The Australian Minister for Climate Change and Energy Efficiency, the Hon Greg Combet MP, and the European Commissioner for Climate Action, Connie Hedegaard, have announced that Australia and Europe will be linking their emissions trading systems.

A full two-way link, by means of the mutual recognition of carbon units between the two cap and trade systems, is to commence no later than 1 July 2018. Under this arrangement, businesses will be allowed to use carbon units from the Australian emissions trading scheme or the European Union Emissions Trading System (EU ETS) for compliance under either system.

“Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions”Combet said.

“The European Union is the first regional emissions trading system and spans the largest part of the European continent. We now look forward to the first full inter-continental linking of emission trading systems” Hedegaard said.

“This would be a significant achievement for both Europe and Australia. It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international carbon market."

To facilitate linking, the Australian Government will make two changes to the design of the Australian carbon price. These are that:

• The price floor will not be implemented.

• A new sub-limit will apply to the use of eligible Kyoto units. While liable entities in Australia will still be able to meet up to 50 per cent of their liabilities through purchasing eligible international units, only 12.5 per cent of their liabilities will be able to be met by Kyoto units.

In recognition of these changes and while formal negotiations proceed towards a full two-way link, an interim link will be established, whereby Australian businesses will be able to use EU allowances to help meet liabilities under the Australian emissions trading scheme from 1 July 2015 until a full link is established, i.e. no later than 1 July 2018.

“Starting today, Australian liable entities can purchase EU allowances for future compliance in Australia”Mr Combet said.

“These arrangements provide Australian businesses with access to a larger market for cost-effective emission reductions and provide European market participants with enhanced business opportunities”Combet said.

Mr Combet also said the arrangements would provide flexibility to businesses with operations in both Australia and Europe, which could reduce compliance costs.

“I welcome the changes agreed to by the Australian Government which will allow the interim arrangements to proceed. The step-wise linking of the European and Australian market will ease full linking in 2018”Hedegaard said.

The European Commission and Australia will work to agree registry arrangements for the interim link by mid 2013. The Australian Government has agreed to enter into negotiations on a full-linking agreement, and the European Commission will seek a mandate to do so in coming months.

An exchange of letters between Minister Combet and Commissioner Hedegaard to confirm this shared understanding on linking arrangements has taken place.