Australian Carbon Market May Face Supply `Squeeze,' Lawyer Says

By Angela Macdonald-Smith

Aug. 8 (Bloomberg) -- Australia's carbon-trading market could be vulnerable to a ``squeeze'' in supply in the early months of operation unless constraints are put in place to limit purchases, a lawyer at Baker & McKenzie LLP said.

A few buyers could purchase ``very large'' volumes of permits in auctions at the outset of the trading system, driving up the price, Martijn Wilder, a partner at the law firm, said at a seminar in Sydney today.

The Australian government last month outlined plans for an emissions-trading system to start up July 1, 2010, that will cover about 1,000 businesses each producing more than 25,000 metric tons of carbon dioxide a year. Companies other than the 1,000 will be able to buy permits in auctions.

``The reality is that it is an open market,'' Wilder said. ``There is the opportunity for people to go in and buy large numbers of permits and trade them'' unless regulatory constraints are put in place, he said.

The Trade Practices Act should help prevent ``gaming'' of the market, while the government may also consider restricting ``banking'' of permits in the first year, Wilder said. The government may put in place regulations that prevent purchases by companies outside Australia or require Foreign Investment Review Board approval, he said.

``Banking'' of permits involves buying and hoarding permits for use in future years.

Lower Prices

Initial over-the-counter trading in Australian carbon permits started in May at a price of A$19 ($17.01) a ton in a transaction between AGL Energy Ltd., the nation's biggest electricity and gas retailer, and Westpac Banking Corp. Trades have since been done at prices of as much as A$21.50 a ton, still less than half the price of similar contracts in the European Union market on London's European Climate Exchange.

A price cap in the early years of the trading system, as proposed by a government Green Paper last month, and the ability to carry forward any shortfall of permits into future years should help prevent a squeeze, said Craig McBurnie, environmental markets director at ABN Amro Holding NV's Australian unit.

The Australian Financial Markets Association proposes that no single party should be able to accumulate more than 25 percent of an auction amount, McBurnie said.

``We see that as potentially being a short-term circumstance that might run for a couple of years, but just to make sure that the scheme and the activity is bedded down and the market goes on and behaves in a somewhat predictable manner,'' he said.

The ability for companies in Australia to purchase United Nations certified emission-reduction credits, or CERs, to help meet their carbon commitments may help cap prices of Australian carbon permits, Wilder said. CERs, generated by UN-accredited emission-reduction projects in developing countries, are trading at about 19-20 euros ($28.94-$30.47), he said.

``If the Australian price is A$19 there will be no incentive to buy those, but if the Australian price is up above that there may be some incentive,'' Wilder said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net.