Bills Digest no. 37 2012–13

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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Kai Swoboda, Economics Section
Juli Tomaras, Law and Bills Digest Section
Anita Talberg, Science, Technology, Environment and Resources Section
30 October 2012

Contents
Glossary
Purpose
Background
Financial implications
Main provisions
Main issues
Concluding comments 

Glossary

Date introduced:  19 September 2012
House:  House of Representatives
Portfolio:  Climate Change and Energy Efficiency
Commencement:  Parts 1 and 3 of Schedule 1 commence the day after this Act receives Royal Assent. Part 2 of Schedule 1 commences on 1 July 2013. All other sections of this Act commence the day of Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The main amendments proposed by this Bill are:

1. provide for a link[1] between the Australian Carbon Pricing Mechanism (CPM) and the European Union’s Emissions Trading Scheme (EU ETS) and facilitate convergence of two carbon prices[2] through the:

–      withdrawal of the planned imposition in 2015 of a carbon credit floor price of A$15 per tonne CO2 equivalent (CO₂-e) and allowing the price cap to be referenced against the expected 2015-2016 price of European emissions units (EUAs)
–      application of an additional quantitative restriction of 12.5 per cent on the use of the Kyoto units[3] (CERs,[4] ERUs and RMUs[5]) within the overall 50 per cent annual limit on the use of international emission units by Australian liable entities, thus the remaining 37.5 per cent may be met by other permits, such as EUAs. The sublimit of 12.5 per cent will have effect from the start of the flexible price phase of the scheme on 1 July 2015 to 30 June 2020
–      addition of EUAs as a class of eligible international emission units that may be used by liable entities in Australia from 1 July 2015, in order to satisfy their compliance obligations as emitters of greenhouse gases (GHGs)
–      setting of the proposed carbon price ceiling against the expected price of EU emissions allowances or units (EUAs)
–      removal of the international unit surrender charge and thus repeal of the Clean Energy (International Unit Surrender Charge) Act 2011 and
–      removing the requirement for a minimum auction reserve price for the financial years
2015–16 to 2017–18 from the Clean Energy Act (CE Act), the CE (Unit Issue Charge-Auctions) Act, the CE (Charges Customs) Act, and the CE (Charges-Excise) Act.

2. empower the Minister to make regulations relating to gas use and supply arrangements so as to ensure full coverage of the sector.

Other related Bills that support these proposed amendments to the CPM are the:

• Excise Tariff Amendment (Per-tonne Carbon Price Equivalent) Bill 2012
• Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012
• Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012
• Clean Energy (Charges–Excise) Amendment Bill 2012
• Clean Energy (Charges–Customs) Amendment Bill 2012 and
• Clean Energy (Unit Issue Charge–Auctions) Amendment Bill 2012.

Background

In simple terms, the CPM implemented by the Clean Energy Act 2011 imposes a liability for a compliance year on a liable entity for its emissions of greenhouses gases (GHGs) or, if the entity is a natural gas retailer, for the potential emissions embedded in the natural gas they supply. The CPM has a three-year fixed price period (1 July 2012 – 30 June 2015) followed by a cap-and-trade emissions trading scheme (ETS) where prices will be flexible as determined by the market. However, for the first three years of the ETS a minimum price—the floor price—was to operate. Also, certain international emission units would be able to be used, up to a limit of 50 per cent of an entity’s liability.

To realise the price floor, the Clean Energy Act requires regulations to be implemented. In the face of concerns over the high compliance costs in the Australian ETS due to falling carbon prices in the European Union ETS (EU ETS) and the possible lack of parliamentary support to implement the price floor regulations, the package of measures proposed by this Bill are essentially a political compromise designed to:

• reduce compliance costs from the level that would have been likely to apply under the price floor and
• at the same time ensure that prices are not set at too low a level through the imposition of a sub-limit on certain cheaper emissions units.

Basis of policy commitment

International linking had already been considered and flagged by the government in discussion and information accompanying the then proposed Clean Energy legislation. However, the timing of this linking of the Australian CPM and EU ETS seems to be earlier than was anticipated, with some commentators expressing concerns that this linking may be premature.[6]

On 28 August 2012 Greg Combet, the Minister for Climate Change and Energy Efficiency, announced that Australia and the EU (together with Norway, Iceland and Lichtenstein, the members of the European Economic Area (EEA) which are not members of the Union) would link their emissions trading systems.

Australia and the EU have entered into an agreement over the unilateral linking and there are to be negotiations in the future to work out details for the bilateral agreement that is expected to be concluded by mid‑2015. In terms of the contents of that agreement, issues to be considered include:

• measurement, reporting and verification arrangements
• the types, quantities and other relevant aspects of third party units that can be accepted into either scheme
• the role of land-based domestic offsets
• implications, if any, for supporting the competitiveness of European and Australian industries in particular sectors exposed to a risk of carbon leakage and
• comparable market oversight.[7]

Committee consideration

The Bill was referred to the House of Representatives Economics Committee, the Senate Economics Legislation Committee and also the Senate Standing Committee for the Scrutiny of Bills.

The House of Representatives Economics Committee reported on 10 October 2012.[8] The majority of the Committee recommended that the House of Representatives pass the Bills as proposed.[9] A dissenting report by the Liberal Party members of the Committee disagreed, citing concerns about the ‘unrealistically tight’ reporting timeframe provided to the Committee and the budgetary impacts of the proposals.[10]

The Senate Economics Legislation Committee reported on 29 October 2012.[11] Again, the majority of the Committee recommended that the Senate pass the Bills, but that the Government should consult further with interested stakeholders in the development of regulations.[12] A dissenting report by Coalition Senators recommended that the Bill not be passed, with some of the issues raised to support this view including giving up policy control to the EU, concerns about the integrity of the EU ETS and policy and budgetary uncertainty.[13]

The Senate Standing Committee for the Scrutiny of Bills reported on 10 October 2012.[14] The Committee’s comments can be viewed at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=scrutiny/alerts/2012/index.htm

Policy position of non-government parties/independents

The Coalition

The Liberal Party, which has announced its intention to repeal the carbon price legislation if it accedes to government, does not support the intent of these Bills. According to the Leader of the Opposition, this series of amendments ‘makes a bad tax worse’.[15] Both he and the Leader of the Nationals have accused the Government of making a backflip on its own claims that a floor price is critical to investor certainty and market stability.[16]

