Australia's New Cap-and-Trade Arbiter

Morgan Stanley to Look at Downside of Eemissions Proposal
By RACHEL PANNETT

CANBERRA, Australia -- The Australian government has asked investment bank Morgan Stanley to test claims by electricity generators that a planned domestic emissions-trading plan may cause them financial distress and disrupt the national energy market, two people familiar with the matter said Friday.
Australia, the developed world's biggest polluter on a per-capita basis due mainly to its reliance on coal-fired generation for about 80% of its energy needs, plans to introduce carbon trading in July 2011.
By 2020, it hopes to reduce greenhouse-gas emissions by at least 5% from their level in 2000.
Under the planned legislation, which hasn't gained the support of the Senate, the upper house of the national Parliament, Australia would adopt a market-based carbon-trading system similar to one in Europe that caps the amount of carbon dioxide that companies such as power generators and steel and cement makers are allowed to put out.
If companies emit more than their cap allows, they must buy "carbon permits" in the market. This "cap-and-trade" system is designed to give companies a financial incentive to clean up.
A spokesman for Morgan Stanley declined to comment.
One person familiar with the matter suggested that Australia's center-left Labor government is keen to disprove generators' claims the rule would cause them financial harm and potentially disrupt electricity markets, despite a government offer of transitional assistance.
To help the power industry adjust to the new greener economy, Australia's government plans to provide about 3.9 billion Australian dollars (US$3.1 billion) of compensation to coal-fired generators, via the allocation of free carbon permits, in the first five years of the new system. To be eligible for that assistance, generators must maintain their capacity at the same level as at June 3, 2007.—Ross Kelly and Cynthia Koons in Sydney contributed to this article.
Write to Rachel Pannett at rachel.pannett@dowjones.com