(EnergyAsia, December 4 2012, Tuesday) — Australian companies are at risk of a double hit from increased costs for carbon and renewable energy credits, said consulting firm RepuTex.

The carbon cost alone could amount to as much as A$3.7 billion over the next four years under the Federal price mechanism scheme if proposed policy changes to the European emissions trading scheme are ratified. (US$1=A$0.96).

RepuTex expects Australian carbon prices to trade at an average over 93% percent higher between 2016 and 2019 if no European policy changes were made.

“With the European Commission’s proposal to remove 900 million carbon units from the European market being towards the upper end of market expectations, it will materially impact Australian prices”, said RepuTex Associate Director Paul Bourke.

In September, Canberra announced it would link the local carbon market to Europe’s, ensuring Australia would be a price follower when its fixed-price regime ends in 2015.

The proposal floated overnight by the European Commission is for 900 million permits to be removed from the European market, with those permits expected to be returned to the market from 2020.

“The effect of this would be an immediate spike in European prices, flowing through to Australia from the end of our fixed price period, but with prices falling to around present levels when those permits come back in,” said Mr Bourke.

RepuTex is now forecasting an Australian carbon price of more than double its previous business as usual forecast for 2018 of over A$18, before falling sharply back towards $9 by 2020, as the back-loaded 900 million tonnes of permits is re-introduced to the European market.

Should permits be cancelled and not re-introduced, as the preference of the European Commission and key states, the UK and Germany, prices are likely to remain high according to RepuTex projections.

Australian companies are collectively likely to be paying around A$3.7 billion more than they would without any European intervention, said RepuTex.

As a follow through, the carbon market analytics firm predicts that a lower-than-expected Australian carbon price could result in a significant rise in the price of large-scale generation credits (LGCs), created under the country’s Renewable Energy Target (RET), with LGCs trading as high as A$65 per MWh in 2020.

In October, the Federal government’s Climate Change Authority (CCA) published a discussion paper, ahead of the release of its review of the RET, which sees LGC prices coming down to near zero by 2026, as the carbon price rises high enough to fully meet the cost of renewable energy. The paper theorised that a high carbon price would replace the need for renewable generators to sell LGCs to subsidise the cost of building and operating new clean energy plants.

In its analysis, the CCA assumes a local carbon price of A$29/t CO2-e in FY 2016 when Australia moves to flexible price trading and links with the EU Emissions Trading Scheme (ETS), rising 5% per year thereafter.

RepuTex disputes the conclusion calling the government’s carbon price forecast “overly optimistic”.

Instead, the local carbon price will likely fall due largely to policy influences from Europe as Australia will become more linked to the continent’s market from FY 2016, said Mr Bourke.

“Given the current magnitude of the oversupply of carbon allowances in the EU ETS, we believe that, even with a tightening of permit supply in Europe, as per current policy proposals, carbon prices in Australia are likely to trade at an average of A$16/t CO2-e between 2016 and 20, meaning that renewable generators will continue to rely on selling renewable energy credits to energy retailers to meet their costs.”

Using its “more moderate” carbon price scenario, RepuTex said LGC prices will retain their value, reaching a high of around A$65 per MWh in 2020, with the carbon price not expected to displace renewable energy credits before the RET expires in 2030.

“Should the EU Commission backload permits in the EU ETS, we will see the Australian carbon price temporarily rise, then fall again as those withheld permits are returned to the market towards 2020,” said Mr Bourke.

“Without that high carbon price to do the heavy lifting, Australia’s RET will remain the key driver of investment in renewable generation well beyond its scheduled shelf-life to 2030.”