Carbon trading around the world will grow to more than $US150 billion in the next few years, analysts say. But the number might turn out a bit lower because of recent developments in Australia, where the government recently decided to delay the next stage of the nascent carbon market until after 2010. The decision effectively made the one-year old carbon market disappear in thin air within minutes.
The Australian government was motivated by giving industry a temporary "breather" due to turbulent economic times. This not only led to the unanimous action by traders to erase bids and offers for carbon off their screens, but it also resulted in a 10% drop in electricity prices for delivery after July 2010, the date at which the market had originally been scheduled to start. That margin was the carbon cost traders estimated companies would have to pay to offset carbon emissions.
The numbers, even though nothing spectacular on a global scale, told a story that insiders say they desperately needed to see whether they were doing the right thing or not. What's more, the delay will amount to costs as high as the technological investments needed to prevent carbon emissions.
Even though only less than one million tonnes of carbon had been traded since May 2008, the signs that could be read from the price formation and demand and supply mechanics was invaluable for company bosses looking at the carbon issues in their own sector. The trading data frequently divulged important clues about what exactly individual companies were planning to do to reduce their emissions output. The way the decisions were received was also visible in the pace of trade and price evolution. This was useful, especially at times when companies actually started practical arrangements like new technology investments, interest in renewable energy and general efficiency programs.
All this has come to a grinding halt with the Australian government's decision to delay carbon emissions trading for another year. Although the decision was made after industry pressure had urged the government to do so, insiders in the energy sector, theoretically hardest hit by CO2 regulations, lament the delay.
It's a much recited phrase in this context, but no less true; business leaders hate uncertainty more than really strict rules. That is the case in carbon markets and environment issues concerning companies around the world. And Australia is an extreme example of this because the market simply responded to the government's decision by eliminating all uncertainty and wiping out the bids and offers of carbon trading. It is unlikely that anyone will re-start the voluntary carbon market of their own accord. So the wait is for the government to pass carbon legislation - which has proven to be an issue thornier than most.
Business leaders are also balking because the effect of the halted carbon market affects them much more profoundly than the simple disappearance of the carbon price.
Power generation companies, which are estimated to be affected the most from national carbon regulations, had been getting going on making investments to do as much as they could to reduce CO2 output and the delays will cost them dearly. One chief executive in the industry told top government officials that the delay would amount to costs matching those of the very investments themselves.
A trading scheme and a price on carbon is the best way of giving a very clear direction to commercial organizations as to where they should invest in terms of their current assets, research and development, and new assets that need to be built to maintain a reliable and competitive electricity supply system," said Grant King, a chief executive at Origin Energy, one of Australia's largest energy companies.
The explanation for this is linked to trading on the regular capital markets. There's been a massive decline in forwards and the market has also lost its lure as a hedging tool for power utilities. That has
created vulnerabilities that are substantial, King commented. Origin is among a few companies that is keen to lock in the carbon price in its daily reality in order to get technology in place to reduce Co2 output. Origin and two other companies would make investments of $9 billion by 2020.
That investment is crucial, insiders say, because it facilitates highly effective carbon emissions reductions at very low cost prices compared to the carbon market.