Politics, price challenge Australia-EU carbon links, lawyer says

Higher carbon prices in Europe would challenge Australia’s willingness to link its new greenhouse-gas market with the world’s largest as rising compliance costs hurt emitters, according to a lawyer.

By agreeing to link to the European Union market, Australia handed control of its carbon price to a bloc that has a more ambitious climate target than its own, Martijn Wilder, a partner at Baker & McKenzie LLP, the Sydney law firm, said.

“Australia’s price will be influenced by the market where the reduction target is the highest in the world,” he said October 10 by phone. “If EU prices go much higher, say 30 euros, then the Australian government will be placed under a lot of pressure by industry to revisit the linking arrangements.”

Benchmark European Union carbon permits have plunged 74 percent since reaching a record high of 31 euros ($40) a metric ton on April 21, 2006. The European Commission in Brussels has proposed to temporarily curb supply of allowances sold at auctions starting next year to help deal with a supply glut. Even with temporarily delayed supply, EU permits will only reach 8.50 euros a ton in 2013 and 9 euros on average in the eight years through 2020, according to an October 11 forecast by Trevor Sikorski, an analyst in London for Barclays Plc.

EU carbon for December rose as much as 4.1 percent to 8.01 euros yesterday on the ICE Futures Europe exchange in London.

The bloc is also seeking more permanent fixes to its glut, which could boost its prices further, Wilder said, citing analysts.

Risk management

Linking to Europe gives Australian emitters access to futures so they can hedge carbon-price risks should they want to, the Australian Department of Climate Change and Energy Efficiency said October 12 in an e-mailed response to questions. The linkage enhances “the long-term carbon price signal for businesses, irrespective of whether or not businesses hedge future carbon price risk in advance.”

The department didn’t immediately comment on what it would do should EU prices surge.

Australia has committed to reduce carbon pollution by 5 percent from 2000 levels by 2020 irrespective of what other countries do, and by as much as 25 percent depending on the scale of global action. The EU has pledged to cut emissions by at least 20 percent in the two decades through 2020 and as much as 30 percent.

Under the linking plan announced August 28, Australia will allow its emitters to use international allowances including EU permits and UN Certified Emission Reductions for as much as half of their compliance needs, tightening the specific limit on UN offsets to 12.5 percent from 50 percent.

Floor scrapped

The nation would scrap a floor price of A$15 ($15.24) a metric ton that was set to take effect in 2015. EU carbon for 2015 was yesterday at 9.16 euros, or A$11.63, reducing costs for Australian emitters compared with the disbanded floor.

The two regions will start a partial link of their carbon markets by July 2015, allowing Australian companies to purchase EU allowances immediately for future compliance. Negotiations for the permanent two-way link would start once the commission gets a mandate to begin discussions on it from member states, the department known as DCCEE said.

“We are handing over control of the carbon tax, which in effect will determine Australia’s electricity prices, to Europe, which will have no interest in the flow on impact to Australian businesses and families,” said Greg Hunt, climate spokesman for Australia’s opposition Liberal party.

The leader of that party, Tony Abbott, has pledged to end what he says is a “toxic tax” that will raise prices in Australia and eliminate jobs as mines are forced to close or relocate, should he win office at elections to be held next year.

Regulatory uncertainty

The regulatory uncertainty in Australia and Europe helps explain why carbon trading is off to a slow start in Australia, said Baker & McKenzie’s Wilder.

“Three years is a long time away,” he said.

By linking with the EU, Australia is reaffirming that carbon markets are the most efficient way to reduce emissions, the DCCEE said.

“The government believes that linking the Australian and European systems will lead to further development of a global carbon market,” Wilder said.

Australia may also link with carbon programs in California, China, South Korea and New Zealand, which could also provide supply to reduce compliance costs, Wilder said.

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