Linking does not necessarily mean a merger. Technical compatibility seems far more feasible option. What are the consequences of this limited approach?
Emissions trading schemes’ linking represents a particularly vivid idea these days with emerging initiatives in bilateral relations between EU ETS and Australia, Australia and California, California and Quebec.
It is clear that EU ETS emissions registry, currently undergoing major refurbishment on account of merging 27 national registries (separate to date but governed but generally the same EU rules), in the event of linking with entirely divergent program, like for instance Australian, will face unprecedented hurdles and problems. The possibility for resolving these problems will depend on a series of regulatory assumptions, which, in turn, may have an impact on market participants’ behaviours and strategies.
Given that EU ETS-Australia emissions trading schemes linking has reached the stage of political declarations, let’s try to predict some points in the timeline as well as outline the conception.
The procedure for linking - based on certain assumptions may be, in brief, as follows:
1. The first preliminary step (already completed) is the declaration of intentions to link emission trading schemes, made by the political bodies of the European Union and hypothetical other country (in this case Australia).
2. The necessary follow-up to the point 1 above is that the relevant EU legislation must be changed via amendments, inter alia, to the Registry Regulation.
3. Amendments to the Registry Regulation must be adopted by the EU Member States in the Climate Change Committee.
4. During a scrutiny period of three months that will start after the adoption, the European Parliament and the Council (at the level of the respective ministers of the EU Member States) will have the possibility to block the adopted changes.
However, in the event that the amendments are accepted by unanimity by the EU Member States in the Climate Change Committee, the European Commission is in the position to have very high expectations that the changes to the legislation will be in force without additional impediments.
Linking does not necessarily mean merger
The fundamental issue for resolving a series of further practical technicalities is the decision as regards linking method and scope. This area remains, however, to a broad extent terra incognita as practical experiences with such a project are negligible and the scope for potential solutions and designs very broad.
Principally, it is useful to observe that linking does not mean that Australia ETS would merely join the EU ETS and the Union Registry. As the more workable option appears that each registry would operate its own accounts i.e. the Union Registry would continue operating with its Member States and the Australian Registry would operate only Australian accounts.
The subtle distinction between the two above approaches is that the more limited one does not consist in the full merger of the two emission trading schemes but only connecting them to the extent that operations between accounts are feasible. The consequence of this is that to achieve that goal the two systems would not need to be the same but should be technically compatible.
Under such an approach:
1. From a technical point of view the Union Registry should be able to exchange information online with the emission trading scheme registry of Australia regarding the transactions carried out with allowances between the two registries. The EUTL and the Australia Transaction Log should also have a direct online connection in order to verify the correctness of the transaction data at any time.
2. The expected functionality is that the installation operators and all other entities that have opened accounts either in the Union Registry and or Australia Registry should be able to initiate transactions between their accounts in either of the registries.
3. The legislation should be laid down ensuring the EU allowances and the Australia allowances are inter-exchangeable and can be used to meet both EU and Australia emission trading schemes compliance requirements for surrendering against verified emissions.
4. The possibility of making transactions between the accounts in the two systems must be ensured.
5. Auctioning poses a specific issue. The preliminary view is that no common auctioning would be allowed between linked emission trading schemes under the above limited approach since joint auctions would involve a risk of escalation of multiple regulatory and legal problems.
There can be seen in that regard an analogy to regulatory considerations made on occasion of linking California and Quebec emission trading schemes, where Allowances Price Containment Reserves (being a facility which allows regulated entities to purchase allowances at quarterly auctions at set prices) of both programs were not merged and consequently it was decided that only entities registered into the California cap-and-trade system were eligible to purchase allowances from the Californian Reserve and only entities registered into the Quebec cap-and-trade system were eligible to purchase allowances from the Quebec Reserve.
The alternative conception for merging both schemes would inevitable require the more extensive unification of rules.
Key political decisions already made as regards EU ETS-Australia emissions trading schemes linking
The said alternatives gain a key importance in the light of the political declaration (see Commission’s media release of 28 August 2012 ‘Australia and European Commission agree on pathway towards fully linking emissions trading systems’) that the partial link will be established between the schemes to allow Australian businesses to buy and use European Union emissions allowances for compliance under the Australian scheme from July 2015, until the full link comes into effect no later than July 2018.
Under the arrangement of full, two-way linking as from 2018 businesses will be able to use carbon units from the Australian emissions trading scheme or the EU Emissions Trading System (EU ETS) for compliance under either system.
To facilitate linking, the Australian government will make two changes to the design of the Australian carbon price:
1) the price floor will not be implemented;
2) 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% of their liabilities through purchasing eligible international units, only 12.5% of their liabilities will be able to be met by Kyoto units.
The above-mentioned press release indicated that the European Commission and Australia identified a number of policy matters to be considered before full linking is established including:
1) measurement, reporting and verification arrangements;
2) the types and quantities of third party units that can be accepted into either system;
3) the role of land-based domestic offsets from Australia’s Carbon Farming Initiative (ACCUs) in the linked system;
4) any implications for supporting the competitiveness of European and Australian industries, in particular for sectors exposed to a risk of carbon leakage; and
5) comparable market oversight arrangements.
The facts already revealed also include that in parallel to initiating negotiations on a full link, the Australian Government and the European Commission are working to finalise technical details of the interim link to be agreed by mid-2013 to allow European allowances to be held in the Australian registry. Until then, Australian liable entities can open registry accounts in the EU and purchase European allowances for future compliance under the Australian scheme.
Linking will provide Australian businesses with secure access to a broader pool of international emissions units. European allowances will be added as an eligible international unit that can be used in the Australian scheme and Australian businesses will be able to use eligible international units for up to 50 per cent of their total liability until 2020.
Removing the price floor is, in turn, intended to ensure a single price for Australian and European carbon units.
Experiences from California-Quebec ETS linking
Drawing from transatlantic experiences the issue that evoked recently some ambiguities was the place for registration of market participants. In that regard it has been stipulated that when California links to an external GHG ETS, an entity must register into a jurisdiction based on the location information the entity provides during registration. Thus:
(1) An entity located in the United States may only register with California.
(2) An entity located in Canada may only register with a GHG ETS operated by a Canadian province to which California has linked.
(3) An entity located outside of the United States and Canada may register with California or any GHG ETS operated by a Canadian province to which California has linked.
(4) California will recognize the registration of an entity that registers into an external GHG ETS operated by a Canadian province to which California has linked.
When it comes to technical issues, the rules also provide that the administrators of the both GHG schemes must mutually inform themselves of the serial numbers of any compliance instruments that the external GHG ETS accepts for compliance.
Generally, once a linkage is approved, a compliance instrument issued by California may be used to meet a compliance obligation within the approved external GHG ETS and, mutually a compliance instrument issued by the linked jurisdiction may be used to meet a compliance obligation in California (for particulars see: California and Québec Cap-and-Trade Programs Linking – Implications for Linkages’ Design).