(Recasts, adds comment; changes dateline from CANBERRA)
SYDNEY, Feb 13 Australia's plans to curb greenhouse gas emissions are in danger of being derailed as the carbon price falls in Europe and the government convenes a parliamentary inquiry into its proposed emissions trading scheme.
Carbon traders and analysts said on Friday the inquiry came at a time when doubts were being raised about how much money the government would raise through its carbon pollution reduction (CPRS) scheme to fund the development of cleaner energy.
The inquiry, called on Thursday, will examine whether the CPRS was the best way for Australia to address climate change at the lowest cost.
The parliamentary committee conducting the inquiry will report back in the second half of the year. Meanwhile, the government plans to publish its draft legislation guiding the CPRS later this month with the legislative package to go before parliament in May.
Under the plan, polluters will be able to offset emissions by importing unlimited certified emission reduction (CER) credits generated by U.N.-backed clean energy projects in developing countries.
The proposal effectively links the price of carbon internationally to the price of Australian emission units (AEU).
But the price of CERs has collapsed on the European Climate Exchange as economic activity slowed, reducing the demand for carbon credits and raising the possibility of a short-fall in revenue when Australia's government auctions carbon permits ahead the introduction of its emissions trading scheme in mid-2010.
"If they continue to allow 100 percent surrender of certified emission reduction units against the Australian CPRS then there's a big question about funding," said Gary Cox, vice president commodities, energy at Newedge Australia.
While the government set no lower limit on the price of carbon credits when it detailed its CPRS in December, it estimated an initial price of about A$25 ($16.41) per tonne, about 17 percent below the price CERs were trading at in early December.
"This European market is falling like a stone. There's nothing in Australian dollar terms over A$17 a tonne so it does chuck out the door anything you might have considered you were going to sell at A$25 come auction time, and it does raise some considerable issues over just how effective the government's plans are," said Cox.
The government proposed auctioning permits to raise an estimated A$11.5 billion ($7.5 billion) to help fund the development of clean energy and to compensate consumers and some industry sectors for extra costs associated with putting a price on carbon.
Cox said European banks and other parties with long positions in CERs on the European Climate Exchange, the oldest and most established carbon market, had been offering CERs to Australian polluters that would need carbon credits when the Australian cap-and-trade scheme was introduced.
"They're desperately trying to shove CERs down the throats of potential liable parties in Australian market," he said.
In Europe, carbon prices have closed at record-low levels for five straight days. On Thursday, the benchmark CER closed at 7.66 euros (A$15.05, US$9.86). The last announced trade in Australian emission units went through on Feb. 2 at A$21 per unit.
Australian Climate Exchange Chief Executive Tim Hanlin said Australian interest in CERs to date had been limited, though they were influencing the price of AEUs.
Hanlin said the flipside to the collapse in prices if sustained would be lower costs for polluters, though this would undermine Australia's target of reducing greenhouse gas emissions by 5-15 percent by 2020.
Global carbon market analytical firm Point Carbon said the government's decision to convene an inquiry had created uncertainty just when traders were becoming more comfortable that the scheme would go ahead.
Point Carbon said, in a market note, calling an inquiry had removed that confidence, and with the slump in CER prices, no buyer was currently willing to go near the A$20 price level AEUs had been bid for in the two weeks before Thursday's announcement.
It said there was market speculation that the government would reconsider its decision to allow an unlimited number of CERs to be imported as the price of CERs was much higher than AEU prices when the decision was made in December.
A spokeswoman for Climate Change Minister Penny Wong said on Friday the government remained committed to its policies.
"It is normal procedure to refer major economic developments and policies to the committee," the spokeswoman said. (Reporting by Bruce Hextall and James Grubel; Editing by David Fogarty) (Euro = A$1.96; A$ = 65.9 U.S. cents)