Australia carbon plan opens door to UN CER imports

By Bruce Hextall and David Fogarty - Analysis

SYDNEY/SINGAPORE (Reuters) - Australia's decision to allow unlimited carbon credit imports into its domestic cap-and-trade scheme will provide a boost in demand for U.N. offsets, giving developers a new source of post-Kyoto revenue.

Canberra released on Monday the eagerly awaited blueprint for its carbon trading scheme, the most comprehensive in the world, set to be launched from July 1, 2010, and pledged at the same time to cut emissions by between 5 and 15 percent by 2020. Legislation is expected to be approved by parliament next year.

One of the details that surprised traders was the allowance for companies to buy and import an unlimited number of Certified Emissions Reductions (CERs), credits approved and issued by the United Nations against investments in developing countries that reduce carbon emissions under the Kyoto Protocol.

"The fact there are no limits imposed on Kyoto offset imports could have a positive impact on global demand for CERs," said Sean Lucy, head of the Carbon Solutions Group for nabCapital, part of National Australia Bank.

In theory, if Australia were to import all of its carbon credit requirements, demand for CERs could double out to 2020, he said.

The Australian government said it would allow the market to set the price of carbon permits, but the government will cap the price at a maximum A$40 ($27) a tonne, rising five percent a year above inflation for four years, to ensure price stability.

CER offsets are trading around 13 euros (A$26) per tonne of carbon avoided, putting them in the initial estimated price range of A$23-A$32 a tonne, with the government's estimated revenue from permit sales based on a A$25 price.

This means Australia's biggest polluters will likely turn to Europe, the main hub of carbon trading and the most liquid market, to acquire the carbon credits if the price is right.

The European Union also allows imports of CERs into its own emissions trading scheme, but only up to a set limit in order to prevent external credits from undercutting European prices, which could dampen the incentive to reduce emissions at home.

Only forestry-based CERs, representing only a small portion of total supply, are banned from the scheme in Australia, one of 37 rich nations bound by the Kyoto Protocol to meet emissions targets between 2008-12.

POST-2012 DEALS

Under Kyoto, rich nations can invest, for instance, in wind farms in India or in cutting emissions from a factory in China and claim CERs to balance against domestic emissions.

Australia pledged on Monday to cut emissions by up to 15 pct by 2020 versus 2000 levels if other countries agreed tough new targets to fight climate change by the end of next year.

Japan has already been buying CERs to try to meet its obligations but the U.N. offset scheme, called the Clean Development Mechanism, can only approve clean energy projects up to the end of 2012, when the Kyoto Protocol's first phase ends.

That has raised questions about demand for CERs after 2012.