The Carbon Briefing: Australia’s punt on the EU ETS – how does it work?
- 05 Sep 2012, 10:00
- Ros Donald
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
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
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
How is the Australian scheme going to
The Australian government has announced it's going to make
changes to its scheme so the systems interact
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
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,
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
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
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
"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,
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.