Over the past two years, European carbon prices and international Kyoto units have been forced down by depressed demand resulting from the economic downturn and a sustained glut in supply of cheap international carbon units. The following graph (originally sourced from Point Carbon) was used by the Department of Parliamentary Services to demonstrate the slide in prices for the main carbon units traded on European and international markets, Certified Emission Reductions (CERs) and European Union Allowances (EUAs).  

Click here to view chart.

On 24 January 2013, the same day that the EU Commission recommended formal negotiations be opened with Australia on linking the two schemes, the European carbon price plunged to a new low of just €2.81 ($A3.60). Prices have generally remained at historic lows reflecting the concerns of market participants and traders that the EU Commission’s proposal to intervene in the market to stabilise prices won’t find sufficient support in the European Parliament.

In response, the EU Commission has tabled a rescue plan to prop up EUA prices. The proposal is known as ‘backloading’ and refers to the temporary and staggered removal of 900 million allowances (which are otherwise set to be auctioned over the coming years) from the over-supplied market to assist in re-inflating prices and restoring confidence in the market.

However, this ‘backloading’ proposal cannot be implemented until the EU Parliament votes and approves the EU Commission’s legal power to intervene in Europe's $148-billion carbon market. The proposal is vehemently opposed by some EU nations heavily addicted to fossil fuels such as Poland. The EU powerhouse, Germany has been equivocal to date in terms of its support of the plan with its economic and environmental ministries being divided on the issue.

Although the European Parliament’s Environment Committee voted in favour of the backloading proposal in February of this year, at the same meeting, the drafting of the legislation was postponed indefinitely, prompting a significant drop in carbon prices.

The progress of the backloading ‘rescue package’ and the stability of the EU market is particularly relevant for liable entities under the Australian scheme. It has implications for our own carbon price, which from 1 July 2015 will be subjected to unregulated market forces including the removal of the carbon price floor and allowing liable entities to meet their obligations using foreign units including CERs and EUAs.

The following article ‘Linking Australian and European Emissions Trading Schemes’ (to view article please click here) discusses the details of the linking proposal and the other changes to Australia’s emissions trading scheme relevant to companies looking at their carbon risk management strategy.