LONDON - Defeat of Australia's emissions trading plans may temporarily dent political momentum ahead of next week's U.N. climate talks, but succeed or fail, the scheme is unlikely to affect global carbon prices until at least 2013.
The Australian government's cap-and-trade scheme, which limits greenhouse gas emissions by forcing polluters to buy permits, was headed for defeat in a hostile Senate on Tuesday after the election of a new opposition leader opposed to carbon trading laws.
European emissions traders said, regardless of whether some opposition members cross party lines and back the bill or it fails completely, an Australian scheme in its proposed form will have little immediate impact on carbon prices.
This won't affect carbon prices much before 2013, said Trevor Sikorski, director of environmental market research at Barclays Capital.
It's a political sideshow, said Simon Glossop of emissions traders CF Partners.
Australia's population of 21 million has the world's highest per capita carbon emissions, as the country is heavily reliant on coal, shipping and motor transport, so its environmental policies and carbon-cutting potential are closely watched.
Australian Prime Minister Kevin Rudd has struggled to get his climate change bill passed in the upper house, the Senate, before parliament adjourns until February, compromising with the opposition on key elements of the cap-and-trade scheme.
The bill would launch the Carbon Pollution Reduction Scheme (CPRS) from July 1, 2011, forcing Australia's 1,000 biggest polluting companies, representing 75 percent of the country's emissions, to buy carbon permits.
It also calls for coal-rich Australia's emissions to be cut by 5 percent by 2020, or by 25 percent from 2000 levels if nations agree an ambitious climate change pact at upcoming U.N.-backed talks in Copenhagen.
Last week, China and the United States, the world's two largest emitters, boosted a new agreement's hopes by pledging reduction targets ahead of the December 7-18 summit.
Observers said this new momentum could be stalled by the Australian bill's defeat, but any effect would be short-lived.
It's not a major setback ... By next Monday people will have forgotten what's happened in Australia and will be fighting in the pits in Copenhagen to get a new agreement, said Andrei Marcu, head of regulatory and policy affairs at Geneva-based traders Mercuria Energy.
LITTLE INFLUENCE ON U.S. DEBATE
Marcu said a defeat of the Australian CPRS will also be of little concern to American lawmakers, who are also mulling over new domestic climate legislation.
It may give more courage to those not in favor of it, but the bill's failure would have little influence on the U.S. debate, Marcu added.
Australia will end up passing a scheme eventually, but it will be heavily influenced by what the U.S. does.
Under the bill, Australia prohibits the use of carbon permits from other markets to meet emissions targets, so allowances from the European Union's $92 billion emissions scheme, seen as the global benchmark for carbon prices, will not be directly affected, traders said.
The CPRS does allow for unlimited importing of international carbon offsets issued under the Kyoto Protocol, called Certified Emissions Reductions (CERs).
But with a A$10-a-tonne ($9.24) price cap in the Australian scheme's first year, compared to CERs forecast to trade around 16-18 euros ($24-$27) by 2012, no firms are expected to buy CERs for compliance in 2011.
From July 2011 to July 2012, the scheme is essentially a A$10 tax so there will be no CER buying at all from Australia, Sikorski said.
In 2012 there will be a price cap that could be below CER prices, so this is unlikely to affect pre-2013 prices ... At best we could expect CER demand of around 25 million tonnes in 2013, based on an annual emissions cap of 500 million.
With Kyoto set to expire in 2013, the future of the CER market is unclear and investors are reluctant to make long-term commitments.
Regardless, analysts have warned that the scheme's emissions caps were weakened by compromises made between Rudd's Labor party and the opposition Liberals, which called for more free permits to be handed out to industry.
The scheme's caps have yet to be set, so more free permits under generous caps could lead to low carbon prices.
(Additional reporting by Nina Chestney; Editing by Anthony Barker)