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ANALYSIS-Australia carbon market sidelined as uncertainty grows

* Political uncertainty crimping carbon trade

* Power generator takes punt with CER deal

* Electricity market needs carbon price clarity

SYDNEY/SINGAPORE, April 29 (Reuters) - Deals in Australia's fledgling carbon market show some investors expect the government's national emissions trading scheme will kick off -- but not necessarily on time or in its proposed form.

A recent deal for 100,000 tonnes of U.N.-backed carbon offsets by a large Australian power generator shows there is growing market interest in setting a price of carbon. [ID:nSYD497225]

But the deal, the largest publicly announced by an Australian power firm, is still rare, despite the planned launch of the scheme just a little over a year away.

Worries about whether the necessary legislation will make it through parliament are damping interest in a multi-billion dollar scheme that would be the largest outside Europe, reducing the appetite for options trades in domestic pollution permits or purchases of U.N.-backed offsets.

This is affecting related markets like electricity, which is struggling to determine a future price of carbon.

"The market is split in half - half believe it will be introduced but I'm a bit sceptical as it looks too hard and complex to up and running in 12 months time," said Fernando Broder, head of environmental products at Nextgen.

The scheme will use national pollution permits called Australian Emission Units (AEUs) to regulate carbon emissions.

It will also allow unlimited imports of U.N.-backed certified emissions reductions, or CERs, that are traded in Europe, to help big Australian polluters meet the scheme's carbon caps.

The government hopes sometime in May or June to introduce the emissions trading scheme legislation into parliament, where it faces a tought fight in the Senate and will have to rely on the Greens and two independents.

(For related factbox, click on [ID:nSP498718]

Greens argue the targeted reduction of greenhouse gases to between 5-15 percent of 2000 levels by 2020 isn't enough, but it is unlikely the government will change the target for fear of further upsetting big polluting industries, such as coal miners, steel and cement makers.

LIMITED INTEREST

The scheme would be the world's most comprehensive, covering 75 percent of the nation's carbon emissions and involving 1,000 of the biggest polluters. The aim is to push companies to pollute less over time or face ever rising costs.

For now though, brokers say interest in the over-the-counter market for AEUs has become restricted to longer-dated options.

NextGen last brokered a trade on April 9, which was a put option for the 2012 financial year.

It was involved in a trade of 50,000 tonnes at A$2.20, with a strike price of A$19 a tonne for the year to June 2012.

The option acts as a carbon insurance product and was priced below the A$25 per tonne that government expects AEUs to trade at during the first year of the scheme.

Newedge Australia, which handled two put options for the 2010-11 financial year for 100,000 tonnes each on March 12, said work was proceeding, with documentation needed to define contract specifications for emissions trading.

Political uncertainty had also curbed interest in Australian polluters buying CERs, brokers and analysts said.

Australia represents a potentially large buyer of CERs, which are derived from clean energy projects in the developing world, but for the moment buying has mostly been small volumes.

"We're being knocked over on the supply side but we're not getting knocked over on the demand side," said Tim Hanlin, managing director of the Australian Climate Exchange.

CERs

CEREZ9

on the European Climate Exchange were trading around 11.60 euros (A$21.40, US$15.30) on Wednesday, less than half the peak reached in July last year.

SETTING A CARBON PRICE

Some buyers, though, are dipping their toes in the water.

Loy Yang Power, owned by a joint venture including AGL Energy

AGK.AX

and Tokyo Electric Power Co

9501.T

, said on Wednesday it had entered into a 100,000 tonnes CER trade with Arcadia Energy Trading.

Loy Yang emissions trading implementation group manager Richard Wrightson said the deal was a "bit of a punt" but one way to try encourage CER trade in Australia.

One CER equals one tonne of carbon dioxide-equivalent saved from being emitted.

"We want to encourage it because until we can start trading carbon we struggle to sell electricity -- we need to know our carbon price before we can sell electricity."

He said trading volumes in Australia's electricity market had fallen to 10 percent of where they would normally would be for 2011.

Origin

ORG.AX

, Australia's second-largest power retailer, said the company was assessing CERs, but was not able to disclosed any detailed information.

Chris Halliwell, Senior Broker, Carbon and Renewables at broker TFS Green, said his firm has conducted some small volume test CER trades for companies likely to be covered by the emissions scheme.

"It's great to see some players setting a carbon price for Australia," he said of the Loy Yang deal.

"But it's difficult to tell if this deal will change the game. Companies aren't waiting for somebody else to jump in, they are making a decision based on their risk perception of the legislation and scheme design and the price impacts of possible delays and scheme changes."

Banks, though, are gearing up for trading at some point.

"A number of banks are getting lined up to hit the decks next year with CER prices, live CER screens, things like that but it's all sort of preparation stuff," said Gary Cox, Vice President Commodities and Energy at Newedge Australia.

He said most of the pricing had been pushed towards the 2012 and 2013 financial years and even 2014.

"It's recognition that this thing will happen but it's pushing out when that's likely," said Cox. (Euro = A$1.843, US$1.323) (Editing by Michael Urquhart)

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