Australia’s linkage to the EU trading scheme - what does this mean for you?

18 Dec 2012Archived News Climate Change Matters

The linkage to the EU scheme moves towards a global carbon trading scheme. This provides an opportunity for business to purchase offsets in Phase 3 of the EU Emissions Trading System that can be used to partially acquit your carbon liability with significant cost saving. 

What’s happening?

1 July 2015 – An interim one-way link with the European Union Trading System (EU ETS) will begin.

1 July 2018 – Full two-way linkage is to commence no later than this date.

50% of an Australian liable entities’ liabilities will be able to be met through purchasing eligible international units, however;

12.5% is the maximum contribution that can be met with Kyoto units.

Linkage transition stages

Pre-linkage: From the initiation of the Australian carbon price (1 July 2012) until the introduction of the one-way linkage (1 July 2015) to coincide with the end of the fixed price period. During this period only Australian units can be surrendered, compliance costs are not affected by the linkage.

Interim one-way linkage: From 1 July 2015 Australian liable entities will be able to purchase and surrender European units but Australian units will not be able to be sold to Europe until a full two-way linkage is established. This may result in lower compliance costs for Australian entities, the inability to sell Australian units rules out upwards price pressure.

Full two way linkage: Under the agreement, a full two-way linkage must be established by 1 July 2018 however this may be introduced earlier. This could result in lower or higher compliance costs for Australian entities depending on the influence of foreign supply/demand.
 

Engaging with the EU ETS

 

 

Pre-linkage

Until 1 July 2015 any interactions with the EU ETS would be limited to hedging future compliance costs. This could involve options, futures or buying international units for use in the 2015/16 compliance period and beyond.

Direct – well suited for multi-national companies with an European presence

Direct participation would involve opening an account in the European Union Registry and purchasing Phase 3 units from 21 November 2012 onwards. Units can be purchased at auction or through standard commercial and contractual arrangements. Purchased units can be banked for future use up until December 2020.

Indirect – Australian companies can purchase offsets

A number of local companies such as Macquarie Bank, Climate Bridge and Climate Friendly offer services to facilitate Australian companies participating in spot, futures, option and forward trading of European Union Allowances (EUAs) and Certified Emissions Reduction (CERs). These companies  enabling you to purchase EUAs and CERs within Australia.

Post-linkage

From 1 July 2015 onwards businesses will be able to meet its liability by surrendering international units. These units could be purchased directly or indirectly as described above. Units could be purchased and banked in a registry account until they are needed to be surrendered to meet liability, or futures or options could be acquired to enable purchasing of the units to occur immediately prior to the surrender date providing a cash-flow advantage.

Once the full two-way linkage is established (no later than 1 July 2018) the incentive for businesses is to purchase EUAs is likely to be largely removed as the ability for Australian Emission Units (AEUs) to be sold to Europe is expected to result in the price of AEUs to follow the price of the European market.

Unknown factors - timing and government

The timing of full two-way linkage commencing which has the potential to change the price of AEUs.
Domestic regulatory uncertainty specifically the actions of a Coalition government in the event that they win the next federal election could affect the relevance of an EU linkage.

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