Out-Law News 2 min. read

Australia and Europe to form first inter-continental emissions trading scheme

Australia and Europe plan to fully link their emissions trading systems by 2018 to create the first inter-continental scheme, officials have announced.

"Mutual recognition" of carbon allowances under both systems will allow businesses based in either jurisdiction to use carbon units from either the Australian emissions trading scheme or the EU Emissions Trading SScheme (EU ETS) for compliance under either arrangement, according to the announcement.

Full integration will begin no later than 1 July 2018; however the authorities have also announced an "interim arrangement" allowing Australian businesses to begin using EU ETS allowances to meet up to 50% of their liabilities when the Australian scheme begins on 1 July 2015.

Greg Combet, Australia's Minister for Climate Change and Energy Efficiency, said that this would "provide Australian businesses with access to a larger market for cost-effective emission reductions". Australia is expected to be a net importer of allowances under the new scheme.

"Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions," he added.

Connie Hedegaard, European Commissioner for Climate Action, said that full integration would be a "significant achievement" for both territories and was "further evidence of strong international cooperation on climate change".

"The European Union is the first regional emissions trading system and spans the largest part of the European continent," she said. "We now look forward to the first full inter-continental linking of emission trading systems."

Under emissions trading arrangements a central authority sets a cap on the amount of greenhouse gases that may be emitted by industry within a particular territory. Companies are allocated emissions permits or allowances representing the right to emit or discharge a specific volume of emissions. Companies that need to increase their volume of emissions must buy additional allowances from those that do not need to use their full quota of allowances.

The EU ETS began in 2005 and was the first large emissions trading scheme in the world. It covers more than 11,000 factories, power stations and other installations with a net heat excess of 20MW per year. It currently operates in all 27 EU member states as well as Iceland, Norway and Liechtenstein.

Energy law expert Ronan Lambe of Pinsent Masons, the law firm behind Out-Law.com, said that the planned link-up was a "significant opportunity" for members of the existing EU scheme, as well as a "significant vote of confidence" in the European scheme by the Australian Government.

"Once both systems are linked in full, which is scheduled to happen no later than July 2018, EU market participants requiring additional allowances will be entitled to meet their obligations through use of Australian allowances," he explained. "In addition, those EU market participants with more allowances than they require will have access to a wider pool of potential purchasers – especially since Australia is expected to be a net importer of allowances."

As part of the arrangement, the Australian Government has said that it will no longer introduce a "price floor" – a minimum price for units - as part of its system. It will also limit the number of units that can be purchased under the existing Kyoto Protocol agreement by companies based in Australia to 12.5% of their liabilities, although businesses will still be able to meet up to 50% of their liabilities by purchasing eligible international units.

The European Commission and Australia will now work to agree registry arrangements for the interim link by mid-2013. The Australian Government has agreed to enter into negotiations on the full linking agreement, and the European Commission will seek a mandate to do so in the coming months.

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