Australia and European Commission agree on pathway towards fully linking emissions trading systems

The Australian Minister for Climate Change and Energy Efficiency, the Hon Greg Combet MP, and the European Commissioner for Climate Action, Connie Hedegaard, announced yesterday that Australia and Europe will be linking their emissions trading systems.

A full two-way link, by means of the mutual recognition of carbon units between the two cap-and-trade systems, is to commence no later than 1 July 2018. Under this arrangement, businesses will be allowed to use carbon units from the Australian emissions trading scheme or the European Union Emissions Trading System (EU ETS) for compliance under either system.

“Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions,” Combet said.

“The European Union is the first regional emissions trading system and spans the largest part of the European continent. We now look forward to the first full inter-continental linking of emission trading systems,” Hedegaard said.

“This would be a significant achievement for both Europe and Australia. It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international carbon market.”

To facilitate linking, the Australian Government will make two changes to the design of the Australian carbon price:

• The price floor will not be implemented.
• A new sub-limit will apply to the use of eligible Kyoto units. While liable entities in Australia will still be able to meet up to 50% of their liabilities through purchasing eligible international units, only 12.5% of their liabilities will be able to be met by Kyoto units.

In recognition of these changes and while formal negotiations proceed towards a full two-way link, an interim link will be established, whereby Australian businesses will be able to use EU allowances to help meet liabilities under the Australian emissions trading scheme from 1 July 2015 until a full link is established, ie, no later than 1 July 2018.

“Starting today, Australian liable entities can purchase EU allowances for future compliance in Australia,” Combet said.

“These arrangements provide Australian businesses with access to a larger market for cost-effective emission reductions and provide European market participants with enhanced business opportunities.”

Combet also said the arrangements would provide flexibility to businesses with operations in both Australia and Europe, which could reduce compliance costs.

The announcement has been welcomed by Environment Victoria as a sign that the carbon price is here to stay.

“While we would have liked a floor price to remain in place, the reality is that Australian businesses will be taking advantage of cheaper European carbon prices from today and purchasing permits to reduce their carbon liability beyond 2015,” said Environment Victoria Campaigns Director Mark Wakeham.

“This makes the carbon price that much harder for the Coalition to unwind and undermines Tony Abbott’s argument that Australia is going it alone.

“While it may potentially lower the price on carbon from 2015 - depending on what happens with the European price - the changes announced today also limit the use of cheap Clean Development Mechanism credits.

“The net effect of these changes on Australian polluters’ carbon liability will not be known until 2015, but what it does signal is that the carbon price is here to stay unless Tony Abbott is prepared to risk billion dollar lawsuits from businesses that lawfully purchase carbon credits from today.”

Wakeham said that resolution of the floor price issue was the final barrier to the government delivering on its contract for closure commitment to retire around 2000 MW of Australia’s most-polluting power stations.

“Owners of outdated and polluting power stations like Hazelwood should realise that the carbon price is here to stay and contracts for closure is a one-off opportunity to be compensated for certainty around their closure.

“The government now needs to finalise negotiations and deliver on the only significant outstanding plank of the clean energy future platform,” he said.

The European Commission and Australia will work to agree registry arrangements for the interim link by mid-2013. The Australian government has agreed to enter into negotiations on a full-linking agreement, and the European Commission will seek a mandate to do so in coming months.