The Shadow Minister for Climate Change and the Environment and Heritage argues that by linking the Australian carbon price to that of the EU ETS, the government is handing over control of Australian electricity prices to Europe.[17] He also maintains that the arrangement is ‘a dud deal for farmers’ because it begins with a multi-year unilateral linkage phase, thus locking Australian farmers out of the European market until 2018.[18] In relation specifically to the amendments limiting the import of Kyoto credits, the Coalition has accused the government of increasing costs for Australian consumers.[19]

Greens

The Greens have welcomed the amendments as part of ongoing improvement to the scheme. According to Senator Milne, ‘From 2015 the price will be the European price and by 2018 I would expect that the European price will be greater than the floor price would have been so I think it’s a good thing, it links the two trading scheme and it gets us into a good position with that experience to consider linking with other schemes as they develop over time.’[20] In the eyes of the Greens, these amendments benefit the Australian scheme by ‘increasing its credibility, buttressing the price and encouraging polluters to deliver more of their pollution cuts with genuine action at home’.[21]

Under the original version of the scheme, the Greens had insisted on a price floor out of concern that the Australian carbon price would be set by the cheap Kyoto units. However, the Greens today support removal of the floor price only because it accompanies an agreement to link with the EU ETS and limit to 12.5 per cent the import of Kyoto units.[22]

Independents

The Government requires the support of five out of seven Independents Members to pass any partisan legislation through the House of the Representatives. The Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012 and six associated Bills passed the Lower House on 11 October 2012 with 71 to 68 votes .[23]

Rob Oakeshott, MP.

Despite participating in the initial negotiations to design the Australian carbon price mechanism, Independent MP Rob Oakeshott later withdrew his support for legislation that would enable a carbon floor price. These new amendments, which present an alternative solution to a floor price, are better in line with Mr Oakeshott’s views. ‘In the coming decade, linking to the EU and other emissions trading schemes will see a direct national benefit through larger trading markets, a more stable permit price, and easier options for business to trade across borders.’[24] Mr Oakeshott voted with the Government to pass these Bills.

Tony Windsor, MP

Tony Windsor, MP also voted with the Government on this occasion. He supports these Bills as they represent a move towards a global carbon market, which would be ‘more effective at finding the lowest cost ways to reduce emissions’.[25]

Peter Slipper, MP

Peter Slipper joined the ranks of crossbenchers after a controversial set of affairs and his resignation as Speaker of the House of Representatives on the evening of 9 October 2012. The Opposition called on Mr Slipper to vote with the Coalition out of respect for his electorate that recently elected a Liberal National member to the State government. However, Mr Slipper chose to support the Government.[26]

Senator Nick Xenophon

The Greens hold the balance of power in the Senate and as such, the support of Independent Senator Xenophon is not crucial for these pieces of legislation. Nonetheless, Senator Xenophon has raised concern over the potential for a budget black hole resulting from low carbon prices. According to the Senator, ‘Even if the carbon price dropped as low as the floor price of $15, the Government was going to be looking at a multi-billion dollar deficit compared with the $29 per tonne price it had used for its modelling … With current European permit prices of $10 a tonne the revenue shortfall could be $6 billion per year.’[27]

Position of major interest groups

Environmental groups

Environmental lobby groups have voiced concern over the removal of the carbon floor price.[28] However, some NGOs and sustainable business groups support it.[29] Linking the Australian scheme with the EU ETS is welcomed as a viable alternative to the floor price to ensure low-cost abatement and market certainty.[30] It is also seen as a positive first step towards establishing and linking more carbon markets globally. According to the World Wildlife Fund Australia (WWF), linking two robust schemes with strong provisions can build momentum towards a global market with strong environmental integrity.[31]

The new 12.5 per cent limit on the import of Kyoto credits is a point of divergence between environmental groups. Some support the decision as a way to prop up prices.[32] In contrast, Sustainable Business Australia (SBA), for example, feels that ‘this limit will need to be reviewed at the same time as the details of any agreement with the EU are being negotiated.’[33] WWF, alongside the Climate Institute and SBA, calls for Australia to sign onto a second commitment period under the Kyoto Protocol.[34] For some environment groups this is seen as a symbol to help drive coordinated global action, for others it provides certainty for Australia’s access to Kyoto credits.[35]

Both the WWF and the Climate Institute see all these changes as further underlining the fact that complementary measures—especially in the energy sector—are essential; the Renewable Energy Target and energy efficiency measures in particular.[36] The Climate Institute also proposes some specific amendments to the legislation to improve governance:

The Bills should be changed to ensure the Minister ‘must’ consider the environmental integrity of this Act and Australia’s international obligations under international climate change agreements when setting designated limits.[37]

Not for profit environmental NGO, Greenfleet, has raised concern over the impact of these amendments on the Carbon Farming Initiative (CFI). There is uncertainty as to whether the EU will accept CFI credits and whether the price of EU ETS credits will be higher enough to drive investment in the CFI.[38]

Emissions intensive sectors

Amongst emissions intensive sectors there is general support for the removal of the carbon floor price, which is seen as an unwanted market distortion.[39] Linkage to the EU ETS is also seen as a positive step to reduce the cost of abatement.[40] However, a number of industry bodies, such as the Australia Coal Association, the Cement Industry Federation and the Australian Industry Greenhouse Network (AIGN), would like to see a stronger focus on linkage with Australia’s main trading partners in Asia, rather than with Europe.[41] Only AGL Energy Limited has shown any reservation in expressing optimism on these fronts. AGL is not convinced that the amendments will lead to increased liquidity in the Australian carbon market.[42] There is also some apprehension that linking to the EU ETS will result in Australia losing control of, and therefore sovereignty over, its own carbon market.[43]

The limitation on the import of Kyoto units is not supported by emissions intensive industry groups.[44] The groups say that this distorts the market and is likely to increase the cost of complying with the scheme. However, some of these industry groups recognise and welcome the explicit provision in the legislation ensuring that the 12.5 per cent limit cannot be altered (and therefore cannot be tightened) before 2020.[45] Nevertheless, because this amendment represents a tightening of the previous 50 per cent limitation, AGL recommends some form of grandfathering so as not to disadvantage those participants that over-purchased Kyoto units by acting early.[46]

Changes to the scheme’s coverage of natural gas are issues of major concern to those industry groups involved in the natural gas supply chain. The Australian Petroleum Production and Exploration Association, AIGN and AGL have called for these amendments to be removed and for the situation to be reviewed in time with further stakeholder consultation.[47] It is felt that any gaps in coverage or loopholes of the original legislation would be negligible in practice and excessively complex to resolve adequately.[48]

