The other side of the table

“If you are in a poker game and after 20 minutes you don’t know who the patsy is, then you’re the patsy.” - Warren Buffett

Photo by Amol Tyagi on Unsplash

Navigating carbon markets revolves around understanding how the most important participants in the market play the game.

In the EU ETS and other major compliance markets it is typically hedging activity by utilities that drives price formation, at least in the short-medium term. Utilities typically hedge 80-90% of their generation at least two quarters before delivery so their actions provide a valuable tell as to underlying fundamentals. As heavy industry, airlines, shipping, and other sectors of the economy become more exposed to carbon price risk in the EU so their hedging behaviour will start to have an influence on carbon prices.

Unlike most other major compliance schemes electricity generation is regulated separately in Australia’s Safeguard Mechanism (SGM). A recently published report examined the key sensitivities influencing the outlook for carbon prices in Australia. Instead of utilities, fossil fuel producers are thought to be the most important actors in the marketplace to watch out for. The pace at which the sector looks to abate their emissions, and the risk management strategy they employ for managing compliance are likely to be central to carbon price formation.

In short, Australia’s carbon price is likely to be very sensitive to the investment decisions made by only a few companies.