A global carbon market is no longer a pipe dream

Today’s EU-Australia agreement to link carbon pricing mechanisms could yet prove globally significant

28 Aug 2012, 14:52

Does your business take account of the carbon price when making strategic decisions? By the end of the decade the answer to this question could be "yes", regardless of where you are located or what sector you work in.

Currently, not that many firms pay close attention to the EU's carbon price. The record low prices that have resulted from the economic recession and the over-supply of carbon allowances means those businesses not directly impacted by the cap-and-trade scheme are not seeing the increase in energy and material costs filter through that had originally been anticipated. Meanwhile, those emission-intensive firms directly covered by the scheme may keep a closer eye on the carbon price, but, with no resolution to the debate over how to prop up prices in sight, few are fundamentally shifting their investment plans towards lower-carbon technologies.

And yet today we got an important reminder of how the concept of carbon pricing could have far-reaching implications – implications that could one day reach from Europe to Australia, taking in pretty much every jurisdiction in between.

The agreement between the EU and Australia to link the EU emissions trading scheme (EU ETS) and the new Australian carbon tax may not have commanded too many front-page headlines, but in retrospect it could prove one of the most important business stories of the year.

International climate change negotiations (which are due to get underway again in Bangkok later this week) might be moving as slowly as ever and the US presidential election may yet deliver a pollutocrat into the White House, but the EU-Australian commitment to build a "full two-way link" between the two region's carbon trading schemes reveals plans to deliver a global carbon price are anything but a pipe dream.

Sources in Brussels have confirmed to BusinessGreen that talks to complete similar agreements with California, South Korea, China and Switzerland are already underway – the framework for a genuinely global carbon market with large-scale cap-and-trade schemes operational in four continents is fast emerging.

Inevitably, plenty of uncertainties and obstacles stand in the way of this vision being realised.

The EU and Australian schemes remain flawed with the low price of carbon set through the EU ETS likely to make Australia's carbon levy even less effective if, as currently planned, the two regimes are connected from 2015. In addition, the whole agreement could well be revoked, if as polls suggest opposition leader Tony Abbott wins next year's Australian election and makes good on his pledge to scrap the current government's carbon pricing legislation altogether.

But no one in Brussels or Canberra is ignoring or underplaying these problems and there is undoubtedly a concerted effort underway at the European Commission to resolve the weaknesses in the EU ETS and drive the price of carbon back up from 2013 onwards. There are still plenty of reasons to hope that the over-supply of carbon allowances will be addressed, while limits on the importing of UN-backed carbon offsets will further bolster the credibility of both the EU and Australian schemes.

Most significantly, however, the case for carbon pricing remains as compelling as ever.

As economists from right across the political spectrum have acknowledged, the simplest mechanism for tackling carbon emissions and driving investment in clean technology is to put a fair price on the polluting externality that greenhouse gases represent, and then let the market do the rest. The only compelling argument against carbon pricing is that imposing a price in one jurisdiction and not others distorts markets and results in "carbon leakage" as mobile industries move to avoid additional carbon costs – hence the unanswerable economic case for a unified global carbon price.

Add in the growing realisation that carbon pricing could play a role in tackling the West's crippling deficit – as evidenced by this week's MIT report suggesting a US carbon tax could slash the deficit without damaging the economy – and this could yet prove an idea whose time has come.

The chances of such a global carbon price being delivered through the deadlocked UN climate change negotiations are supermodel slim, but bilateral agreements based on the new deal between the EU and Australia raise the prospect of a global price being set by default.

A president Romney or prime minister Abbott is never going to sign up to this European-led strategy – in fact, they would probably do everything in their power to undermine it. But savvy business leaders will realise this vocal opposition does not preclude the creation of a new inter-linked international carbon market imposing a unified carbon price on key markets in Europe, China, South Korea, Japan, New Zealand and California, all of which could be in place by 2020.

Once this framework is in place, political leaders would have the power to significantly drive up the price of carbon when (and I believe it is a case of when rather than if) climate change impacts give them the voter support they need to accelerate the transition to a greener economy.

The carbon market has had a torturous first few years of existence, but, as today's news demonstrates, it could still grow into a powerful mechanism for tackling climate change and rewarding green businesses. Business leaders from all walks of life would be wise to keep abreast of this evolving market and ascertain how it could impact their long-term strategies.

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Previously known as the BusinessGreen Blog, James' Blog features musings, observations and occasional rants from BusinessGreen editor James Murray

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