Business and finance groups

In general, business and financial groups approve of the move to link with the EU ETS and eliminate the carbon floor price.[49]  The limit on the import of foreign units has not been well received as it tends to add unwanted additional costs. However, the minimum five-year term on this limit is of some comfort, especially to those businesses dealing directly in emissions reduction project development.[50] Many Australian businesses are also worried that they may become definitely tied and directly affected by decisions made in the EU.[51] In contrast, the Australian Financial Markets Association (AFMA) is not concerned by this potential threat to Australian sovereignty. According to AFMA, ‘risk is reduced as EUA permits will have a much larger secondary market’.[52]

Financial implications

The Explanatory Memorandum notes that the amendments proposed by the Bill are not anticipated to have a financial impact.[53] This was re-affirmed in the 2012–13 Mid-Year Economic and Fiscal Outlook.[54]

Any financial impact on the budget is likely to relate to changes in the level of international prices for emissions permits. The Clean Energy Regulator is budgeted to receive net revenue of $4.6 billion—the value of emissions permits issued less the value of free permits and carbon credits—in 2015–16, the first year in which the emissions trading scheme is in place.[55] This estimate is based on the carbon price projections included in the original Treasury modelling for the Clean Energy Future package in July 2011, which was for a carbon price of $A29 (in 2010 dollars) in that year.[56]

The 2012–13 Budget Papers acknowledge that changes in international prices have an impact on the net revenue of the package as a whole, with any change in carbon price receipts offset by changes in the cost of assistance under industry compensation arrangements.[57] The Budget Papers also note that in 2015–16, the budget would remain in surplus even if the international price fell to $15, the level at which the price floor was to bind.[58]

Main provisions

Linking the Australian Carbon Pricing Mechanism with overseas Emissions Trading Schemes

Use of eligible emissions units for an entity’s compliance obligation under the carbon pricing mechanism

At present, liability under the carbon pricing mechanism can be satisfied by a liable entity surrendering eligible emissions units. Eligible emissions units are surrendered from a liable entity’s account in the Australian National Registry of Emissions Units (ANREU) by an electronic notice transmitted to the Clean Energy Regulator (CER).[59] When surrendered, each carbon unit represents the right to emit one tonne of CO₂-e for the compliance year.

There are presently three types of eligible emissions units recognised under the carbon pricing mechanism: a carbon unit issued by the Clean Energy Regulator under the Clean Energy Act; an eligible Australian carbon credit unit (ACCU) which may be generated via carbon offset projects under the Carbon Farming Initiative, or an eligible international emissions unit.

Currently, the only categories of eligible international emission units (defined in the Australian National Registry of Emissions Units Act 2011) are Certified Emission Reduction Units (CERs), Emission Reduction Units (ERUs) and Removal Units (RMUs) under the Kyoto Protocol. Thus European allowance units are currently not recognised as eligible emissions units and are ineligible for use under the Australian carbon pricing mechanism.

Linking the Australian CPM with the EU ETS

Item 5 11 of Schedule 1 to the Bill amends the definition of ‘prescribed international emissions’ unit in section 4 of the ANREU Act to include a European allowance unit (EAU) and an Australian-issued international unit (AIIUs).

Prescribed international emissions unit

This means that the general rules dealing with non-Kyoto prescribed international emissions units under Part 4 of the ANREU Act will also apply to EAUs and AIIUs.  As prescribed international units, EUAs and AIIUs are included as eligible international units for the purposes of section 122 of the Clean Energy Act.[60]

In practical terms this amendment means that EUAs and AIIUs may be surrendered by Australian liable entities in order to meet their liabilities under the CPM beginning the 2015–2016 financial year, up to prescribed limits.

It is envisaged that in the future, other eligible international ‘listed units’ may be included and thus surrendered by Australian liable entities in order to meet their liabilities under the CPM.[61]

Item 4 amends section 4 of the ANREU Act to include the definition of EUA, which is defined as an allowance (within the meaning of the European Union Greenhouse Gas Emission Allowance Trading Directive[62]) issued by, or under the authority of:

–      an EU member state or
–      a foreign country that is not an EU member state but participates in the scheme for greenhouse gas emission allowance trading established by the Directive.

However, it does not include an allowance issued in respect of aviation activities listed in Annex 1 of the EU GHG Emission Allowance Trading Directive.[63]

In practical terms, an EUA is an emission right that allows industries that fall under the regulations of the European Emission Trading Scheme to pollute one metric ton of CO₂-e.

Registry amendments to facilitate indirect linking and the issuance of Australian Issue International Units (AIIUs)

Item 1 inserts the definition of an AIIU as another category of prescribed international unit which may be issued under proposed section 48A of the ANREU Act (at item 17 of Schedule 1 to the Bill).

While the ANREU Act will be amended to provide for linking to international registries, there may be cases where direct registry-to-registry linking is not possible[64]. In such cases, the Clean Energy Regulator will (subject to agreement by international registries) open and operate international registry accounts which will issue AIIUs. AIIUs correspond to foreign emissions units withdrawn from circulation within the relevant foreign registry.

Regulations will provide the conditions that must be satisfied in order for the AIIUs to be issued, in addition to providing for any further provisions in relation to AIIUs (Item 17, proposed sections 48D and 48E, ANREU Act). The Explanatory Memorandum states that to ensure adequate parliamentary oversight, these regulations will be disallowable instruments.[65]

In circumstances where these conditions are not met, the Regulator must cancel the AIIUs from a person’s Registry account (Item 23, proposed section 66A, ANREU Act).

The regulator will be required to publish on its website, the total number of prescribed international units of each class for which there are entries in Registry accounts at the end of a quarter, and also publish any other information relating to the units or registered holders of the units, as is specified in the regulations (item 20, proposed section 59A and item 21, proposed subsection 61(5) ANREU Act).

Relinquishment requirements for AIIUs and EUAs are to be consistent with those for other carbon units (item 13, proposed section 4, Item 23, sections 66B-66D, ANREU Act).

Civil penalty provisions, including ancillary contraventions, will apply if a person contravenes or aids a contravention of a requirement relating to AIIUs set out in the regulations (Item 17, proposed subsections 48E(4), 48E(5) and 48E(6) ANREU Act).

