Australia Plans To Join Europe’s Carbon Trading Market: How Will It Work?

by Ros Donald, via The Carbon Brief

Last week Australia and the European Commission  announced they would begin linking emissions trading schemes (ETS) in two years’ time.

An emissions trading scheme sets a cap on carbon emissions, requiring polluters to hold a permit for each tonne of carbon dioxide they emit. The level of the cap dictates how many permits are available.

Under the European ETS, each EU member state sets a national cap for carbon emissions, which is then converted into allowances for polluters. At the end of every year, polluting industries must say how much carbon dioxide they have emitted. If they’ve used more than their allocation, they have to buy permits from those that have spare, and the market sets the price of those permits.

David Parnell, director of the Centre for Environmental Economics at the University of Western Australia,  explains that under the EU ETS:

“[I]t’s not actually the price that causes the overall cuts in emissions. The cap determines the level of emissions, and the required cuts in emissions cause the price. That is, permits have a value because they allow you to avoid making cuts in emissions.”

The current Australian system works in a different way, with the government setting the price of carbon dioxide allowances. This may be why the scheme is commonly referred to in Australia as a carbon tax, even though it isn’t really a tax, but a capped emissions trading scheme. The government decided that a fixed carbon price would reduce uncertainty in the scheme’s early years, but Australia plans to move to a full blown emissions trading market over the next few years.

What’s going to happen?

Last week, Australia and the European Commission announced there would be a full two-way link between their emissions trading systems by July 2018. Businesses will be able to use carbon units from either the Australian or the European emissions trading systems interchangeably.

Until then, Australian businesses will be able to use EU allowances to meet up to 50 per cent of their needs from 2015. But European businesses won’t be able to use Australian carbon credits until 2018.

How is the Australian scheme going to change?

The Australian government has announced it’s going to make some  changes to its scheme so the systems interact successfully.

Originally, it had planned to enforce a minimum price for emissions permits of around AU$15 dollars (around £7). But it’s now dropped the price floor – the European Commission says removing it will make it easier to link the schemes, ensuring there’s a single price for EU and Australian units.

Second, the Australian government is going to limit the amount of  international emissions units Australian emitters will be able to trade. These units are created under the Kyoto Protocol of the United Nations Framework Convention on Climate Change, and allow international trading in greenhouse gas emissions, as well as things like changes in land use.

Australian emitters will only be able to use Kyoto units to cover 12.5 per cent of their 50 per cent international allowance. This is to ensure that these credits, which are incredibly cheap, don’t  drag the price of EU and Australian credits down.

And third, the Australian scheme will adopt the expected European 2015-6 carbon allowance price, essentially making credits interchangeable.

Why bother?

Why link carbon markets in the first place?  The European Commission argues that creating international carbon markets helps countries cut their carbon dioxide emissions more cheaply by increasing market liquidity.

In a liquid carbon market, permits can be easily and quickly sold without losing their value. The commission says a more liquid market will provide a more stable price signal, and also give businesses more opportunities to trade their excess units. The more buyers and sellers and the more diverse the market, the theory goes, the better it works.

The commission says the link with Australia is the  first step in creating broader links with developing carbon markets in the Asia Pacific region. Australian energy minister Greg Combet recently told reporters that his government is pursuing carbon market links with California, New Zealand and South Korea, and China could be another important potential partner – its 12th five-year plan, announced in 2011, includes provisions to  pilot cap-and trade schemes in some provinces.

Linking to a larger international carbon market may also make it more likely that Australia’s carbon policy will survive, as repeal would also mean “severing the connection to the world’s largest carbon market”,  says Frank Jotzo, the man who helped design Australia’s carbon floor price.

What are the downsides?

Commenters have pointed out several ways the link could have downsides for Australia.

The announcement comes at a time when, because of a surplus in permits, EU allowance prices are at a record low. The current cost of an EU allowance is around €7 (£5.40), €4 (€3) lower than Australia’s proposed carbon price floor.

