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Aug 29 (Reuters) - The decision by the European Union and Australia to link their carbon trading schemes is a push towards the creation of a global carbon market and takes some of the heat out of business opposition to Australia's controversial programme.
Linking up with the EU's $125 billion carbon market, the world's largest and involving 30 nations, opens the possibility of joining up programmes in other nations, such as New Zealand and eventually South Korea, China and regional schemes in the United States and Canada.
Australia's scheme, starting with a three-year fixed priced period from July 1 this year, covers about 300 of the nation's top polluters before moving to market-based trading by mid-2015.
Following are details of Tuesday's joint announcement by Australia and the EU and some of the implications.
Both schemes are based on carbon caps on big polluters. Australia will set its overall cap in 2014. Trading of emissions allowances and carbon offsets helps firms meet those caps, with each permit representing a tonne of emissions.
Under the two-step deal announced, Australia would first link its scheme with the EU's, allowing Australian firms to use EU allowances from July 1, 2015, to meet carbon limits.
Full two-way linking between both schemes, where permits are accepted by the other, is to start by July 1, 2018 at the latest, the agreement says. Each EU allowance is currently trading around 8 euros ($10).
In return, Australia has scrapped a controversial A$15 a tonne floor price from 2015 and cut the percentage of U.N. carbon offsets from emissions-reductions projects in poorer nations that can be used by companies to meet annual carbon targets.
Australian firms can meet up to half their carbon liabilities through buying approved overseas credits, with a limit of 12.5 percent of U.N. offsets, including certified emission reductions, or CERs.
Closer alignment to the EU scheme undercuts political opposition to the Australian programme. Australian opposition leader Tony Abbott has long pledged to repeal the carbon pricing programme if he wins elections late next year. He says it is flawed because the country is acting alone in carbon pricing.
Instead, the agreement will create a much larger carbon market and give companies more options in meeting their annual carbon targets.
Scrapping the floor price will mean Australian firms are likely to meet their targets much more cheaply and simplify decisions on trading and hedging. Companies had been complaining the floor price was too high when compared with much cheaper EU carbon costs.
Analysts and traders say linking means greater trading volume, more demand for EU carbon permits and a more reliable price curve for companies making longer-term investments.
Australian companies can buy and hold EU allowances for use after July 1, 2015. The allowances have fallen sharply in price since last year because of excess supply and a sluggish economy, cutting demand.
Thomson Reuters subsidiary Point Carbon forecasts the Australian scheme will face a net shortage of 550 million tonnes between 2015-20 and estimates total EU allowance imports during this period at 230 million tonnes. Imports of CERs and use of offsets from domestic carbon abatement schemes, such as tree plantations, would make up the remainder.
The Australian parliament is expected to pass amended legislation this year, most likely by November. The European Commission will also need a mandate from member states before it can approve two-way linking. (A$1 = $1.036; $1 = 1.25 euro)
Writing by David Fogarty, Editing by Jonathan Thatcher