Removal of the carbon floor price and minimum auction reserve charge

The Clean Energy Act and associated legislation provides that from 1 July 2015 (the flexible period) the carbon units will be auctioned. For at least the first three years of market prices there was to be a floor price of A$15/t (increasing by four per cent per annum) and a ceiling of A$20 above an international price which was to increase by five per cent per annum. The price floor was to be implemented through a minimum auction reserve price (necessitating a top-up fee if the eligible international units had been purchased for less than the floor price) and a charge on the surrender of eligible international emissions units. The floor price was planned to apply to international units.

This Bill withdraws the planned imposition in 2015 of a carbon credit floor price so as to ensure that the cost of carbon units in the CPM reflects the cost of carbon units in the international market – effectively allowing the cap to be referenced against the expected 2015–2016 EUA price. Unlike the CPM, EU ETS does not provide for a price floor on its EUAs. Consequently it is necessary to remove the requirement for a minimum auction reserve price for the financial years 2015–16 to 2017–18 from the Clean Energy Act (CE Act), the CE (Unit Issue Charge–Auctions) Act, the CE
(Charges–Customs) Act, and the CE (Charges–Excise) Act (item 66, section 111, CE Act; item 2 of the CE (Charges–Excise) Amendment Bill 2012, amending section 8, CE (Charges–Excise) Act; item 2, of the CE (Charges–Customs) Amendment Bill 2012, amending section 8, CE (Charges–Customs) Act).

Also removed is the requirement for an international unit surrender charge, thus section 124 of the Clean Energy Act is repealed as is the whole of the Clean Energy (International Unit Surrender Charge) Act 2011 (items 80 and 107).

Why have a floor price in the first place?

The inclusion of a domestic floor price was largely to provide greater investment certainty during the initial phase of the emissions trading scheme by avoiding the risk of sharp downward movements in the price.[66] Together with the price ceiling—set $20 higher than the expected international carbon price—the price floor was also designed to reduce risks for business as it gained experience in having a market set the carbon price.[67]

Papers prepared for the Multi-Party Climate Change Committee (MPCCC) note that while price uncertainty can be reduced in a number of ways including permit banking and international linking, the main advantage of a price floor was that it provided participants with greater certainty upon which to make abatement decisions by reducing downside risk.[68] The main disadvantage of a floor price is that it could lead to higher than necessary abatement costs to meet a given target. This is because if the floor price is exercised, abatement could have been achieved at a price lower than the floor price.[69]

The MPCCC also noted that price floor arrangements were proposed for the UK (from 2013) and the California ETS (upon commencement from 2012) and in operation, albeit at a low level, as part of the US state-based Regional Greenhouse Gas Initiative.[70]

The proposed price floor in the UK, due to commence from April 2013, is designed to support investment in renewable energy by providing greater certainty about the level of the carbon price. It is also intended to lift the level of the carbon price from the low levels in the EU ETS.[71] The proposed price floor would apply to the electricity sector only and would require the payment of a levy that is equivalent to the difference between the EU ETS permit price and the nominated floor price. The floor price is proposed to be £9.55 per tonne of CO2 (around $A15) in 2014–15.[72]

The proposed California floor price takes the form of a ‘reserve price’ for auctioned units, which acts as the settlement price at auction unless a higher price outcome results from the auctioning process. The reserve price for the next auction of emissions permits (‘Californian Carbon Allowances’ (CCAs)), to be held in November 2012, is $US10 (approximately $A10.30).[73]

In setting the level of a floor price, expectations of what the market price would be, and therefore whether the floor price comes into effect, are important:

The level of a floor price could be set below expected market prices, as a safeguard against inadequately low permit prices. This is appropriate given the intention to manage the ambition of Australia’s contribution to global mitigation through the quantitative target. Setting a relatively low floor price would imply that it is most likely that the actual price will be determined by the market most of the time; while setting the floor price at a relatively high level implies that it would be likely to determine the actual price most of the time.[74]

It is important to note that during early 2011, when the MPCCC was considering the design features of a possible emissions trading scheme, the carbon price in the EU ETS was around €15 (around $A19)[75] and that expectations at this time were for a global price of between €20–€30 by 2020.[76]

Impact of uncertainty on investment

Investors in renewable energy are faced with uncertainty from a range of sources. These include the risks associated with domestic and international policy changes (including those arising from changes in government), economic uncertainty and, if a carbon price were in operation, uncertainty relating to the level of the carbon price.

The level of a carbon price, and expectations of future prices, are important for investors, as the carbon price is an important factor in determining the relative competitiveness of higher cost renewable electricity with lower cost sources such as gas and coal.

The implementation of a price floor was intended to boost certainty for investors in renewable energy by providing for a fixed minimum price for three years following the fixed carbon price. However, beyond 2017–18, any continuation of a price floor (and, if it was to continue, the level of the price floor) was dependent on decisions by the Government following a review by the Climate Change Authority.[77]

The proposed arrangements provide a degree of certainty for the period 2015–16 to 2017–18 relating to the operation of a one-way linking arrangement, with the Government announcing the intention to provide for a two-way link from 1 July 2018.

However, the Government has also retained some flexibility within this framework, arguing that this reflects the need for flexibility in both setting and changing limits over time:

• a ‘designated limit’ of 12.5 per cent for Kyoto units applies until 2019–20, beyond which it can be amended by regulation—the 50 per cent limit on international units also applies up to this date and
• additional ‘eligible international emissions units’ (ie: other than Kyoto units and EUAs) may be proscribed in regulation and each of these may also be subject to a designated limit from 1 July 2015 with a minimum of 12 months’ notice.

With most renewable energy technologies having asset lives of more than 25 years[78] it is not clear that removing a degree of the price certainty for three years will significantly impact on investment decisions. This is particularly relevant given the remaining domestic policy uncertainties about the level of the carbon price and other support for renewable energy including:

• government decisions on the outcomes of a current review on the renewable energy target
• how the Clean Energy Finance Corporation operates to support different renewable energy investments and
• the political uncertainty associated with the lack of bi-partisan support for a carbon price.

While considerable uncertainty remains, participants in the Australian emissions trading scheme, investors and other experts nevertheless appear to be factoring in the continuation of an emissions trading scheme. However, there is considerable variation in the longer term expected level of a carbon price. In a recent survey by the Centre for Climate Economics and Policy, more than 80 per cent of participants expected that a carbon price would exist in Australia in 2025, with the average price expected by respondents (including those who expected a zero price) to be $22 in 2025.[79]

Auction arrangements

The proposed changes to the maximum quantities of carbon units that can be auctioned in advance are unrelated to those parts of the Bill that implement the abolition of the price floor and one-way linking with the EU ETS.

