In brief

  • The Australian Government has announced that the Australian carbon pricing mechanism and Europe’s emissions trading scheme will be linked and that the proposed $15/t price floor in the Australian mechanism will be scrapped.
  • These changes will have significant ramifications for the Australian carbon price from 1 July 2015 and will open a range of price management options for Australian businesses. The changes may also support the long term survival of the carbon price in Australia.

Link to the EU scheme

The Australian carbon price commenced on 1 July 2012.

On 28 August 2012, the Australian Government and the European Commission jointly announced that they had agreed to link the Australian carbon mechanism and the European Union emissions trading scheme (EU ETS). The EU ETS is the world’s largest and longest-established carbon market.

Under the agreement, ‘liable entities’ under either scheme will be able to use carbon units from either scheme to help meet their carbon liabilities:

  • From 1 July 2015, Australian liable entities will be able to use EU allowances issued under the EU ETS. 
  • By 1 July 2018, a full two-way link will be established to also allow EU liable entities to use carbon units issued under the Australian mechanism. 

To facilitate linking, a number of changes will be made to the design of the Australian carbon price, namely:

  • the $15 per tonne CO2 equivalent (CO2e) floor price, which was to have applied to the Australian carbon price from 1 July 2015 to 30 June 2018, will be scrapped, and
  • between 1 July 2015 and 30 June 2020, a new sub-limit of 12.5% will apply to the use of Kyoto units by Australian liable entities. Kyoto units are: Certified Emissions Reduction Units (CERs) under the Clean Development Mechanism (CDM) program applying to emissions reduction projects in developing nations; Emissions Reduction Units (ERUs); and Removal Units (RUs). This means that, while Australian liable entities will still be able to surrender eligible international emissions units to meet up to 50% of their liability from 1 July 2015 to 30 June 2020, they will only be able to meet 12.5% of their total liability using Kyoto units. 

The Greens and key independents have been consulted with, and back, these changes. It is expected that legislation required to give effect to the changes will be passed shortly. 

Relevance for Australian business

Scrapping the floor price

Scrapping the floor price is intended to address a key industry concern that the Australian carbon price was set too high and out of step with the low EU and international price.

It will not effect the Australian fixed price between now and 30 June 2015 ($23/t CO2e, rising to $25.40/t CO2e).

Rather, the floor price will be removed with effect from 1 July 2015 (when the fixed price phase of the Australian carbon price mechanism  gives way to a flexible price phase under an emissions trading scheme). In that flexible price phase, the carbon price applying in Australia will be influenced by the EU price. That future EU price remains uncertain–the EU price is currently around $10/t CO2e–but European governments have indicated they intend to lift the current price by releasing fewer units. Current forecasts indicate that the EU price will be around $15-20/t CO2e by 2015. However, this is complicated by Southern Europe’s continuing economic uncertainty.

While Australian liable entities will be able to use a proportion of cheap CERs to meet their carbon liability from 1 July 2015, the new sub-limit of 12.5% will prevent CERs from being the predominant influence on the Australian carbon price. CERs are currently trading at less than $4/t CO2e.

Immediate opportunities

Australian liable entities can now take advantage of the current low prices for EU units and Kyoto units and can buy them now for use under the Australian scheme from 1 July 2015.

Risks remain, however. There is still some uncertainty about the political future of the Australian carbon price mechanism, and the Kyoto Protocol’s future is uncertain beyond 2012.

But it is very likely that the EU scheme will continue and so there is a low risk in buying EU allowances. Even if the Australian carbon price mechanism was changed or repealed in the future, EU allowances bought now will still retain value under the EU ETS.

Freehills can assist you with undertaking necessary due diligence and acquiring EU and Kyoto units. Our merger with international firm Herbert Smith LLP will bring considerable EU and international carbon market experience and enhance the assistance we can provide you. The merged firm, Herbert Smith Freehills, will be effective from 1 October 2012.

Australian Carbon Farming Initiative (CFI) implications

The removal of the price floor from 1 July 2015 will apply pressure to the viability of Australian CFI projects which can no longer be assured of the $15/t CO2e floor price that would otherwise have applied.

Further international links

The government has stated that linkage of the Australian carbon price mechanism with other emissions trading schemes does not stop with the EU–in particular, it is also pursuing linkages in the Asia Pacific region, including New Zealand. This trend may support increased international action on climate change.

Implications for possible Australian carbon price repeal

A further consequence of the 28 August 2012 announcement is that the link with the EU ETS further entrenches a carbon price mechanism in Australia. This will likely make it more difficult for the Tony Abbott led Coalition to repeal the carbon price if it wins government at the next election in late 2013.

Jessica Brivik, Graduate.