The scene has now been set. The parameters established. And now the time has come for market forces to be unleashed on the issue of climate change. It took just under four years from the day Kevin Rudd became Prime Minister with a policy to introduce a nationwide carbon price, but finally the monumental environmental and economic reform has been passed.

With Tuesday's successful passage in the Senate, a carbon price will indeed be introduced from 1 July 2012 with a fixed starting price of $23 per tonne. Three years later, the price will switch to a floating one, making it in every sense an emission trading scheme.

The reform means that for the first time in Australian history greenhouse gases will be given a value. A value which reflects the reality that the emission of greenhouse gases has real world costs associated with it. That previously those gases had been ascribed no value means that they have been released in excess of what is best for society and, hence, the world is now battling with the global warming issue. This is a simple and very common problem that in economics is referred to as an externality. By putting a price on greenhouse gas emissions, emitters will ascribe them a value and hence will factor them into financial decisions. This is known as internalising the externality. What it effectively means is that, from now on, companies and households will not completely overlook the cost of greenhouse gas emissions and, perhaps most importantly, intelligent, creative individuals across the economy will be able to be rewarded for the innovative solutions they develop to reduce or even avoid emissions. And this is one of the core reasons why putting a price on emissions is believed by economists to be the most efficient approach to solving the climate change problem.

After staking his political career on the issue and taking what has unquestionably amounted to the most belligerent and brutal opposition to any issue in modern politics, Tony Abbott was noticeably absent on Tuesday, having opted instead to attend a conservative forum in London early. The issue of his ‘pledge in blood' to repeal the scheme remains a real one, though there are many who expect it will diminish in importance over time as the issue itself subsides and the practical complexity of a rollback becomes obvious. Speaking to this issue, in an interview at a carbon conference in Melbourne the day after the legislation was passed, the Prime Minister was asked whether she had been able to erect an ‘Abbott proof fence' around the legislation. For her part, Gillard responded by stating that she believed it would be the Liberal Party more broadly that shifted its position once it became obvious that the maintenance of a completely contrarian view on this issue was no longer effective, and was itself, like the party's current policy on climate change, too much of a departure from core Liberal Party views.

With the laws passed, for polluting businesses, the focus will now shift to minimising cost under the new system. For many of those and a litany of others, it will also be about taking advantage of new opportunities. A notable one of those will be the projects developed under the Carbon Farming Initiative. While there are as yet still no approved methodologies to create Australian Carbon Credit Units (ACCUs) under the CFI, a token, but not necessarily unimportant trade was reported in the market last week with 5K to be delivered in June 2013 at a price of $22.50.

Far from the volatility which had characterised the spot STC market across much the first 8 months of its existence, in recent times it has been stability which has defined the newly created market. And last week was no different.

The spot STC market continues to remain lodged within the narrow $29.00-$30.00 trading band which has confined it for precisely one month. In truth, the market has once briefly broken the $29.00 floor, and twice, equally as briefly, perforated the $30.00 ceiling. Yet the overwhelming weight of activity has taken place between these levels and there have been countless instances where the market has broached them only to find itself returning to the middle ground. Last week there was even less variation than in other weeks with activity confined to $29.35-$29.70.

Prices in red are indicative and prices in black last/mkt) are actual traded prices

The activity began with what would ultimately prove the spot market's highest trade for the week, a deal at $29.70. From there, the spot softened into the middle of the week in a market deprived of many participants owing to an industry conference, with the midweek close taking place at $29.35. The market was boosted by the return of interest on Thursday, trading at one point up to $29.65, yet the remainder of the week saw the spot soften with the market eventually closing at $29.40.

The Nextgen STC WASP was $29.52 for the week. And, to provide some further perspective on the market's trading range in recent times, the weighted average price of all trades reported over the last five weeks is $29.54.

There has been very little forward activity in recent weeks following the drop in the spot market below $30.00. For the most part sellers have been reluctant to contract forward, hoping that a bounce in the spot price would once again see forward contract prices for early next year around the $33 level. The flipside of the argument is that although some buyers find Q112 contracts appealing based upon the current spot market level, when the spot was at $31+ levels demand for forward contracts was minimal.

Of primary importance to the market will be the announcement of the firm 2012 Small-scale Technology Percentage (STP). In the lead up to the split of the renewable market into large and small components last year, the ORER announced the 2011 STP in December 2010. In doing so allowing buyers to know precisely what their Q1 obligation was ahead of time, to facilitate trade in the forward and, eventually spot, STC market.

It is certainly the case that the Regulator would like to do the same again this year, yet there are some potential complications with their doing so. In particular, as was the case last year, the ORER have commissioned 3 consultants to model both the estimates of the 2011 STC oversupply and the overall level of installations for 2012, which is referred to as the base figure. While this exercise is currently underway, the dataset the modellers are using becomes more and more out of date as each day goes by, making it difficult to derive an accurate indication of oversupply in the process. This is because of the lag between installation of a system and the submission to the ORER of the STC form from that system. In essence this means that should the ORER release the firm STP in December, it would be based upon an incomplete data set for 2011 installations and hence the estimate of the 2011 STC oversupply would likely be less accurate. It is for this reason that it appears increasingly likely that the firm STP will not in fact be set this year and that instead, the ORER may provide some other form of indication in December. This may come in the form of another update to the non-binding STP estimate which would show what the ORER was thinking as of a fixed date, but would still be subject to change. Or instead it may opt to release of the 2012 base figure along with a non-binding estimate of the oversupply figure. Precisely how this pans out remains a closely watched issue with most market participants wanting an announcement sooner rather than later, while the Regulator on the other hand remains focused on accuracy.

