Trading on environmental commodities in future

ENVIRONMENTAL commodities like carbon have become new financial instruments in trading markets and could soon be considered a common tradeable commodity along with the likes of wheat and oil.

Carbon trading should be seen as an opportunity to reduce carbon emissions and for global investors seeking to diversify risk. As for the efficiency of existing carbon trading schemes, such as the European Union Emissions Trading Scheme (EU ETS), there are definitely lessons to be learnt byAustralia. .

Subdued economic activity and volatility of global markets has driven carbon prices down in the EU, indicating that the market has been a net seller of carbon in recent years.

For carbon trading schemes to make an impact on emissions, the carbon price needs to increase dramatically to create an incentive for industry to move to competitive and cleaner energy or technologies.

However, recent empirical research indicates that the EU ETS is starting to achieve a greater level of efficiency and may continue to do so if not hampered by policy or further economic problems.

An ETS could achieve its aim of changing consumer and industry behaviour. However an ETS in Australia would need to be flanked by other flexible economic policy incentives in order to assist businesses and individuals in their transition to a cleaner economy.

A fixed carbon price, like the current Australian carbon tax, is unlikely to achieve the aims of an ETS in creating a rapid incentive for industry to move to cleaner technologies.

When the Australian carbon tax transforms to an ETS in two years, it is imperative that the scheme has links to the EU ETS.

A market-based mechanism is the preferred option for Australia, and to be successful it needs policy and regulatory certainty, inter-operability, transparency and links with major international schemes and emerging economies.

Scott Niblock is a lecturer in Finance at the Southern Cross Business School at Southern Cross University.

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