Australian Emitters May Use EU Permits to Cut Costs
Companies in Australia’s emissions trading program will be able to buy European Union emission permits to cover as much as half their discharges from July 2015, cutting their cost of compliance.
Europe and Australia said they will start a partial link of their carbon markets by July 2015, allowing Australian companies to purchase European allowances immediately for future compliance. Australia, which will allow its emitters to use international credits including EU permits and UN Certified Emission Reductions, also said it would scrap a floor price of A$15 set to take effect in 2015.
“Australian companies comfortable with the regulatory risk around the scheme can purchase both EU allowances and CERs well below the current floor price and bank them for future compliance use,” Martijn Wilder, a partner at Baker & McKenzie LLP in Sydney, said today by phone.
Australia’s fixed price on carbon was set at A$23 ($23.86) a metric ton for about 300 of its largest polluters on July 1 and it will rise at a predetermined-rate of 2.5 percent a year in real terms until 2015. EU carbon allowances for December rose 1.6 percent today to 8.29 euros ($10.40) a metric ton. Prices for EU permits for delivery in December 2015 rose 2 percent to 9.92 euros.
The interim link will evolve into a full two-way connection by the middle of 2018, Australia’s Climate Minister Greg Combet and EU Climate Commissioner Connie Hedegaard said today.
“Starting today, Australian liable entities can purchase EU allowances for future compliance in Australia,” Combet said in a statement. “These arrangements provide Australian businesses with access to a larger market for cost-effective emission reductions and provide European market participants with enhanced business opportunities.”
The EU created its carbon market in 2005 as a key tool to reduce greenhouse gases and has repeatedly said that it is committed to have an international network of linked emissions trading programs by the middle of this decade. In Australia, Prime Minister Julia Gillard has struggled to defend a carbon price more than twice as high as the one in Europe, which runs the world’s biggest cap-and-trade plan.
Before the full linking, the EU and Australia will need to consider measurement, reporting and verification arrangements, types and quantities of third-party units that can be accepted into either system, the role of land-based domestic offsets from Australia’s Carbon Farming Initiative in the linked system and comparable market oversight rules, the EU said in a statement today.
The two sides will also discuss any implications for measures aimed at preventing the relocation of European and Australian industries to regions without emission curbs, known as carbon leakage.
“The Australian Government and the European Commission are progressing work on a full link as a key priority,” according to the statement. “It is envisaged that a full link will be agreed by mid-2015 and begin operation no later than July 2018.”
In parallel to initiating negotiations on a full link, the EU and Australia aim to agree by the middle of next year technical arrangements to allow European allowances to be held in the Australian registry. Until then, Australian emitters can open registry accounts in the EU and purchase European permits for future compliance under the Australian system, the commission said.
To facilitate the link with the EU, Australia agreed to scrap a planned floor price and set a new “sub-limit” for United Nations-sponsored emission credits, including Certified Emission Reductions, known as CERs. While companies in the Australian program will still be able to use international carbon units to meet as much as 50 percent of their liabilities, the ceiling for the use of UN credits will be 12.5 percent, Combet said.
“The tighter CER limit will dry up demand for CERs from Australia and has the possibility of creating additional demand for EU allowances,” said Matthew Cowie, an analyst at Bloomberg New Energy Finance in London.
UN CERs for delivery in December gained 3.7 percent to 3.05 euros a metric ton, trimming their decline in the past 12 months to 68 percent. While strong political uncertainties will remain for some time about the chances of a full two-way link, the initial one-way link proposed this morning looks set to widen the spread between EU permits and CERs, Cowie said.
The premium for EU permits over UN CERs widened as much as 1.5 percent to a record. The spread expanded as much as 8 cents to 5.30 euros a metric ton.
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