Of note last week for the modellers, the STC submission rate once again recovered to over 700k (see chart above).

In other policy news, the NSW auditor general's report on the Solar Bonus Scheme found the (previous) NSW government and the state's bureaucracy ‘grossly underestimated' the cost and number of people that would install systems under the scheme. While the report caught some peoples' attention, it is the IPART feed-in tariff Review which the industry continues to wait on. The NSW solar industry has been left stranded since the middle of the year with new customers left without any certainty surrounding what they will receive (if anything) for the energy they export to the grid. The IPART review aims to establish the actual value of the energy exported back into the grid, though there have been some who have criticised the scope of the analysis being done. As it stands, a draft report is due to be released at the end of the month and many in the solar industry are desperately hoping that the O'Farrell Government will act early on its recommendations.

With legislative success on both the carbon price and the Australian Renewable Energy Agency (ARENA) in recent weeks, and the benefits of the split in the renewable energy target into large and small-scale schemes beginning to be felt, the future for large-scale renewable energy project deployment has finally once again begun to appear rosy. Yet the question which of course remains is will project commitments be able to take place in time to meet the increases in the LRET which are looming in the coming years?

Prices in red are indicative and prices in black last/mkt) are actual traded prices

Following the negative decision by the Howard Government not to expand the Renewable Energy Target (RET), optimism had returned to the renewable energy industry by 2007 as Kevin Rudd, armed with a policy platform which included both a dramatic expansion of the RET and the introduction of an emissions trading scheme, appeared destined to win government. That optimism among large-scale project developers however, did not last long. The expanded RET was quickly bogged down with an oversupply of certificates created from small-scale technologies such as solar water heaters and, eventually, photovoltaic panels, which deflated REC prices. The Carbon Pollution Reduction Scheme (CPRS), Rudd's emissions trading scheme, was repeatedly blocked by the Opposition, including via a leadership coup in which Tony Abbott toppled the more moderate Malcolm Turnbull after a bipartisan negotiated compromise was reached. This state of affairs meant that not only was there a substantial short-medium term alternative for liable entities in terms of their RET obligations, there were also considerable uncertainties surrounding the future of wholesale electricity prices. With financiers requiring long term power purchase agreements in order to get involved, and little demand for such from the relatively limited set of buyers, it was the perfect storm which blew the industry off course.

Having weathered this storm, the winds now appear more favourable for large-scale renewable project development. And it's just as well, because the significant delays in project commitments which have occurred in recent years must not continue if the scheme is to remain operational. Given the lead time of at least two years between commitment and actual commissioning (and hence new LGC generation), the next 12 months will be pivotal in this regard.

The truth is none of this information is new. But, with the passage of both the carbon and ARENA legislation, the pieces of the puzzle are beginning to come together. It isn't precisely clear whether or not there is a link, however the successful introduction of these policies has coincided with the spot LGC price reaching its highest level since May 2010.

In terms of forward market activity, late in the week a large trade in the Cal 12 vintage was reported at $44.80.

The passage of the Clean Energy Future legislation informally signals the end of the NGAC market. The question remains precisely when and how Australia's first carbon market will be drawn to a close.

Prices in red are indicative and prices in black last/mkt) are actual traded prices

With its own legislation having been amended in anticipation of the introduction of a national carbon scheme, the NGAC market was always set to conclude when the national market kicked off. It now appears that 2012 will only be a half year of NGAC compliance, yet this is still to be confirmed by the scheme's administrators. Also, there has still been no word on what is to happen to surplus NGACs at the scheme's completion date.

AA single trade of 10K spot VEECs moved the market up further this week once again reaching an all time high for the commodity. Whilst the increase this week to $40.50 was more modest than in the past three weeks, it is still a significant movement and shows that there remains some interest at these higher levels. And a correction to last week's article which initially stated an incorrect tax effective shortfall penalty rate. The correct rate is $58.90 and the original article has been amended.

Prices in red are indicative and prices in black last/mkt) are actual traded prices

In complete contrast to their southern neighbours, the ESC market has stalled in recent weeks with no trades being reported since mid-September. Notionally the last spot price is $30.75, and with few bids and offers in the market, and with little movement in the demand-supply dynamic, it would seem that an indicative price at this level is not terribly inaccurate.

As the end of the year approaches, participants in NSW's ESS are becoming increasingly eager to find out the projected demand of ESCs for 2011. Such a projection will be made in the 2010 ESS Annual Report to the Minister which was completed back in July, but cannot be made public until it has been tabled in both houses of the NSW Parliament. Unlike other environmental schemes, the targeted level of demand is not known before the surrender date, forcing participants to rely on the estimate.

Prices in red indicative. Prices in black (last) = actual trades

A roller-coaster week in the European carbon market began with carbon hitting a thirty-three month low in early trade on Monday, but the market rebounded in late trade to finish the day in the black. This positivity was short-lived with the next three days seeing continual downward price movements. However, a rally on Friday on the back of some encouraging news in the Euro zone debt crisis saw prices finish the week in positive territory as Dec 11 EUAs closed on €10.19 (AU$13.61) and Dec 11 CERs closing on €7.01 (AU$9.36). Many doubt whether this positivity will be sustained with the upcoming sale by the European Investment Bank expected to flood the market with permits.