There are three ways that the Clean Energy Regulator issues emissions permits:

• to eligible emissions-intensive trade-exposed businesses under the Jobs and Competitiveness Program
• to eligible coal-fired electricity generators under the Energy Security Fund and
• to registered participants—who may be liable entities or individuals or businesses that wish to hold emissions units for other purposes—through the auctioning of permits.[80]

Once issued, emissions permits can be traded between registered parties, with exchanges required to be notified to the emissions registry administrated by the Clean Energy Regulator. The timing of the issue of permits and the number of permits issued is subject to specific restrictions:

• a minimum period of 13 months applies for a regulation to be made to specify the total emissions cap for the scheme for the subsequent five-year period from 2016–2017 (a period of a minimum of 1 month applies for 2015–16) and if this is not met a ‘default’ emissions cap is in place[81]
• the Clean Energy Regulator is limited to issuing only the number of permits of a specific vintage year that equals the total emissions cap under the scheme for that year[82] and
• the Clean Energy Regulator is limited to auctioning 15 million emissions units in a financial year before their vintage year if no total emissions cap for the scheme has been set for that vintage year.[83]

The Bill proposes to increase the maximum number of units that may be auctioned prior to their vintage year in the event that an emissions cap has not been set, from 15 million units to 40 million for units with a 2015–16 vintage year auctioned during 2013–2014, and then a maximum of 20 million units for auctions of units relating to later vintage years.[84] Another change to auctioning arrangements proposed by the Bill is to prohibit the Regulator from auctioning carbon units more than 36 months from the start of a vintage year.

Emissions units are required to be relinquished to the Clean Energy Regulator in a number of circumstances, such as when units are issued under the Jobs and Competitiveness Program for a particular year but planned production ceases during the year, or where a court has ordered relinquishment.[85]

Specific administrative arrangements for relinquished units are also provided, including a requirement that relinquished units for fixed charge years (2012–13 to 2014–15) are cancelled in the holder’s registry account. Relinquished units for flexible price years (2015–16 onwards) are transferred to a Commonwealth relinquished units account.[86] These can then be issued through secondary auctions.

The Bill provides that all relinquished units are cancelled. Instead of issuing relinquished units through secondary auctions, new units can be issued through the regular auction process.

Items 58 and 60 substitute an auction limit of 20 million emissions credits for the existing 15 million limit that applies as a limit to the number of permits than the Clean Energy Regulator can auction if no emissions cap has been set for that vintage year.

Item 59 inserts proposed paragraphs 101(1A) and 101(1B) into the CE Act, to impose an auction limit of 40 million units with a vintage year of 2015–16 for auctions conducted during 2013—14 if there are no regulations specifying the emissions cap for 2015–16.

Item 61 inserts proposed subsection 101(3), which provides that the Clean Energy Regulator can only auction emissions units of a particular vintage year if the year in which the auction occurs is within 36 months of the relevant vintage year.

The rationale for limiting the number of permits that can be auctioned when the overall emissions cap is yet to be determined is to prevent the risk that future governments could auction an unlimited number of carbon units from distant vintages, which has the potential to compromise subsequent governments’ decisions on setting future pollution caps.[87]

The Regulatory Impact Statement (RIS) on carbon unit auction arrangements, prepared by the Department of Climate Change and Energy Efficiency in September 2012, included an assessment of options for amending the limit on the number of carbon units that can be auctioned when a pollution cap is not in place.[88] The choice of a limit of 40 million units for 2015–16 and annual limits of 20 million units thereafter is based on the likely hedging requirements for electricity
generators—who in general already enter into forward price contracts for several years in advance to manage risks associated with the electricity market—and a limit of around one-eighth of the likely 2020 emissions cap.[89]

A number of electricity providers expressed support for abolishing or increasing the auctions cap on the basis that the limit constrains forward electricity contracting and distorts the market. Such a measure was also supported as a means to stimulate demand in secondary markets.[90] The Electricity Supply Association of Australia commented that:

There is insufficient volume of early permit releases. This is compounded in earlier years by the fact that auctions are not expected to occur before 2014 and that there is an arbitrary restriction on the quantum of units available before an emissions cap is confirmed. The requirement that permit purchases be settled years in advance of when the permit is actually surrendered imposes an inefficient and unnecessary barrier on energy companies’ participation in domestic auctions.

Making it harder for energy companies to secure prices for their future carbon liability at domestic auctions could undermine energy contracting. Independent modelling shows that reduced electricity contracting could lead to increased wholesale market volatility and much higher prices for customers – a 10 per cent increase in retail electricity prices for households and 15 per cent for large users in a single year.[91]

Item 87 repeals existing subsections 210(3) and (4) of the CE Act—which provide for the cancellation of relinquished units for fixed charge years and the transfer of relinquished units from the owner’s registry account to a Commonwealth relinquished units registry account—and inserts a new proposed subsection 210(3) which provides that all relinquished units are cancelled.

Item 68 repeals section 112 of the Act, which provide for auctions of relinquished carbon units. References to section 112 are repealed by items 65, 69, 70, 71 and 72.

Items 62, 63 and 64 amend section 102—which provides that the total number of emissions units that the Clean Energy Regulator issues for a vintage year through auctions as well as the other mechanisms (free allocations under the Jobs and Competitiveness Program and Energy Security Fund) equals the carbon pollution cap number for that vintage year—so that the cancelled relinquished units are included in the cap.

Changes to the treatment of some natural gas supply and use arrangements

Natural gas is included in the coverage of the carbon price mechanism. However, there are gaps in the coverage. Users of natural gas in small facilities producing less than 25,000 tonnes of GHGs per year are not captured by the CPM in circumstances where they either produce the natural gas themselves or buy that gas from a supplier whose delivery and metering occurs upstream of the point of withdrawal of the gas from the pipelines. 

