Should Australia pursue international carbon links?

It has been recently reported that the federal government is considering the possibility of limiting access to international carbon permits. Also, South Korea has said it will ban the use of international emissions units (such as Certified Emissions Reductions (CERs)) under its ETS until 2020. So should this cause Australia to re-consider linking its carbon market with international markets? 

For the first three years of the carbon pricing scheme, Australia will not allow liable entities to offset their Australian carbon liabilities with international emissions units. However, from July 1 2015, liable entities will be able to use certain international emissions units to offset up to 50 per cent of their Australian carbon liabilities. 

Currently, the international emissions units that will be recognised under the Australian scheme include the CERs from Clean Development Mechanism projects under the Kyoto Protocol, emission reduction units from Joint Implementation projects under the Kyoto Protocol and removal units issued by a Kyoto Protocol country.

The Australian government will also link its carbon market with other trading schemes such as the EU emissions trading scheme and the New Zealand emissions trading scheme, if the schemes are deemed by the government to be credible.

However, there are a few things going against the idea of the international linking of carbon markets. For one, South Korea (which is one of the very few countries in the Asia-Pacific region to have legislated an emissions trading scheme legislation) has ruled out international linking until at least 2020, saying that “our 2020 emission target is based on domestic reductions, therefore we will not accept international units”.  Also the EU emissions trading market, meanwhile, is in a state of flux, with the scheme plagued by low permits prices due to overallocation of free permits. 

This raises questions as to why the Australian government has opted for the international linking. If liable entities can acquit their Australian carbon liabilities with international emissions units, the Australian carbon pricing scheme may not raise sufficient funds to maintain the government's generous assistance schemes such as the Jobs and Competitiveness Program, Clean Technology Investment Programs and the household assistance schemes. It may seem counter-intuitive to allow liable entities to reduce their Australian carbon liabilities by paying the money to foreign governments and entities.

The Australian government has however recognised that carbon pollution is not confined to national borders. The government argues that international linking of carbon markets will encourage action to reduce carbon pollution around the world, and play an important role in helping developing countries adopt clean technologies. When an Australian business buys an international emissions unit, it means that a tonne of pollution cannot be released overseas.

The Garnaut Climate Change Review (30 September 2008) found the following potential benefits of the international linking of carbon markets:

-- 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; and

-- Providing equal treatment or a level playing field for trade-exposed industries, through convergence of carbon pricing across countries.

The Garnaut Review however also recognised the potential dangers.

One is that linking with an international market which has a flawed domestic mitigation system will result in the import of those flaws into Australia. Hence, the efficient functioning of the Australian market will depend on the veracity of foreign regulatory systems, including the reliability of the monitoring, reporting and verification systems. This is of particular concern given the problems in the EU ETS market. 

Nonetheless, if the Australian government determines that an international carbon market is not credible, it will not link the Australian market with that market. It may be that more restrictions on the access to international carbon markets should be imposed to protect the integrity of the Australian scheme (as argued by Tristan Edis), but the very idea of the international linking of carbon markets is still a sound one.

Carbon pollution in other countries has direct consequences for Australia given that global warming affects the world as a whole. It therefore makes sense to link the Australian carbon market with the international markets to encourage other countries to reduce their emissions as well. Reducing greenhouse gas emissions is not a competition – it is a global challenge. Either everyone will win, or everyone will lose. 

Albert Yu is a Law Graduate at Allens.