Josephine V. Yam

World's Largest Carbon Market: Linking Australian & EU Emissions Trading Systems

Last week, the Australian Minister for Climate Change and Energy Efficiency, Greg Combet, and the European Commissioner for Climate Action, Connie Hedegaard announced that Australia and the European Union (EU) will be linking their emissions trading systems.

Commissioner Hedegaard said: "We now look forward to the first full international linking of emission trading systems. This would be a significant achievement for both Europe and Australia. It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international carbon market."

Minister Combet said: "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."

A link between emissions trading systems allows companies in one system to use units from another system for compliance purposes. The advantages of linking include:

  • reducing the cost of cutting carbon pollution because enterprises will have access to more and lower cost emissions abatement units;
  • increasing market liquidity, which in turn offers a more stable carbon price signal;
  • increasing business opportunities to trade because companies with excess units will have access to more buyers and companies that need more units can purchase them from a wider range of sellers; and
  • supporting global cooperation on climate change.

A full two-way link between the EU and Australian cap-and-trade systems will start by July 1, 2018. Under this arrangement, private industry will be able to use carbon units from the Australian emissions trading scheme or the EU Emissions Trading System for compliance under either system.

An interim link between the two systems will be established allowing Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme from July 1, 2015 until the full link is operational in 2018.

According to the EU website, this linking arrangement “represents the first step towards linking the established carbon market in Europe with developing carbon markets in the Asia Pacific. Together, the linked Australian and European emissions trading systems will be the world’s largest carbon market and a major driver of the global transition to a low carbon economy.”