(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON, July 18 (Reuters) - The European Union and Australia last August agreed to link emissions trading schemes, with the aim of injecting new momentum into flagging moves for a global carbon price.
Less than a year on, it is clear they have conflicting aims.
It should not be a surprise, their motives were probably in opposition from the start: on the European side to fuel demand for emissions allowances and lift carbon prices in its flagging market; in Australia, to access cheaper carbon credits.
Australia’s view is that the present low level of European carbon prices is desirable, to cut the impact of climate policies on consumer energy bills.
Prime Minister Kevin Rudd reinforced that position this week when he proposed to accelerate the union.
If the opposition leader, Tony Abbott, won forthcoming elections, the same view would be doubly underlined.
The European Union’s executive Commission, meanwhile, is equally clear that the carbon price is too low, as its climate division strains every sinew to lift these back above 10 euros.
Inevitably, a full carbon market union - where emissions allowances are directly tradable in two markets - will create tensions, given that the same carbon price will affect countries differently according to their energy mix and priorities.
The result for prices is likely to be on the downside - that is partly the idea, to give polluters access to the cheapest carbon credits and so cut the cost of emissions cuts.
But it also likely to lead to a race to the bottom, as polluters lobby for policymakers to conform to the weakest scheme.
The EU and Australia may have been better to link markets indirectly through a separate, international carbon currency of carbon offsets, leaving policymakers in charge of domestic prices - according to their political priorities - and removing a lever from lobbyists.
Carbon offsets are earned for every tonne of carbon dioxide that project developers cut in poor countries which do not have carbon caps. They sell the offsets to polluters to help them meet targets in cap and trade schemes.
Australia last year introduced a carbon tax from 2012-2015.
The country’s Carbon Pricing Mechanism would shift to an emissions trading scheme from 2015, with prices set by a carbon market like the one the EU introduced eight years ago.
Last year the European Commission and Australian government agreed to link their markets from July 2015.
The link would allow Australian polluters to meet half their emissions liability by buying allowances issued in the EU, and European polluters to do the same from 2018 at the latest.
Industry opposition to the tax, coupled with a much lower European carbon price, prompted Rudd’s proposal this week to accelerate the shift to emissions trading, to next July.
EU carbon contracts for 2014 delivery are trading at 4.3 euros (6.1 Australian dollars) compared with an Australian tax on major polluting companies set for next year of A$25.40 per tonne of CO2.
“The Government has decided to terminate the carbon tax, to help cost of living pressures for families and to reduce costs for small business,” Rudd said on Tuesday.
“The modelling from Treasury shows that in the financial year 2014-15 an average family will receive a cost of living relief to the value of $380 per year.” Currently big polluters pass on the costs of the tax to consumers via energy bills.
Australia’s efforts contrast with those of the European Commission, which is the regulator in charge of administering the EU emissions trading scheme.
It is presently trying to boost prices by removing from its bloated market EU allowances (EUAs) equivalent to about half annual demand.
It seems to have the support of most European countries - with Germany a notable abstention.
The aim is to lift carbon prices.
The Commission’s head of energy Guenther Oettinger last year said an EUA price of 12-18 euros (A$17-A$26) was in the right ballpark.
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At the top end, that is above the level of the Australian tax which Rudd seems so keen to avoid.
EU officials rarely mention carbon prices, given the sensitivity of deliberately raising these, but the implication of their whole market reform effort is to increase them.
It is a mistake to think that linking carbon markets is bullish for carbon prices.
That view is founded on the vague notion that it will somehow build momentum towards a global price, and so advance international climate action and demand for emissions permits.
In fact, the carbon price impact is on the downside.
Australia has already abolished a A$15 carbon price floor in its trading scheme (one of its best design features) as a direct consequence of linking with Europe, and by accelerating a union will shift downwards further to A$6.
On the other side, Europe has bolted on not just an additional market, but a new lobby resistant to higher prices.
In theory, linking emissions markets is a great idea, by giving polluters a wider choice of emissions allowances, creating a deeper, more liquid market, and in theory more efficient carbon cuts.
But that can be achieved indirectly through international carbon offsets - generated by emissions cuts from projects in poor developing countries outside cap and trade schemes.
Making the same offsets equally tradable in two markets would link domestic carbon prices but only indirectly, in the same ways as having separate, tradable currencies, maintaining a firewall and leaving policymakers in control of domestic prices.
It is not a perfect solution: carbon offsets are plagued by credibility problems, where there will always be doubt whether they are really equivalent to a tonne of avoided CO2 emissions.
But it is the best there is in an imperfect world where the prospect for the most efficient solution, a global carbon tax, is as remote as ever.
$1 = 1.0850 Australian dollars $1 = 0.7637 euros Reporting by Gerard Wynn; editing by Keiron Henderson