AT the end of August, Climate Change Minister Greg Combet announced that, in a few years, the Australian carbon pricing scheme would start to link with the European Union’s emissions trading scheme.
The Federal Government crowed that we would be part of the world’s largest carbon market and help drive the global move to low carbon economies.
Critics said it was evidence of a backflip on a freshly inked piece of legislation.
What was not discussed in great detail was what it means for the operation of the Carbon Farming Initiative.
I was initially excited by the prospect.
Surely, linking with the world’s largest ETS would be a win for farmers and land managers with an interest in the CFI.
But it turns out that it’s not that simple.
Is linking with the EU ETS a friend or foe of the carbon farming initiative?
In a previous article, we looked at how the fixed (2012-13 to 2015-16) and flexible (from July 1, 2015) price periods of the carbon pricing scheme worked and what demand might exist for carbon offsets produced in Australia and hence, returns to Australian farmers and land managers.
At that time, there was a floor price of $15 a tonne of CO2 equivalent in the flexible price period and liable entities could buy 50 per cent of their offsets from international sources.
The floor price was a real issue for some liable entities who questioned why they should pay $15/t if they could get offsets cheaper elsewhere.
Enter the link with the EU ETS, which starts in 2015.
The EU ETS itself was set up in 2005. It covers just under half of Europe’s total greenhouse gas emissions and involves at least 30 times more liable entities than Australia’s carbon pricing scheme.
Given the number of participants, the market is deep.
In the past year, prices have come back from a peak of above 11 euros to a low of ?6 and have more recently traded for ?7-8.
This equals about $A9-$A10.
On the face of it, this is good news for Australian liable entities because they will have to pay less for emitting carbon than they would have otherwise.
Liable entities would also hope that the liquidity of the EU ETS market will make prices more stable in the long term.
The depth of the EU ETS would have been of interest to Australian farmers and land managers, but for one major issue: Europeans cannot use Australian CFI offsets to meet their obligations under the EU ETS.
This is because the European scheme does not allow trading of permits generated from agriculture and forestry.
This is a problem for those producing offsets under the CFI, because that is essentially what it is about!
It should be said that this seems to be a point of debate for the Europeans. Some of their concerns arise from the permanence of carbon sinks and views that there should be fewer emissions, rather than the same emissions with more sinks.
Like Australia, the EU scheme does not include agriculture and forestry as participants in the ETS.
That is, they do not have to pay to produce greenhouse gases.
Any attempt to recognise offsets produced from agriculture and forestry in Europe raises questions about whether to bring agriculture and forestry into their scheme as well.
I am sure many Aussie farmers would be happy not to prod this issue too much, especially if our own domestic carbon policy is about to be more heavily influenced by the EU, but it is hard to see this not happening.
The second issue is price, and the impact is clear.
If the EU ETS trades at prices lower than our previous floor price, then Australian farmers and land managers stand to earn less than they would have under the original arrangements.
And just because you can turn a profit in the next three years when the carbon price is $23/t CO2 equivalent and above, there is no guarantee that you will be viable after July 1, 2015 when the price drops.
Looking at it from another perspective, farmers, land managers and project developers have three years to work out how to produce offsets at a price of about $A10 to meet domestic demand, given that liable entities will still need to buy 50pc of their offsets locally even after linking.
An underlying assumption here is that the price in the EU ETS will be low.
There is no guarantee of this though, given the past volatility of EU ETS prices.
Some commentators have even suggested that the price could be $15/t CO2 equivalent by the time linking starts between the Australian and EU schemes in 2015. Where have we heard about a price of $15/t before?
The bottomline is that linking will be of greatest benefit to liable entities through access to cheaper offsets.
For farmers and land managers interested in the CFI, linking holds no real benefit at this stage and is more a foe than friend.
There will be no increase in the size of the market for Australian carbon credit units and our domestic farmers, land managers and project developers need to sharpen their pencil more than before in the hope of being able to generate offsets at what may be a lower future price than they would have otherwise planned for.
*From Stock Journal, October 18 issue, 2012.
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