Australia prepares for launch of carbon futures

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SYDNEY, Feb 19 (Reuters) - Preparations are under way for the launch of an Australian carbon futures market that has the potential to overtake the $8 billion a year national electricity market as the country’s largest domestic commodity market.

Two groups planning to launch rival contracts said on Thursday that preparations were well advanced, but the final touches would not be able to be applied until the government passed legislation required to establish an emissions trading scheme (ETS).

The government is intent on having an ETS in place by mid-2010 but an active futures market is expected to have evolved by then as companies with greenhouse gas emission liabilities seek to manage their risk.

Minister for Climate Change Penny Wong has indicated the government will release draft legislation for the ETS as early as next month and aims to have the package before parliament mid-year.

Australia has promised to introduce carbon trading in July 2010 as part of its efforts to fight global warming and cut greenhouse gas emissions by at least 5 percent by 2020.

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Gary Cox, head of environmental derivatives for Newedge Group in Australia, says competition will determine which company becomes the preferred contract provider.

“Ultimately that will be a function of reliability, compliance and market trust and recognition, so you would have to say that the ASX has a perceived advantage but it may be someone who is smaller and more nimble,” he said.

ASX’s general manager of emerging markets, Anthony Collins, said his firm expects competition from enVex and possibly other parties, though ultimately there will be only room for one contract in the Australian market.

“We’re going to be about one-fifth the size of Europe and all the liquidity in Europe has gravitated to one futures exchange so I don’t see why that wouldn’t happen here — the market will decide,” said Collins.

He said the government’s December policy document on carbon pollution reduction had provided a framework to develop draft specifications for a contract but the ASX could not proceed until the legislation was in place.

“We clearly can’t do anything until it is definitive. We’ve consulted the market and got draft contract specifications but anything could change between now and that legislation passing,” said Collins.

Vincent Cornes, enVex’s general manager, said his firm would not be able to finalise specifications for its carbon futures contract until it saw the draft legislation due to be released next month.

ASX has the advantage of already holding an Australian markets licence which is required to operate a trading platform.

EnVex plans to use Sydney-based Financial & Energy Exchange (FEX) as its trading platform but FEX is still in process of obtaining an Australian markets licence.

“We can’t really put a timeframe around that but we’re hopeful that we will be able to launch contracts around the middle of this year,” said Cornes.

EnVex is operating an over-the-counter market with FEX unit Mercari that links brokers and dealers to a single central platform for trading environmental products.

But that business is still to gain scale as counterparties are still refining the appropriate documentation, Cornes said.

“The market in general is looking for more certainty around the scheme before volumes start to pick up in a big way,” he said.

Cornes said as legislative certainty increased, trading was also expected to pick up in Certified Emission Reduction (CER) units generated by projects in developing countries that were registered as a clean development mechanism under the Kyoto Protocol.

The government in its ETS policy document released in December unexpectedly indicated it would allow the unlimited importation of CERs that polluters could use to offset emissions in Australia.

“We believe CER contracts will be heavily traded in Australia but we haven’t seen a great deal of OTC trading in CERs to date largely because counter-parties are still going through the process of getting product approval and developing and appropriate documentation,” said Cornes.