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By Naomi Tajitsu and Nina Chestney
WELLINGTON/LONDON, July 17 (Reuters) - The goal of a global carbon market to tackle climate change, once touted to reach $2 trillion by 2020, received a major setback when Australia on Thursday scrapped its planned carbon trading scheme, which would have been the world’s third biggest.
Australia’s Emissions Trading Scheme (ETS) was to have started in 2015 and linked with the world’s biggest market in Europe — the first direct connection between major emissions trading schemes and a test case for possible links between schemes emerging in China and planned in Japan and the United States.
“There’s a realisation that linking ... is not going to happen within the 2020 timeframe,” said Andrei Marcu, head of the Carbon Market Forum at the Centre for European Studies in Brussels, referring to when a new global treaty on emissions reduction is expected to begin.
Another looming setback to connecting markets and eventually setting a global price on polluting carbon is the possibility that New Zealand’s ETS, small but one of the first to be established, will be scrapped after a September election.
Currently there is no universal carbon price, each ETS operates under different rules and sets individual prices, ranging from around 20 U.S. cents to $45 a tonne, yet a tonne of polluting carbon in each country is the same.
In 2008 when Australia, one of the world’s biggest carbon emitters on a per capita basis, announced plans for an ETS it was hoped it might be the impetus for global CO2 trading, starting with Europe, Australia and New Zealand.
It would have seen Australian polluters buying European permits, providing a solution to the massive glut of permits in the European Union’s Emissions Trading System (EU ETS), which drove prices down to record lows below 3 euros a tonne last year.
“Linking the Australian to the European ETS could have been a catalyst for linking systems together,” said Ingvild Sorhus, an Oslo-based senior analyst at Point Carbon, which is owned by Thomson Reuters. “The repeal of the Australian scheme has to be considered as being one step backwards in this regard.”
Carbon markets allow polluters to buy and emit CO2, blamed for global warming. Under such “cap-and-trade” schemes, companies or countries face a carbon limit. If they exceed that limit they can buy permits to emit from others in the scheme.
Around 40 countries and over 20 states, regions or cities have either set up or are planning to set up emissions trading schemes or carbon taxes. Together, they account for more than 22 percent of global emissions.
The world’s carbon market was estimated at $53 billion last year as prices slid in the main EU and U.N. schemes and trade was limited in new programmes, Thomson Reuters Point Carbon estimated in January.
U.N. negotiations on a 2015 pact to tackle climate change, to come into force from 2020, are not aiming to agree on a new global market but proponents hope it will offer guidance on how the growing patchwork of national and regional markets will fit into an international framework.
But carbon experts seem resigned to the currently fragmented emissions market, hoping national and regional schemes will in at least in the short-term develop the world’s carbon market.
“A new global (climate) agreement is highly unlikely to be reached any year in the future. I’d rather see more room for national or regional mechanisms spreading all around in the short-term,” said Matteo Mazzoni, carbon analyst at Italy’s Nomisma Energia.
Abolition of Australia’s carbon tax and planned emissions trading was a centrepiece policy of Prime Minister Tony Abbott’s 2013 election and on Thursday he secured enough Senate votes to scrap the policy.
Abbott, once a climate-change sceptic, argues the tax and emissions trading are burdens on industry and consumers and do little to cut polluting CO2 emissions.
“The policy world seems to be struggling to implement carbon pricing and more importantly, getting it to stick and remain effective,” David Hone, climate change advisor for Shell, said in a blog last month.
“Part of the reason for this is a concern by business that it will somehow penalize them, prejudice them competitively or distort their markets,” he added.
Last month, China launched the seventh and final regional pilot carbon market, but plans to set up a national trading scheme remain fraught with uncertainty.
Many including the United States and Japan, are designing programmes to eventually use foreign credits, but most remain stuck in the planning stages given the difficulty of aligning reduction targets, sector coverage and other issues.
As a result, linking remains limited. The EU ETS includes non-EU members Norway, Iceland and Liechtenstein, while California and the Canadian province of Quebec linked their regional trading schemes earlier this year.
The future of New Zealand’s ETS, the world’s second oldest market which started in 2008, is also facing a political axe, depending on the outcome of general elections in September.
A win by the opposition Labour Party would likely result in a partnership with the Green Party, which has proposed scrapping the scheme in favour of an emissions tax.
“The reality is that it’s a political football in every country and so the rule setting tends to be set by domestic politics, and the characteristics of the domestic industry,” said Stuart Frazer, director of emissions trading consultancy Frazer Lindstrom in Wellington.
But even if the NZ carbon market survives the election, its impact in the international marketplace is diminishing.
After opting out of a second phase of the Kyoto Protocol, the globally agreed climate change treaty that ran from 2008-2012, it will now lose access to international carbon permits from 2015, a key source of liquidity for its market. (Additional reporting by Ben Garside in London; Editing by Lincoln Feast and Michael Perry)