28 Aug 2012

Australian Carbon Scheme to link to European Carbon Scheme - carbon floor price scrapped

On 28 August 2012, Australian Climate Change Minister Greg Combet announced a linkage of the Australian carbon scheme to the European Union's carbon scheme, intended to be effective from 1 July 2018, with an interim one-way linking effective from 1 July 2015.

Under the current scheme, Australian liable entities may use "eligible international emission units" to meet up to 50% of their emissions liability, as from the commencement of the flexible phase of the scheme on 1 July 2015.

Until now, the only classes of "eligible international emission units" (defined in the Australian National Registry of Emissions Units Act) have been Certified Emission Reduction Units (CERs), Emission Reduction Units (ERUs) and Removal Units (RMUs) under the Kyoto Protocol.

With this announcement, the Government will prescribe European Union emission allowances as an additional class of eligible international emission units that may be used by liable entities in Australia from 1 July 2015.

The Government will also apply an additional quantitative restriction of 12.5% on the use of the Kyoto units (CERs, ERUs and RMUs) within the overall 50% annual limit on the surrender of international emission units by liable entities.

With these two measures, for emission years from 1 July 2015 a liable entity could, for example, use Kyoto units for up to 12.5% of its emission liability, European allowances for another 37.5% of its emission liability, and Australian carbon units or Australian carbon credit units for the remaining 50% of its emission liability.

The Climate Change Minister also announced that the Australian Government would discontinue its plans to impose a $15 floor price on emissions units from 1 July 2015. This measure had been the subject of significant criticism and was also proving difficult to implement in the face of international emission units trading well below that price.

The fixed price (which is currently $23 per tonne) will continue to apply as we are still in the fixed-price phase.

The Australian Government and the European Commission have exchanged letters setting out a pathway to full linking of the two carbon schemes by 2018, including the interim one-way use of European allowances in Australia from July 2015.

This access to a wider range of international emission units, and the dropping of the unworkable floor price, is likely to be beneficial to the Australian carbon scheme, ensuring that its carbon price stays within range of the European economies and international carbon prices.

The European Commission will also be hoping that this additional demand from Australian liable entities will soak up some of the excess liquidity in the European scheme, and may exert some upward pressure on the European carbon price.

Once European allowances are prescribed as "eligible international emissions units", they will also become financial products regulated under the Corporations Act, and subject to the licensing, market regulation and inside information provisions of the Corporations Act in Australia.

We will provide updates as any further developments arise.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.