Though the finer details of the upcoming emissions trading scheme are slowly being filled in, one remaining unknown — the price of carbon — is a particular concern for businesses.
According to Clayton Utz partner Graeme Dennis, who presented at a carbon markets seminar forming part of the firm’s “Risky Business” conference last week, difficulty in forecasting the price of carbon is making it hard for businesses to prepare for the scheme’s implementation.
“The market price [for carbon] will be mostly driven by supply and demand and the features of the scheme, but [businesses] are unlikely to have an opportunity to actually trade permits until 2010. So they’re not seeing and price signals from the market yet and their concerned about what the price impact on their business might be,” he said.
Dennis has, however, identified some mechanisms, such as carbon hedging and carbon price swaps, which could help businesses manage this uncertainty.
Carbon hedging would involve emission intensive businesses such a power generators which currently hold only coal-fired plants, diversifying their portfolios by investing in a number of lower emission plants, such as wind-powered plants.
If the price of carbon turns out to be higher than predicted, Dennis said, then the emission intensive businesses would suffer, while the lower emission businesses would benefit. Conversely, if the price ends up being lower than expected, the coal-fired plants would be advantaged, while the wind-powered plants would be disadvantaged.
“It really involves business having a foot in both camps,” Dennis said, explaining that strategy could also be implemented by high-emissions businesses which are not directly caught by the scheme, but could be indirectly affected by high electricity prices being passed down by producers.
“If [those businesses] have some hedging investment in a low emission technology or low emission business that is going to be advantaged by a high-carbon price, then the two offset each other,” he said.
Another option for businesses who don’t want to diversify their own investments, Dennis explained, is to engage in carbon price swaps. This would involve a high-emission businesses which would suffer from high-carbon price, entering into agreements with low-emission businesses which would suffer from a low-carbon price. The high-emission businesses agree to pay the low-emission businesses if the carbon price turns out to be below an agreed price, and vice versa if the price turns out to be above the agreed price.
“By that mechanism, the person investing in a new, low emission business is effectively underwriting or protecting their forecast about what the carbon price will be,” he said.
While uncertainty about the price of carbon is perhaps one of businesses’ greatest concerns, the Garnaut Emissions Trading Scheme Discussion Paper, released late last month, has also raised some other concerns for clients, Dennis said.
One of the paper’s more controversial recommendations is that all permits for emissions should be auctioned off, with no free allocation given, meaning business caught under the scheme would be required to pay for all rights to emit.
“I think [this] is a concern if you’re an emissions intensive business with a right to emit at present,” Dennis said. “If that right was taken off you without compensation and suddenly you had to pay for your emissions on the open market, that’s a very large value shift from you to the government.”
Dennis also raised the issue of whether the right to emit could be considered a property right. “If emission rights are property, you could wonder about the constitutionality of taking away those rights away without compensation,” he said.