Australia ditches carbon floor price, joins EU carbon market

Australia and Europe will be linking their emissions trading scheme by means of the mutual recognition of carbon units between the two cap and trade systems. A full two-way link 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.

The agreement was announced by the Australian Climate Change Minister Greg Combet and the European Commissioner for Climate Action Connie Hedegaard.

To facilitate linking, the Australian Government will make two changes to the design of the Australian carbon price. These are that: the price floor will not be implemented; and, a new sublimit 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, announcing the deal on 28 August.

“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 said. He further said that the arrangements would provide flexibility to businesses with operations in both Australia and Europe, which could reduce compliance costs.

The changes agreed to by the Australian Government will allow the interim arrangements to proceed and the step-wise linking of the European and Australian market will ease full linking in 2018, said Hedegaard.

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.

Commenting on the agreement, AiGroup CEO Innes Willox said, “The changes announced today are a clear improvement on the previous arrangements business would have faced from 2015. However, there are continuing concerns that the price Australian industry will pay between now and 2015 remains well out of kilter with our international competitors.” Willox said Australian industry also needs lower fixed prices to 2015 and an earlier transition to trading.