The price of EU carbon credits (European Union Allowances (EUAs)) plummeted by 40% following the rejection of the EU emissions trading scheme (EU ETS) rescue plan or ‘backloading proposal’.

The rescue plan was to remove about 900 million carbon allowances from the over supplied EU ETS market to assist in re-inflating prices and restoring confidence in the market. For further background and details of the plan please click here.

As we informed clients in our earlier update here, the price of carbon units in Australia from 1 July 2015 will be heavily impacted by price movements in the EU ETS. This follows the passage of amendments to Australia’s clean energy legislation[1] which removed the floor price and set in motion arrangements for linking Australia’s scheme and the EU ETS.

The rescue plan was voted down by the European Parliament (334 votes to 315) on 16 April 2013. The European Parliament’s Environment Committee had initially approved the backloading proposal in February this year. However it was the EU’s largest political alliance, the centre-right European People’s Party that voted against the proposal when it was put to a vote last week. In a surprising turn of events, all but four British conservative members of the European Parliament voted against the plan despite Britain’s domestic government policy which introduced a carbon floor price that could soon be higher than the price of EUAs.

Members of the European Parliament have decided to send the issue back to the Environment Committee allowing the proposal to then be put before the full parliament again later this year. It seems that with the EU ETS rescue package now on life support, a sliver of hope remains for the optimists. For the rest of us, a slow European parliamentary process awaits before the ultimate fate of the package and arguably the EU ETS will be decided.

EU ETS in turmoil: Effect on Australian business

The plummet of the price of EUAs at just $A4 might be viewed by some Australian businesses (including Australian entities liable under the Australian Clean Energy legislation) as an opportune time to invest in cheap credits, which can then be banked and later surrendered for compliance in the Australian scheme from 1 July 2015.

As we predicted in our previous update here, calls for the government to move to a floating price on carbon (by bringing forward the flexible price period from 1 July 2015) have already begun in earnest from some business groups. [2]

However, concerns over the ongoing impact of the European economic crisis, the longevity of the EU ETS scheme and the threat of repeal legislation following a Coalition victory in the Australian federal election adds considerable risk and uncertainty for Australian companies. For more information on the likelihood and timing of any repeal of Australia’s carbon price mechanism click here to see our previous update.

As any change in the EU’s policy now has a direct effect on the price of Australian credits from 1 July 2015, Australian businesses should be sure to follow the developments in Europe as well as political developments at home.