The proposed amendments empower the Minister to make regulations setting out specific circumstances in which liability would arise for a supplier or end user of gas so as to ensure full coverage of natural gas and maintain competitive neutrality.[92]  Specifically, the definition of ‘supply’ is to be set by regulations. There is also created an ‘own use notification’ and ‘follow-up notification’ (Item 52, proposed section 35A, CE Act).  These concepts are meant to assist suppliers in determining whether the gas they have supplied to a person has been used by that recipient, and how much of that gas has been used. This is designed to assist the supplier in identifying the relevant entity and imposing liability for GHG emissions. The proposed amendments are only meant to cover specific commercial arrangements in the gas sector and will not apply to small users such as households.[93] However, their operation may be problematic.

The treatment of natural gas under the existing legislation is already complex and it is unclear what these further changes will add, other than unnecessary complexity. The regulations will deal with the substance of the changes and, given this, it is difficult to remark on the proposed changes, other than to say that some guidance or indication as to the possible details needs to be made available for public consideration before any decision is made to proceed with the proposed amendments. [94]  Because of the rather comprehensive[95] treatment of natural gas supply under the existing legislation, it appears that the effort devoted to trying to fill in rather insignificant gaps may outweigh the benefits.

Main issues

What are the benefits and costs of linking emissions trading schemes?

Under the original Clean Energy Future package, the Government indicated that businesses would be able to purchase international units from ‘credible international carbon markets or emissions trading schemes in other countries’.[96] Linking was to be limited in quantitative and qualitative terms:

• from 2015–16 to 2019–20, liable entities are required to meet at least 50 per cent of their annual liability with domestic carbon units and
• qualitative restrictions are to be imposed by listing approved emissions units in regulations. Eligible units were to include those traded under the Kyoto Protocol, with the types of units and restrictions imposed by the EU ETS and NZ ETS to be taken into account when determining other international units that may be accepted for compliance.[97]

The key benefit to linking the Australian ETS with other countries is that it allows liable entities in Australia the opportunity to access the lowest cost emissions units available. Other benefits to international linking include:

• reducing mitigation costs and price volatility by making it easier to set and adhere to national emissions budgets
• providing financial incentives for developing countries with opportunities for low-cost mitigation to take on commitments
• providing equal treatment or a level playing field for trade-exposed industries, through convergence of carbon pricing across countries and
• greater market liquidity and reduced risks of market abuse by dominant players.[98]

Some of the key risks of international linking relate to the relatively small size of Australia’s ETS compared to those in other countries and the likelihood that Australia would import the risk of policy change from these countries.[99]

Not all countries with emissions trading schemes have planned for international linking in the next few years. Indeed, some countries—notably South Korea and proposed regional emissions trading schemes in China—have explicitly ruled out linking with other schemes prior to 2020 on the basis that their domestic carbon markets need to be developed prior to linking, or that abatement should be pursued domestically in the first instance.[100]

The degree of linking between emissions trading schemes varies across schemes, ranging from no limits to the use of Kyoto units (New Zealand) to the use of quantitative and qualitative limits on Kyoto and other units (EU ETS) (table 1).

Table 1 Use of Kyoto emissions permits, selected emissions trading schemes

Source: Multi-Party Climate Change Committee, ‘EU Limits on International Linking’, Department of Climate Change and Energy Efficiency website, viewed 17 October 2012, http://www.climatechange.gov.au/government/initiatives/mpccc/meetings/fourth-meeting/eu-limits-international-linking.aspx#footnote2

What is the likely effect of removing the price floor and introducing limits on different types of international emissions permits on the Australian ETS?

By simultaneously removing the price floor and introducing a one-way link with the EU ETS that incorporates a sub-limit on the use of Kyoto emissions units, the Government has sought to balance a number of factors. The proposed arrangements are likely to reduce the costs of complying with the Australian ETS compared to other countries in a period of low international carbon prices, but they do so by reducing the price certainty for investors in renewable energy in the short term.

The net effect of this balancing act on prices and costs of the Australian ETS, renewable energy and abatement investment and emissions is difficult to determine.

The direct compliance cost impact of the proposed changes on entities liable under the Australian ETS will ultimately depend on the level of prices for EUAs and CERs from 2015–16:

• if the price for EUAs and CDMs is above $15 (the original price floor), then liable entities will face a lower cost under the original arrangements
• if the price for EUAs is above $15 but the price of CDMs is below $15 then liable entities are better off under the proposed arrangements and
• if the price of EUAs and CDMs is less than $15 then liable entities are even better off under the proposed arrangements.

Therefore, the cost of complying with the Australian ETS requirements for liable entities will be lower if EUAs and CDMs are below the existing floor price of $15, even when applying a sub-limit to CDMs, which generally trade at a substantial discount to EUAs.

However, the direct cost impact is only one effect of the proposed changes. Other elements that the Government has sought to balance include:

• whether a known price minimum over the first three years of the ETS, which is then subject to a review, provides more certainty for investors and participants than an unknown price in an existing and liquid market and
• whether the reduction in policy control of domestic arrangements is offset by the benefits of promoting international emissions trading with the consequent risks associated with policy changes in other emissions trading schemes.

As noted above, other countries with an operating or proposed ETS have chosen a mix of arrangements relating to linkages with other schemes, varying from no linkage to having prescribed limits on the use of Kyoto permits. The abolition of a floor price could reduce price certainty for investors in renewable energy projects. However, it is arguable that this certainty was limited anyway given the asset lives of such investments, and that the key driver for renewable energy investment will be the likelihood of high carbon prices in the future together with support from other complementary measures.

Factors impacting on the EU carbon price and 2020 price forecasts

The abolition of the floor price and one-way link to the EU ETS from 2015, and then a proposed two‑way link from July 2018, will provide for price signals from the EU ETS to translate directly through to Australia earlier than under current arrangements. This means that carbon price movements in the EU ETS will be more relevant to Australia. But what drives carbon prices in the EU ETS and what is this price likely to be by 2020?