Sandbag, a campaign group that deals with the ETS, notes that if the issue isn’t dealt with, it could have consequences for linked schemes:

“Failure to act will mean European policymakers could be responsible for dragging down not just the EU system, but also the Australian scheme.”

And even if the price goes up, Australian permits will be exposed to price fluctuations in the international market. This will increase uncertainty, and meaning the Australian government won’t have much say over the price,  critics say.

Newspaper the Australian, meanwhile, has pointed out that country’s coal industry –  one of the country’s biggest export sectors – could lose out, because methane is regulated under the Australian regime, but not under the EU ETS. Australian coal mines will have to pay for emitting methane, a potent greenhouse gas, but those in Europe won’t. The Australian also claims that while many European businesses receive free carbon permits, the Australian government hasn’t yet determined which sectors will get the same benefit.

While it might be an exaggeration to claim, as  the Australian does, that “those crafty European bureaucrats have locked a gullible Gillard government into a carbon headlock”, it’s certainly true that the EU ETS has some fairly major flaws it hasn’t dealt with yet. Australia’s decision to link up could help the EU carbon market survive – or mean that Australia’s carbon trading system is at the mercy of the same flaws that have plagued the EU ETS.

Ros Donald is a writer and researcher with The Carbon Brief. This piece was originally published at The Carbon Brief and was reprinted with permission.

5 Responses to Australia Plans To Join Europe’s Carbon Trading Market: How Will It Work?

  1. Leif says:

    Still the big gorilla lurks in the shadows. That is the ability of the ecocide Fossil Industry to pollute the commons for personal wealth. The denier-sphere is all financed by this fundamental flaw of Western Capitalism. The fresh waters and oceans of the world become acidified, the air becomes overly energized, the topsoil parched, food shortages face the populations, epic floods rampage the nations of the world and more, yet the few profit from dumping 19 pounds of pollutants gallon of fuel out the exhaust of the commerce for “free.”

    Good Grief. I pay $150/ton to dump my household garbage. $50/T to recycle yard waste. Waste water fees, of course. I even have a “storm water run off fee” of $5/month, rain or shine! (guide lines here?) Yet Corpro/people swallow their gum at the suggestion of $25/ton for pollutants. Where is the justice?

  2. Gerald Wilhite says:

    Australia had difficulty getting their market off the ground. That’s why they are trying to merge with the EU market, which also has its problems.

    How will either EU or Australia be able to proceed in the face the findings in the newly released paper by Willie Soon? See this link:

  3. Aussie John says:

    Wilies Soon’s assertions outlined in that article have no support from respected scientists.
    How does he dismiss the greenhouse action of CO2; over 150 years of science has confirmed CO2 theory; – has he discovered contrary evidence? If so publish it for review.

    Does he really think that a massive object the size of the Earth would be likely to heat up at the same rate at which we have increased the level of CO2 in the atmosphere?
    What about thermal inertia of the Earth?
    What about the laws of thermodynamics?
    Such newspaper articles offend one’s intelligence.

    See: for some rational science.

  4. Mulga Mumblebrain says:

    Gerry’s tribute to the ‘Reverend’ Moon on his ‘áscent’-to quote from his oleaginous rag, The Washington Times, the favourite reading matter of Ronny Raygun (need one say more?). Sorry Gerry. no credibility old boy. Why not return to Andrew Bolt or Tim Blair’s little Republics of Mediocrity, like a nice chap.

  5. Mulga Mumblebrain says:

    The Australian regime, with its contemptible 5% reduction by 2020 ‘target’, its support for the ‘clean coal’ chimaera, its obstructionism at all recent climate meetings and its continuing support for a massive increase in coal mining and export, hit a new low this week. It abandoned plans to close the brown coal burning power stations (the dirtiest type of coal) but still gave these corporate interests 5.5 billion in various ‘çompensation’. You couldn’t make this stuff up. The carbon reductions are planned to be entirely ‘virtual’ by dint of buying permits, or ‘índulgences’ in a market that will, and indeed has already been, immensely corrupted, as the Holy Market weaves its ‘magick’.