A Tenuous Linkage

ECO cautiously welcomes the announcement made this week by Australia and the EU that they have entered into negotiations to link their carbon trading schemes by 2018. If implemented with ambition, this could be a positive step toward greater international cooperation in carbon pollution reductions.

However, ECO wants to respectfully remind delegates that if two dogs play together they will catch each other’s fleas. In the case of linking carbon markets together, weak ambition may be contagious. If neither emissions cap meets the targets that science suggests, then linking is only a gimmick.

Europe is already and will continue to face deficiencies in the EU ETS. Unless policymakers move to restore scarcity to the oversupplied European carbon market, they risk weakening incentives for zero-carbon development not only in Europe but also in the countries to which they link. Australia’s economy is the size of Spain’s, and could be overwhelmed by a flood of cheap European emission allowances, undermining climate action there. We note that this linkage is marginally better than allowing a flood of even cheaper CDM credits into the Australian scheme, which was a distinct possibility before changes were made in order to link with Europe, but, as feared, is likely to undermine climate action on both sides.

Full linking with the Australian scheme after 2018 also presents potential dangers for the EU. Since Australia’s 2020 climate targets remain considerably weaker than Europe’s, an insufficiently robust Australian cap could see a reverse flow of cheap Australian credits into the European market exacerbating the existing oversupply. Also, there is a danger that Australian land-based credits could enter the European scheme by the backdoor.

ECO urges the EU to act quickly and decisively to make structural adjustments to the EU ETS by permanently removing surplus emission allowances to fix the glaring problem of oversupply.

Australia regrettably had to do away with its intention to install a carbon floor price, which provided an important safety net to ensure a minimum level of investment in domestic pollution-saving activities. Removing this safety net means that other policies become even more important. ECO urges Australia to commit to extend and increase the Renewable Energy Target to at least 40 per cent.

Finally, ECO can’t help wondering…surely the EU did not forget to make joining the second commitment period of the Kyoto Protocol a pre-condition for bilateral negotiations between the EU and Australia to proceed?

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