The Australian government has announced it will scrap the proposed floor price of its emissions trading scheme as part of a deal to link the scheme with the European Union, and take some of the political heat about the carbon pricing debate.
Climate Change Minister Greg Combet announced the move in Canberra today, saying that the floor price of $15 a tonne of CO2-e would not come into effect from July 1, 2015, as previously agreed.
Instead, Australia has agreed to link its scheme with that of the EU, and will allow Australian emitters to buy up to 50 per cent of their liabilities from international markets, but only 15 per cent of the liabilities can be met from “Kyoto units” – certificates generated under the UN-sponsored Clean Development Mechanism and other schemes.
The decision follows concern about how Australia would transition from a fixed price of $23 (rising each year to 2015), yet allow its emitters to buy permits in CDM, which are currently trading at a level of around $3.50/t. The EU price is currently trading at less than $10/t.
The linking will inititally be a “one-way” link that will allow Australian businesses to buy permits from the EU scheme. They will be able to buy future permits from today. It is envisaged that European emitters will be able to buy permits from the European scheme by July 1, 2018.
“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 in a statement.
EU Climate commissioner Connie Hedegaard said the linking would be significant 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,” she said in a statement.
The move responds to concerns from business and also seeks to defuse the political polemics around the scheme. Combet indicated that the move could frustrate any attempts by a Coalition government led by Tony Abbott to repeal the scheme. “From today, Australian businesses can start purchasing units in the EU scheme,” he said.
He acknowledged that Australian business had been vocal about the level of the floor price, and the EU had also raised the floor price as an impediment to a deal on linking.
He rejected suggestions that Australian business would be laying on an “unlevel” playing field in the next three years because of the fixed price. “We have got to start to reduce the emissions intensity of our own economy in our own interest,” he said. He said the fixed price was an appropiate level to start cutting greenhouse gas emissions. Combet also indicated that the move could frustrate any attempts by a Coalition government led by Tony Abbott to repeal the scheme. “From today, Australian businesses can start purchasing units in the EU scheme,” he said.
Combet said the EU price would effectively become the floor price for the Australian market. Australia would set its price ceiling with reference to the expected 2015-16 price of European units.
However, it seems certain that European politics will now be the dominant factor over Australian carbon prices. Many EU countries have been pushing for tighter emissions reductions targets, or a change of rules to remove the overhang of credits, but have been thwarted by a handful of countries, mostly notably Poland.
European reform is usually pushed by those countries that hold the presidency of the EU council – and in the next three years that will be those giants of the green economy Cyprus, Ireland, Lithuania, Greece, Italy, and Latvia, with Luxembourg holding the keys to power when Australia’s fixed price carbon regime ends in 2015.
“Australia will be a price-taker after 2015,” Deutsche Bank analyst Tim Jordan said on Tuesday. “That means our carbon price oulook will depend to a large extent on the state of the European economy and how EU policymakers deal with oversupply of allowances in their scheme.”
“This removes a lot of that uncertainty. I think it’s a really important initiative the Australian scheme to the international carbon market,” said Martijn Wilder, the head of climate change practice at Baker McKenzie. He noted that the carbon price in Europe has been as high as 30 Euros. “We think the EU carbon price will go up over time,” he said.
Bloomberg New Energy Finance said the deal will fundamentally change the economics of its carbon market. “Businesses in Australia would then see a very different carbon price trajectory than previously thought, with ramifications for long-term planning and more immediate compliance activities and carbon price risk management,” Bloomberg New Energy Finance said in a recent statement..
The Greens, which had previously insisted on a floor price, welcomed the move, saying it would embed emissions trading in Australia, although Greens leader Christine Milne conceded that the EU will have to work out its internal politics. “It is the best thing to give Australians a clear view to the future,” she told reporters. “We’ve worked really hard to get a negotiated outcome with the government and the EU.”
The Australian Conservation Foundation said although the decision meant a lower carbon price, it could offer the opportunity to strengthen national pollution target.
Combet said China, Korea, and California either have or about to introduce emissions trading scheme, and Australia would pursue links with those schemes. “This is an evolving approach that countries are adopting to achieve the lowest cost emissions reduction to tackle climate change.” Combet said talks were also continuing with New Zealand on a link to its scheme.