By Matthew Stenberg, Transatlantic Community Analyst
In late August, Australia announced that it would link its domestic carbon trading scheme with the EU Emissions Trading System (ETS) beginning in 2015. As previously discussed onStreit Talk, the EU ETS has been in effect since 2005, serving as a cap and trade market for greenhouse gas emissions. Australian companies will be able to buy European allowances for carbon emissions from July 2015; when full market integration between the EU and Australia is completed by July 2018, European companies will have reciprocal rights to purchase Australian allowances as well.
The Australian emissions trading scheme was established after Prime Minister Julia Gillard brought the Clean Energy Bill 2011 to the floor following an agreement with her coalition partner, the Australian Greens. It was approved by both houses in the fall of 2011, establishing a domestic carbon emissions trading system from July 2012 on. The system requires businesses to purchase emissions permits at set prices until July 2015, when market pricing will take over. By linking to the European system, the carbon markets will be combined. The most important modification to the Australian system is the removal of the previously proposed price floor, which would have differed from the European system and potentially interfered with standardized market pricing between the two.
With the precedent set by Australia’s role in the EU ETS, the European Union continues to negotiate with other countries and regions about further carbon market integration. Discussions with Switzerland about linking its domestic system to the EU ETS have been ongoing since September 2011. Similarly, negotiations with the state of California began in April 2011, which if successful would build upon existing cooperation that California has made with the Canadian province of Quebec. The South Korean domestic carbon trading system, approved in May, could also link to the EU ETS in the future, with Danish EU Climate Commissioner Connie Hedegaard noting the possibility of future cooperation. Analysts have suggested that links between the South Korean domestic system and the European ETS could come as early as 2018.
Not all recent developments in carbon trading have been positive. Plans for comprehensive emissions trading systems have faltered in Japan and failed to get off the ground at the federal level in the United States. But even the newly agreed upon Australian system had a difficult birth. The Labor government under Prime Minister Kevin Rudd proposed the Carbon Production Reduction Scheme, which was originally intended to go into effect in 2010; however, the Senate rejected the system in a vote in December 2009. Rudd withdrew the bill and ultimately the successful establishment of a carbon trading system fell to his successor, Julia Gillard.
Such progress in a short time frame indicates that plans for a Japanese system may yet be approved with time. However, polling in the United States has not revealed conclusive public support for the establishment of a cap and trade system and cap and trade schemes have turned into a political litmus test for the Republican party in the 2012 election season, which suggests that there is insufficient bipartisan political will at this point for the establishment of a system across the United States. Carbon markets do exist on smaller scales, in the aforementioned California system as well as among several states participating in the Regional Greenhouse Gas Initiative.
Australia’s decision to link with the existing EU system rather than maintain a separate domestic system is the first step toward a truly worldwide carbon market that accounts for the negative externalities of pollutants and slows the progress of climate change. While the EU ETS has not been limited solely to EU members (with participation from Norway, Iceland, and Liechtenstein), it functioned only on a regional basis. Moreover, this new cooperation comes after diplomatic conflict between the EU and India, China, and the United States over the incorporation of air travel into the EU ETS. Australia’s decision provides important momentum for continued cooperation to combat climate change and could advance efforts to link other domestic emission trading regimes.