EU ETS carbon price 2005–2012 and factors affecting prices

The price of EU ETS emission units (EAUs) is currently at historically low levels, having declined significantly over the past year or so (figure 1). EUAs are currently around €8 which is around $A10.  In the absence of policy intervention by Brussels, Australian businesses will enjoy much lower compliance costs, which may impact on the ability of the scheme to act as incentive to change behaviour. Carbon analysts Repu Tex expect that the price of EUAs will be trading at around $A11.50 per tonne between 2015 and 2020, which is below the planned $A15 floor price.  Indeed, potential Australian demand for EUAs may not be sufficient to soak up the excess supply and thereby have an impact on the weak price for EUAs.[102]

Figure 1                EU ETS EUA and CDM spot price, October 2008–October 2012 (€)

Source: Point Carbon EUA OTC assessment, Point Carbon website, viewed 22 October 2012, http://www.pointcarbon.com/news/marketdata/euets/forward/eua/

The fall in prices for EUAs and CDMs in the EU ETS can be attributed to both supply and demand factors:

• [103] In addition to this oversupply of EUAs, CER issuance has increased in recent years, further contributing to an oversupply in CERs, which have no major market outside of the EU ETS[104] and
• on the demand side, there has been lower than expected demand for permits caused by the
  2008–2009 economic downturn in Europe and a weak industrial recovery and the substantial investment in domestic renewable energy capacity has meant lower demand from fossil fuel-based electricity generation.[105]

Academic studies have examined how economic, financial and environmental factors have influenced the EU ETS price over the first two phases of the Scheme. While to some extent these factors may have been swamped by the oversupply issue and the low level of industrial activity, they may nevertheless be important determinants of the EU carbon price. Factors include:

• industrial production — fluctuations in the level of economic activity were found to be a key determinant of the level of carbon price returns in the combustion, paper and iron sectors during 2005–2007. The economic recession during the years 2008 and 2009 resulted in a reduction in emissions (and demand for permits) of around 150 million tonnes of CO2
• financial markets — international shocks may be transmitted to carbon markets, where permits are held for compliance purposes but also for speculative purposes as per other types of financial instruments. The price differential between EUAs and CERs may be partly explained by arbitrage strategies by market participants and
• energy prices and the weather — carbon prices in phase 1 were found to be linked to the volumes of fossil fuels used (oil, gas and coal) but this relationship depends on the period under consideration. The weather (extreme events and departures from seasonal averages) has a statistically significant effect on carbon price changes (this is also the case on the supply of renewables taking into account rainfall (hydro), wind speeds (wind energy) and hours of sunshine (solar)).106]

While these underlying factors are important in determining carbon prices also relevant are policy issues related to the operation of the market and uncertainties over policy direction.[107] These are discussed further below.

EU ETS carbon price projections to 2020

There are a range of price projections for the EU ETS from carbon market analysts. These incorporate a number of assumptions about the policy and operation of the EU ETS over the next decade and market fundamentals such as the rate of economic growth.

There have been a number of forecasts of the EU ETS price in 2020 (table 2). In general, there is limited information on the assumptions behind each of the forecasts, so their usefulness can be limited. It is important to note that the forecasts were made at different points in time and may also make different assumptions about future policy arrangements.

Table 2 Selected forecasts for the EU ETS carbon prices, 2020 (Euros)

(a) ‘Green’ CER (CERs eligible for phase 3 of the EU ETS).

Sources: Australian Treasury, Strong Growth, Low pollution: Modelling a carbon price, Chart Data: Chapter 3: Global climate change mitigation, Chart 3.4 Global carbon prices, Treasury website, viewed 24 September 2012, http://carbonpricemodelling.treasury.gov.au/carbonpricemodelling/content/chart_table_data/chapter3.asp; ‘SocGen cuts carbon price forecasts by over 22pct’, 17 January 2012, viewed 24 September 2012, http://af.reuters.com/article/energyOilNews/idAFL6E8CG2TV20120117; ‘Point Carbon issues 'very gloomy' forecast for EU carbon prices’, Business Green, 5 December 2011, viewed 29 October 2012, http://www.businessgreen.com/bg/news/2129829/carbon-issues-gloomy-forecast-eu-carbon-prices; Point Carbon, CER price forecasts to 2020: green and shades of grey, 19 June 2012; Point Carbon, EU ETS eligible sCER price forecast, 5 October 2012; Point Carbon, Carbon market brief, sCER price forecast, 4 October 2011, ‘Deutsche Bank Downgrades Carbon Market Forecast (Ind. Report)’, ep Overviews Publishing Inc., 7 September 2011, viewed 30 October 2012, http://epoverviews.com/articles/visitor.php?keyword=Deutsche%20Bank; Point Carbon, Carbon market analyst: CER price forecasts to 2020, 13 September 2011; Point Carbon, Price forecast for EU ETS eligible sCERs towards 2020, 21 February 2011; Exchange rates as at 31 July 2012, viewed 30 October 2012, http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html

Economic factors

In terms of economic fundamentals, the most recent assessment by the International Monetary Fund (IMF) (October 2012) is that the EU economies as a group will only grow by 1.5 per cent in 2015 and 1.7 per cent in 2017 (figure 2).[108] These low levels of economic growth are insufficient to absorb the excess supply of emissions permits, with an estimate that EU GDP growth of 4.3 per cent to 2020 is required to restore the balance between demand and supply.[109]

Figure 2                EU area real economic growth and forecast growth, 2010 to 2017 (per cent)

Source: International Monetary Fund, World Economic Outlook Database, October 2012, viewed 22 October 2012, http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weoselagr.aspx

Uncertain economic conditions and concerns about sovereign debt in a number of EU-member countries is likely to contribute to low levels of economic growth. While the Government has incorporated low levels of economic growth in the EU into its budget forecasts, there are significant risks that continued uncertainty over future economic conditions in Europe, or the exit of one or more countries from the EU, will further reduce EU and world economic growth.[110]

EU policy uncertainty about mechanisms to support a carbon price

In the current circumstances of significant oversupply of EUAs, any additional demand for these units by Australian businesses is not expected to impact on the price of EUAs.[111] However, demand from Australia may influence the EUA price if supply is delayed or permanently reduced.

Possibly the most important policy issue impacting on the EU ETS carbon price that is currently being debated by EU member countries is a proposal to withhold (or set aside) carbon units from the market between 2012–2020 to support a higher carbon price. Such a proposal—first mentioned by the European Commission in 2010—would involve a yet-to-be-determined number of emissions permits being withheld from the market on a temporary or permanent basis.[112]

The set aside proposal is currently under consideration by the Commission and EU member countries, with the Commission outlining on 25 July 2012 proposals to ‘back-load’—delay auctioning allowances from early in phase 3 of the EU ETS (2013–2020) to later in the period—between 400 million–1200 million EUAs.[113] While the proposal is for units to be temporarily withheld from the market but returned prior to the end of phase 3, some analysts consider that only a permanent withdrawal will impact the price of carbon and that the increase in price will depend on the volume of units permanently removed from the market:

Point Carbon is reported as considering that a permanent set-aside of 600 million allowances, combined with a postponement of 200 million allowances until after 2016, could lead the price of EUAs to rise to €15 by 2020[114]:

• Jefferies Bache is predicting EUAs to average either €9, €14 or €19 in 2015 if 400 million tonnes, 900 million tonnes or 1.2 billion tonne set-asides are implemented without permanent cancellation, with the EUA price dropping to a low of €6 in 2018 before rising to €7 in all three scenarios.[115]

It is unlikely that any decision on the set-aside proposal will be made until 2013. In recent months a number of countries, including Poland and the Netherlands, have been reported to be against a set‑aside.[116] Furthermore and presumably, a set-aside decision would be informed and made problematic by the continuing economic uncertainty in Southern Europe. Even if a set-aside can be successfully negotiated, the price outcome will depend on the size of the set-aside and whether it is temporary or permanent.

