Unclear implications from EU carbon link

28 August 2012

The rumor I blogged about last week is no longer a rumor. Australian Climate Change Minister Greg Combet today announced the Government has done a deal, approved by Cabinet, with the European Commission, independent Rob Oakeshott, and the Greens. They agreed a number of changes to Australia’s emissions trading scheme (ETS, which will succeed the present fixed carbon price from 2015), summarized by Climate Spectator:

The $15 floor price on Australian carbon permits will not be implemented.

Companies will be allowed to use CERs [offsets through Kyoto] up to a maximum of 12.5 per cent of their liability, down from 50 per cent.

From 2015-16, companies will be able to use European ETS allowances to meet their liabilities under the Australian scheme up to a maximum of 50 per cent of their liability (minus any CERs they might also wish to employ).

The Australian government and the European Commission are negotiating on establishing a two-way link to commence no later than July 1, 2018. This would mean Australian government carbon permits could be purchased by companies overseas to meet their liabilities under the EU ETS.

Important details such as the accounting rules, allowance of third-party offsets, and role of land sector offsets are yet to be agreed. A full agreement is expected mid-2013.

An analysis in The Age says “at face value, the announced change looks like a business issue.” Wrong: the details of climate change policy affect us all, because they determine the amount of greenhouse gases emitted and therefore the extent of climate change. Surely it is a political journalist’s job to look beyond the “face value” of policies. That’s what I will make some attempt to do here.

The important question to be asked about these changes is: will they help, hinder, or make no difference to emissions cuts and economic decarbonization? In this particular case it depends on the answer to two specific questions:

  • Will the changes increase or decrease Australia’s carbon price? A lower price would drive less decarbonization.
  • Will the changes increase or decrease creative accounting? Dodgy accounting would mean less genuine emissions cuts.

When the original carbon price policy was announced in July 2011, I was impressed by the inclusion of a floor price. It would have provided some investor certainty to help drive decarbonization. It was one of the best features of the Government’s policy and a reason I chose to support it despite countless reservations. Now it’s gone. Without it, the carbon price could collapse and limit emissions reductions instead of encouraging them. A broader reason why I have supported the carbon price is that it was supposed to have the flexibility to be strengthened in future – instead, it looks like the opposite may be happening.

One of my biggest reservations has been that Australian companies would be allowed to import almost unlimited offsets from overseas. Here the picture is murky: I am not sure whether the new changes should allay or cement my concern. Let’s look at it in some detail.

I strongly oppose international offsets because they are a breeding ground for creative accounting, and humanity urgently needs all countries to decarbonize their economies at home. At times I have also been suspicious about emissions trading generally (an even more fundamental reservation about Australia’s carbon price!), but I accept trading is relatively credible when it takes place in a single scheme with emissions caps and consistent rules, which is the case with Australia’s carbon price, the EU ETS, and could be the case with an Australian-European ETS. For pragmatic reasons I support a well-designed ETS. Nevertheless, it is important to understand that carbon trading and offsets were never intended to cut emissions: it is the cap that limits emissions, while trading is supposed to reduce the cost. The problem with such a market-centered approach to policy is that cheap can mean dodgy – after all, we’re dealing with a market failure in the first place. Thus progress on international linking is not progress on cutting emissions, and may well be the opposite.

The 12.5% limit on CERs is a step forward, though ideally they should be limited to 0%, as they are the cheapest, dodgiest permits (currently the most common type of CER comes from Asian companies who produce gratuitous pollution so they can be paid to stop). If this limit means the majority of permits imported by Australia come from the EU ETS, then that would be more credible than the previously expected wild-west access to international offsets. However, Combet says the Government is also talking to New Zealand about linking to their ETS, which is a joke, and will be looking to link to other emerging carbon markets, which are unknowns.

What about the effect on domestic decarbonization – how will linking to the EU ETS affect the level of Australia’s carbon price? Effectively it means Australia and Europe will have the same carbon price. What will that price be? At the moment the EU ETS is flooded with surplus permits (among other flaws) which have caused its carbon price to plummet to around $10. European politicians are debating whether and how to rectify the situation, but so far coal-addicted Poland has succeeded in blocking progress. (Note the irony that Australia is trying to weaken our carbon price while the EU is trying to strengthen theirs – we should be encouraging them.) Thus the implications of the Australia-Europe link are unclear.

Unfortunately, the Greens seem more interested in justifying their compromises than in explaining the sad state of affairs. Yes, limiting contamination of the Australian ETS by CERs is good news, but it is an oversell to describe the changes as “a big step forward for genuine action to cut pollution both in Australia and globally”. The Greens argue the EU will fix their ETS and their carbon price will recover, but this is counting our chickens before they’ve hatched. They argue international linking builds global cooperation, but this misses the point: what is important is what is being collaborated on. And they argue it will make it harder for Tony Abbott to scrap the carbon price, but Tony Abbott is not a good reason to do anything.

The bottom line is the changes announced today, with the possible exception of the CER limit, will do nothing new to cut greenhouse gas emissions. Offsets will not drive decarbonization, as the abandoned floor price would have done. Meanwhile the Government is dragging its feet on another of its better policies, to close 2,000 MW of coal-fired power.

The best way for Australia and the EU to ensure strong domestic action and a higher carbon price in future would be for both to increase their emissions targets, and ban all international offsets as South Korea and California have done. The ultimate reason why the prices are too low is because the targets are too low. The Government should also bring back the floor price, indeed strengthen it. Now we know $23 hasn’t caused the sky to fall in, the Government could raise the floor price with minimal impact.

In the absence of a floor price, as RenewEconomy points out, “European politics will now be the dominant factor over Australian carbon prices.” Let’s hope Europe’s fossil fuel industry turns out to be less powerful than Australia’s.

While the politicians fiddle, Arctic sea ice is in meltdown. That will be the subject of my next post.


  1. Nice summary. Thanks for linking to my Hot-topic.co.nz post about the NZETS.

  2. […] 2012/08/28: PlanetJ: Unclear implications from [Aus -] EU carbon link […]

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