Australia is just two years from implementing an emissions trading regime. Permits are likely to be auctioned to a broad section of the Australian business community, raising up to $6 billion, depending on the size and price of the auction.
By that time, in early 2010, up to 900 corporate entities will need to be able to provide verifiable emissions data. A recent survey conducted by a group of institutional investors found that most Australian companies didn’t have a clue how much they emitted, least of all their suppliers. Someone is going to have to do some pretty fast, and hopefully very accurate, calculations.
Developing a carbon services industry – one that can map carbon footprints and verify emissions data – is just one of the big challenges Australia will be facing as it seeks to meet the Rudd government’s vow to have a carbon trading scheme in force in two years time.
Abyd Kamali, the global head of carbon emissions for Merrill Lynch, says the other major challenge would be the development on IT infrastructure to cope with a cap and trade scheme that would be able to identify individual allowances and carbon credits.
This, he says, was essential if Australia was to develop a scheme that could fit in with the UN framework for carbon abatement, and be compatible with other international trading schemes.
Poor verification and identification – the services market and the IT sector – were two of the biggest weakness of the European trading scheme when it was introduced a few years ago. What started as a strong market fell into a ditch when it was discovered that too many allocations had been issued. And the scheme has struggled with allowance identification issues.
The other major lesson from the ETS was the folly of allocating free allocations to the European utilities who were directly impacted by the scheme. It was thought that this could soften the blow to the utilities and mitigate a rise in energy prices to the consumer. Instead, it delivered windfall profits estimated at some $US20 billion across the continent, and did little to stop energy price hikes.
Australia must wrestle with the same issue. Professor Ross Garnaut, who heads a government review into the new scheme, favours the auctioning of all permits, if only – he argues – to ensure the simplicity, integrity, credibility and transparency of the scheme.
Large carbon emitters such as refiners and electricity distributors argue strongly that permits should be given away, for fear of putting some out of business or causing untenable rises in energy prices.
Merrill Lynch’s Kamali sits between the two schools of thought. He notes that in Europe, full auctioning will only occur in 2013, at the start of the new phase of the scheme. A bill before the US congress proposes only a third of such permits should be auctions.
"Australia would be sticking its neck out to go for 100 per cent auctioning on day one," he says.
"It is unrealistic to go from a standing start … to then suddenly having a scheme that is potentially going to be $6 billion worth of value on day one, requiring every single entity paying to purchase all of its allowances."
Meantime, Merrill Lynch is one of those investment banks keen to participate in the carbon services industry.
Apart from its current involvement in the European trading scheme and future involvement in the Australian involvement, Merrill Lynch has also struck a deal with the Lismore-based Carbon Conservation to help secure a 750,000 hectare forest in the Indonesia province of Aceh.
Merrill Lynch’s initial investment is for $9 million, which provides funds to help protect the forest (with the aid of around 1,000 former Aceh independence fighters), and an off-take agreement for the carbon credits this could generate – conceivably up to $400 million.
“Avoided deforestation” is the next big trend in the fight to contain carbon levels in the atmosphere. Rudd recognized this in his preliminary agreements with PNG, but Merrill is the first investment bank to invest directly in the area.
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