their allotment of emissions can offset them either by surrendering NSW Greenhouse Abatement Certificates (NGACs) purchased from others in the scheme, or by paying an $11/tonne fine. NGACs can be created through emissions abatement schemes, including:
- Low-emission electricity generation, or improvements in existing generation efficiency
- Demand side abatement – including initiatives such as the distribution of low energy light bulbs and the like
- Large-user abatement – or abatement activities carried out by large electricity users designed to abate emissions not directly related to electricity consumption, and
- Carbon sequestration through forestry.
The scheme is administrated and regulated by the State's pricing and licensing regulator for the utilities, the Independent Pricing and Regulatory Tribunal, which runs an online registry of the holders of certificates. There are some five brokers and seven principle traders in the market.
Where Things Stand
Market volume still fluctuates fairly unpredictably under the NSW scheme—one large deal can put the monthly volume up above 1,000,000 certificates traded, although that generally only happens once a year—usually in February. Moving into the 2003 compliance period, the market saw record trades of close to 4,000,000 certificates in February—close to A$63 million in carbon deals in one month. The spot price of a NSW Greenhouse Abatement Certificate (NGAC) is trading up to the A$15.71 level, just shy of the A$11.00 penalty for not having one, after tax has been taken into account. But according to Ken Edwards, a broker at Sydney-based Next Generation Energy Solutions, forward prices are trading well up on that. "Prices started at about A$6 when the scheme started, but we've recently seen deals that settle early 2010 trade at A$17.10," says Edwards. "The spot price is trading lower than the fine, but the forward price is above that so the market is anticipating that the fine will go up," says Edwards. At the same time, prices are also likely to increase for a number of other reasons—demand will increase as abatement projects grow more expensive—after early "low-hanging-fruit" abatement projects are used up. Also, an oversupply of NGACs in the early years of the project is likely to run dry over the next few years, so the government will have to begin looking at approving new types of abatement projects, and freeing up players on the supply side. "I think the government has a good handle on supply and demand levels," Edwards says, adding that he thinks the NSW government is wary of not repeating what happened in the federal market for renewable energy certificates. Under a federal scheme, alternative energy producers could claim renewable energy certificates (RECs) for creating renewable energy capacity. But the government failed to raise the value of RECs as steeply as the market was anticipating, so prices collapsed. "I think the government is orchestrating a steady as she goes policy with the market, looking for a target of about A$20/tonne," says Edwards. Even as the market has worked to find its feet in its first three years, observers say the scheme has had a number of positive consequences for the climate change industry in NSW. For instance, proceeds from the NGGAS have been used to fund energy saving initiatives through local councils, such as the distribution of A$270,000 worth of water-efficient shower heads and energy smart light bulbs in Tweed Heads in the north of the state at the end of last year. As far as carbon sequestration is concerned, it is gathering pace, but slowly. The only supplier to have actually delivered NGAC's created through carbon sequestration is Forests NSW, the government forestry agency. Forests NSW sold some 65,000 NGACs in 2005. Last April, energy producer Country Energy and forester CO2 Group signed a deal to provide 30,000 hectares of Mallee eucalypt planting in rural NSW. The contract is to provide 3.2 million tonnes of carbon pollution offsets—making the contract worth about A$41 million. Other deals are also in the pipeline, but many in the market have been waiting for the formal ratification of the extension of the scheme beyond 2012 – which has yet to pop out of parliament.
A Lonely Road
While the formal ratification of the scheme's extension looks probable at the state level, the real prize chased by market advocates—a national trading scheme—does not. The Premier of NSW, Morris Iemma, wrote to the federal Prime Minister in November last year requesting a summit to discuss a national carbon market. Mr Howard has not yet replied, but some signs indicate the feds may change their tune—if slowly—in the future. Late last year Australia's Environment Minister, Senator Ian Cambell, finally declared the debate about climate change to be over. It is time, he says, for action. Theoretically, action could come in the form of a national emissions trading scheme based on the NSW model. But the NSW scheme was the brainchild of left side politics, and it would be difficult to conceive of the Howard government adopting the idea in its current form. Yeadon thinks it a shame that the structure of the scheme hasn't already been replicated across Australia's states, but notes, "To his credit, the NSW Premier at the time [in 2003] took the scheme to the national forum for state and federal political leaders, the Council of Australian Governments, with extensive modelling which showed how the system would impact the country's greenhouse gas emissions if adopted nationwide. But all the other states rejected it." "We did it in spite of everything speaking against it," remembers Yeadon. Now, after establishing a successful track record, NSW is again trying to get the federal government to adapt the scheme nationwide—but it continues to be a struggle. "The NSW Government believes a market-based approach is needed to tackle the problem of carbon emissions," explains Iemma. "Such a scheme would provide greater business and environmental certainty for Australia." Indeed, Iemma argues the success of the NSW scheme has already fuelled a significant shift in the business sector's opinion of emissions trading. And so the time has come, he says, for his country to take up the fight on a national level: "There is only so much we can do on our own…Climate change is a global problem and we need to cooperate internationally, which requires a national approach." Mike Hanley is a Sydney-based freelance financial journalist. First published: April 20, 2006