Further uncertainty about the EU ETS is related to what action will be taken on a review of the scheme, which is expected to be published in November 2021.[117] Proposals included in an EU draft document include:

• deepening the EU's 2020 emission reduction pledge to 30 percent under 1990 levels from current levels of 20 percent, consequently cutting CO2 permit supply over the next eight years by 1.4 billion
• cancelling an undisclosed number of EU Allowances from the third phase of the EU ETS
• deepening the rate at which the EU ETS cap is cut on an annual basis beyond 1.74 per cent
• extending the scheme to other sectors in 2021, such as transport fuels
• limiting or banning the use of U.N. carbon credits in the scheme and
• launching a price management mechanism to control supply of permits and prices.[118]

By linking to the EU ETS, the price implications of these various policy measures will be directly experienced by businesses in Australia. 

Signing up to Kyoto 2

The Kyoto Protocol is an international agreement that sets legally-binding emissions targets and international emissions trading rules for developed economies, and is due to expire at the end of 2012.

The linking of the CPM and EU ETS may have implications for Australian and EU support for a second commitment under the Kyoto Protocol. At the very least it may mean that both parties are in a sturdier position should a new international agreement as envisaged under the Durban platform[119], fail to be achieved. However, it was reported that at the recent Bangkok talks: stronger

More than 130 of the world’s poorest nations have sought to pressure richer countries to agree new legally-binding goals to cut greenhouse gas emissions by threatening to deny them access to cheap U.N. carbon credits, potentially making it more expensive for them to meet domestic emission goals.[120]

While both Australia and the EU include Kyoto units as compliance ‘currency’ in their respective schemes, for a while now there seems to be a steady drift away from reliance on the use of Kyoto units for compliance. The EU has already announced its intention to restrict the use of CERs.[121] The proposed amendment under this Bill to impose a 12.5 per cent sub limit[122]on the use of Kyoto units is perhaps further evidence of this emerging trend. As the purpose of emissions trading schemes is to use price as a signal for behavioural change so as to reduce greenhouse gas emissions, it is unclear that this will necessarily be facilitated by access to cheaper units in order to satisfy compliance obligations under the respective schemes. At present, CERs are trading at less than €1.6 ($A2).[123]

There already exists an indirect link between CPM and the EU ETS via the International Transaction Log (ITL).[124]  Australia has not yet indicated whether it will commit to a second Kyoto commitment period which would run from 2013 to 2017. If Australia does not commit[125] to a second Kyoto commitment period but the EU does, Australian entities may still be able to participate indirectly by gaining access to Kyoto units at primary market prices as a consequence of their linking with the EU.

At the time of writing this digest, it was reported that the EU had been unable to finalise its negotiating position for the upcoming UN climate talks in Doha. Significantly, the reported reason for this is because:

EU member states are divided on the issue of whether to carry over excess credits (AAUs) from the first period into the second period. Poland is blocking adoption of any EU position that would eliminate these excess credits, a move called for by the G77 group of developing countries and all western European countries. Poland has garnered the support of other eastern European and Baltic states for its position.[126]

Opponents of carrying over the credits say it would render a second Kyoto commitment period meaningless, because central and eastern European countries were over-allocated allowances due to their rapid de-industrialisation in the early 1990s.[127]

At the conclusion of the talks it was decided to adopt an open mandate for negotiations at Doha

that takes into account the Polish position and [their] right to preserve and dispose of the emissions reductions achieved under the Kyoto Protocol.[128]

In the event of a failure to achieve an international agreement, a series of bilateral and multilateral linkages seems to already have been contemplated by many states as an acceptable proxy, albeit less efficient than a more harmonised and coordinated effort coming out of an international agreement. Nonetheless the Australian CPM and EU ETS linking creates a significantly larger carbon market, making further international linking a real prospect, and may serve as a strategic pathway to broader and deeper action on climate change on a global scale.

Carbon Farming Initiative

Since the commencement of the CPM on 1 July 2012, unlimited use of ACCUs has been allowed for compliance use. ACCU credits are derived from Kyoto Protocol compliant projects approved under the carbon farming initiative (CFI). Such projects may include agricultural emissions avoidance projects, landfill gas (LFG) legacy emissions avoidance projects and reforestation projects. Entities that achieve abatement of CO₂-e under the CFI are allocated CFI credits which can be sold to liable entities for surrender under the Scheme, these credits can be banked for future use and exported.

Abandoning the planned $15/t CO₂-e floor price for the flexible price period as a reference point for a project’s viability,[129] combined with expected low EUA and CER[130] prices may have a chilling effect on the supply of CFI ACCUs and thus investment in associated domestic abatement projects. Based on the New Zealand experience this may happen notwithstanding the limit on the use of CERs and EUAs.

As at the time of writing this digest, the availability of ACCUs for use in the EU ETS following full bilateral linking by 2108 remains unclear.[131]

Concluding comments

The linking of the Australian CPM and the EU ETS has been generally welcomed by liable entities in Australia who are expected to benefit from a decrease in the cost of compliance. However, the success of such linkage will largely depend on accomplishing a necessary level of harmonisation in order to avoid price distortions. The contours and details of further design negotiations will therefore be of key importance in this regard, as will the extent to which Australian businesses are impacted by decisions in Brussels such that Europe would significantly benchmark Australia’s energy policy.[132] Finally, at least in political terms, this legislation entrenches emissions trading as a linchpin in Australian climate change policy.

The linking unfortunately raises concerns about the viability of Australian CFI projects with the abandonment of the plan to have applied a $15/t CO₂-e price floor from 1 July 2015.

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