Australia Scraps Carbon Floor Price to Set Up Link With Europe

Australia Scraps Carbon Floor Price Ahead of Link to Europe
Steam rises from the cooling pond outside International Power Plc's Hazelwood coal-fired power station in the Latrobe Valley, Australia. The Australian tax on emissions is set at A$23 a metric ton for about 300 of its largest polluters for the year that started July 1. Photographer: Carla Gottgens/Bloomberg

Australia abandoned its attempt to set a minimum price for carbon permits and agreed to begin linking to the European Union market by mid-2015, laying the groundwork for global emissions trading.

EU carbon allowance rose to a two-month high after Australian Climate Change Minister Greg Combet said the two programs will have their first links as of July 1, 2015, and a full tie-in three years later. Businesses will be able to buy carbon units immediately from the EU system to comply with Australia’s new emission restrictions, he said.

“This is the first step toward a truly global trading system,” said Alex Wyatt, the Melbourne-based chief executive officer of Climate Bridge, a developer of projects that produce global offsets. “This provides clarity on the Australian scheme and enables liable entities to determine hedging and purchase strategies.”

Prime Minister Julia Gillard has struggled to defend a carbon price more than twice as high as the one in Europe. While Gillard won political support by agreeing to a fixed price on carbon for the next three years, she’s backing down under pressure from business on a price floor of A$15 ($15.90) established last year for the cap-and-trade system starting in 2015. Australia also is restricting access to the global offsets from the United Nation’s Clean Development Mechanism.

The EU, which started the world’s largest carbon cap-and-trade plan in 2005, is following through on a commitment earlier this year to work with Australia and other nations to set up an international network of linked emissions-trading programs by the middle of this decade. Australia started its program this year and will maintain a fixed price for CO2 discharges until the markets are linked.

Delivering ‘Certainty’

“This delivers certainty to businesses that will have a liability under the Australian scheme because they will have access to the largest carbon market in the world,” Combet told reporters in Canberra today. “This is the best sort of confidence, market confidence that you can deliver.”

Australia’s fixed price on carbon was set at A$23 a metric ton for about 300 of its largest polluters on July 1. It will rise at a predetermined-rate of 2.5 percent a year in real terms until 2015. The carbon price is Gillard’s main tool for reducing Australia’s reliance on coal and meeting its target for a 5 percent cut in greenhouse gas emissions from 2000 levels by 2020.

“In the discussions we had with the business community, there was an issue in relation with the floor price,” Combet said. “Business would prefer a fully flexible market price. They deal with it every day with the exchange rate, commodity prices and a host of other things.”

EU Permits Rise

The EU system is based on the cap-and-trade principle and doesn’t allow any minimum prices. The system covers around 12,000 utilities and manufacturers and expanded this year into the aviation industry.

EU permits for delivery in December rose as much as 3.7 percent to 8.46 euros ($10.56) a metric ton on the ICE Futures Europe exchange in London and traded at 8.42 euros at 8 a.m. The contract has lost 41 percent in the past year as an economic crisis curbed demand for pollution rights and exacerbated oversupply of allowances.

The EU is considering tools to improve its carbon program, including an option to delay sales of a yet unspecified number of permits as of 2013. That would help the price rebound from the current levels, which the bloc’s Climate Commissioner Connie Hedegaard and Energy Commisioner Guenther Oettinger have said fail to encourage investment in clean technologies.

‘A Lot Cheaper’

“Buying an EU allowance at current prices is a lot cheaper than doing domestic abatement in Australia, so I would expect some demand once the market starts to trade,” said Seb Henbest, a Sydney-based analyst for New Energy Finance.

Any bigger purchases by Australian companies are unlikely for the moment as domestic political uncertainty is still hamstringing the development of the market, he said. Firms should look to buy either EU or UN credits as early as possible as they are likely to be cheaper than the domestic carbon price, according to Henbest.

Australia agreed to a “sub-limit” on UN-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 up to 50 percent of their liabilities, the ceiling for the use of UN credits will be 12.5 percent, Combet said.

Higher Prices

UN CERs for delivery in December rose as much as 7.4 percent and traded at 3.1 euros a metric ton at 8 a.m. They were down 69 percent in the past 12 months.

The EU and Australia aim to agree registry arrangements for the interim link by mid-2013, according to a statement published today on the EU website.

The changes to the Australian system will involve “minor” legislative amendments, Combet said. They have been agreed to by the Greens and independents, who the ruling Labor minority government relies upon to pass laws, he said. The agreement with the EU paves the way for potential linking with carbon-trading markets in the Asia-Pacific, he said, without elaborating.

Tony Abbott, the Australian opposition leader whose Liberal-National coalition leads polls ahead of elections that must be held by November 2013, has vowed to repeal the so-called carbon tax should he win power.

Treasury forecasts the carbon price will reap A$24.7 billion in revenue within four years. Greens leader Christine Milne, whose party supports the laws and holds the balance of power, told reporters today’s announcement means carbon pricing will be “embedded” into Australia’s financial system.

“Abbott may have backed himself into a corner, ” said Nick Economou, a political analyst at Monash University in Melbourne. “Economic rationality doesn’t come into it. It’s all about politics. For him to fulfill his promise of scrapping the carbon tax would have legal implications and financial implications from the lost revenue. His credibility wouldn’t be sustained if he wasn’t at least seen to try to get rid of it should he win power.”

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