The full two-way link between the systems, to start in July 2018 at the latest, will allow businesses to use CO₂ allowances from the Australian emissions trading scheme or the EU ETS for compliance under either system. To allow the full interlinking, an interim link will be established by July 2015 through which Australian businesses will be allowed to use EU allowances to meet obligations under the Australian emissions trading scheme.

“This would be a significant achievement for both Europe and Australia,” Connie Hedegaard, EU Commissioner for Climate Action says in the joint press release. “It is further evidence of strong international cooperation on climate change and will build further momentum towards establishing a robust international market.”

The agreement has forced the Australian government to make changes in the ongoing design of their CO₂ price. The planned floor price of A$15 (€12.4) will not be implemented and a new sub-limit will apply to the use of Kyoto units, allowing them to make up maximum 12.5% of companies allowances.

Final details of the agreement need to be settled before the full link can enter into force, and in this process the registry arrangement for the interim link will be agreed by mid-2013. Issues which still need to be settled include agreement on emissions measurement, reporting and verification rules, use of third-party credits in both schemes, and the development of comparable market oversight systems.

Linking the EU ETS with the Australian emission trading scheme paves the way for additional bi-lateral agreements and is particularly timely with respect to China’s plans to have an operational national emissions trading scheme by 2016. Pilot tests of different emissions trading systems are currently being undertaken in seven Chinese provinces.

The inclusion of aviation in the EU ETS in January this year opened up the system further outside the EU’s borders. Any aircraft, no matter its home country, flying to or from the EU is included in the system and is required to buy allowances for its emissions. This move by the EU has angered both companies and governments in China and the US, the world’s two largest emitters.

While linking the two systems will be a step in the right direction for an international CO₂ market, the effort risks suffering from the deficiencies of the current EU ETS. The oversupply of allowances together with a weak market has had the CO₂ price plummeting, and the excess allowances could provide the CO₂-intensive Australia with little incentive to reduce their domestic emissions. The CO₂ emissions per capita were 20.6 tonnes in Australia in 2008, compared to 8.1 in the EU, according to the EU JRC.

For the interlinked Australian and EU markets to reach their full potential, the EU needs to continue efforts aimed at strengthening the EU ETS price. Short-term options for achieving this were presented by the Commission on 25 July, but without additional measures they will be insufficient at solving the existing deficiencies in the system.