Carbon gap draws buyers

A drop in European carbon permit prices to a record low has widened the gap with Australia's fixed price, driving power generators to look more seriously about buying cheap credits overseas.

European Union emissions permits hit a low of €5.68 ($7.11) a tonne on Tuesday, less than a third of the $23 Australian price, after a delay in a vote by EU nations on a plan to prop up carbon prices, reports The Australian Financial Review.

Even cheaper United Nations-backed permits, known as Certified Emission Reduction units (CERs), also hit a record low, of €0.57.

The yawning price discrepancy has led to interest from Australia companies despite uncertainty over the Australian system, traders said.

Opposition Leader Tony Abbot has vowed numerous times that a Coalition government would make repealing the carbon tax one of its first tasks.

Under changes in the federal carbon framework this year, companies can start buying lower-cost European and international emissions permits to help meet their liabilities after 2015.

"It's a little difficult to see that prices could widen much further, and that's the very motivation why people are starting to think, let's start to get a few in the tin, let's get organised now," said Gary Cox, ICAP's director for energy and commodities in Asia Pacific.

He said that while he didn't know of any companies that had bought EU credits, several had set up systems in readiness. Australia's carbon price is expected to track EU prices from 2015, when the fixed price moves to a traded price linked to the European system.

Dozens of companies including NSW power generator Macquarie Generation, small power retailer Lumo Energy and several specialist carbon traders have obtained licences from Australia's securities regulator, allowing them to trade emissions units.

The advantage of buying European credits is that "there's almost certain to be a market to sell them back into" no matter what happens in Australia, said Deutsche Bank analyst Tim Jordan.

"It really comes down to access to capital and where you think the price is going," he said.

EU nations were due to vote on December 13 on a plan to withhold 900 emissions credits from the market to boost prices.

Deutsche Bank's European carbon analysts Isabelle Curien and Mark Lewis said this week that EU prices are likely to remain under pressure until there is clarity on the timing of the vote, which it expects won't occur until February at best.

Prices could fall below €5 a tonne given the amount of supply that will become available over the next few weeks and the risk of negative political news on the issue, they said.

As of 2015, Australian companies can use foreign permits for up to half their carbon liabilities, including a maximum of 12.5 per cent for CERs.

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