The prospect of a global carbon market came one step close this week with the announcements that [Australia and the EU are to link]( “”) their respective emissions trading schemes (ETSs). This is not the first time the EU has sought to link its scheme, [negotiations with Switzerland]( “”) were announced in November 2011 and the European Commission has openly remarked that talks with South Korea, California and China were under way.
This announcement sets the EU-OZ scheme on course to becoming the de facto global emissions trading scheme. Australia had previously spoken about the creation of an [Asia Pacific trading scheme]( “”), along with their neighbours New Zealand, China and South Korea. This latest move is likely to focus fledgling emissions trading schemes’ attention on how they might join the EU-OZ partnership in years to come.
While Sandbag cautiously welcomes the news of linking between the EU and Australia many questions remain. Non-more so than around the level of ambition within the two schemes; Australia was given emissions growth targets under Kyoto and has far weaker pledges than Europe out to 2020 (i.e. 5% below 2000 levels), Europe on the other hand is close to meeting its minus 20% reduction by 2020 and is grappling internally with the prospect of increasing its ambition to minus 30% by 2020. Does this mean Europe is tying itself to a country with a far less ambitious overall climate framework? Perhaps not, Australia’s Clean Energy Future (CEF) scheme will have a clean start in 2015 and, if their cap is ambitious, it may be inundated with Europe’s cheap hot air allowances. Low levels of ambition would result in caps based on political horse trading as opposed to scientific consensus on how best to avoid runaway climate change. Rendering the linked scheme nothing more than a show piece.
This decision also comes at a time when the prices of EU allowances are at a record low due to a vast surplus of freely allocated allowances. The European Commission is looking to resolve this issue and there is overwhelming agreement among observers that the EU ETS is in need of fixing to ensure it remains fit for purpose. Failure to act will mean European policymakers could be responsible for dragging down not just the EU system, but also the Australian scheme. As the significantly larger party in the partnership the EU ETS will drive the price of carbon in Australia, a fact that has already been [noted by Australian climate change Minister]( “”), Greg Combet. One potential positive is that in linking schemes Australia will become a stakeholder supreme and will undoubtedly add its voice to the chorus demanding prudent management of the EU ETS. After all, it’s unlikely that the Australian government / public will be content with their companies simply buying European hot air when they could be directing low-carbon investment inernally.
Further clarification is needed on the fungability of credits. As it stands Australian business will be able to use EU allowances for 50% of their compliance from 2015, with full integration happening in 2018 allowing European and Australian firms unlimited use of allowances from their respective schemes. Clarification is needed early on as to what other credits will be eligible. The EU has already implemented quality restriction on certain international offsets and it will be keen to avoid loopholes which allow them to re-enter the scheme, either indirectly or directly. Furthermore, as linkages multiply to embrace more schemes, further allowance / credit types might enter the global market. For example forestry credits from New Zealand may prove contentious.
For all the hype around how such a scheme may function the political realities remain very present. The EU is still [working to resolve glaring issues of oversupply]( “”) within its scheme, and the Australian Labour government has an ultra slim majority making the passing of any legislation through parliament a delicate affair. Ignoring such inconveniences, the EU-OZ agreement is undoubtedly an impressive move. With the news coming just before the UNFCCC intersessional in Bangkok it shows that action on climate change and carbon pricing is not over. As the international climate negotiations continue its lumbering path, bi-lateral agreements look set to reinvigorate the debate, getting the ball rolling on a truly global emissions trading scheme.
VIDEO: [Sandbag’s Damien Morris talks about the the upside of emissions trading in Australia]( “”) (April, 27th 2012).