EU and Australia to link carbon trading schemes

The Australian government has announced that its new emissions trading system will be linked to the European Union's scheme by 2018, in a major expansion of the scope and influence of the EU's flagship climate policy.

A partial tie-up will be implemented in 2015 before a full two-way link is established three years later, allowing companies to use carbon units from either the European or Australian system in what will be the world's biggest emissions trading scheme.

Connie Hedegaard, the EU's climate change commissioner, said the first full linking of inter-continental emissions trading system would be a "significant achievement" for both Europe and Australia. She added: "It is further evidence of strong international cooperation on climate change and will build momentum further momentum towards establishing a robust international carbon market."

Australia's climate change minister Greg Combet said the link reaffirmed that "carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions."

Prime Minister Julia Gillard's government wants to reduce emissions by 5 per cent of 2000 levels by the end of this decade. The country's reliance on coal power stations means it is among the highest per capita emitters in the world. Since July, 300 top polluters – responsible for 60 per cent of emissions – have been charged a carbon tax equivalent to €19.08 per tonne.

As part of the deal with the EU, Australia will not implement a €12.45 floor price it had planned to enforce when moving to a floating emissions trading system in 2015. The low price of carbon permits in Europe – currently trading around €8.16 a tonne – had led to concerns among Australian businesses that they would face higher charges than their European competitors.

But, announcing the deal, Combet said: "This means that from July 1, 2015, Australia's carbon price will effectively be the same as that that operates in our second largest trading bloc. The same carbon price will cover 530 million people." Australia is also negotiating with New Zealand over linking with its emissions trading system.

Australian businesses can start buying EU allowances from today in readiness for compliance from 2015 – a move expected to boost demand for European permits. Companies will only be able to cover a maximum 12.5 per cent of their liabilities through the United Nations' low-cost Kyoto credits. European firms will only be able to use Australian permits from 2018.

In a statement the European Commission said linking emissions trading systems had a number of benefits, including "reducing the cost of cutting carbon pollution, increasing market liquidity and supporting global cooperation on climate change". However, it said there were "a number of policy matters to be considered" before the full link is established. The EU's emissions trading system was set up in 2005 and involves all 27 member states plus Norway, Iceland and Liechtenstein.

The EU's push for global cooperation on the trading scheme had been hit when a number of countries including the United States and China vociferously opposed the inclusion of international airlines in the scheme starting from this year – so the collaboration with Australia is a timely boost.