Policymakers in Europe and Australia have agreed to create a common carbon market by 2018, in an effort to broaden the use of cap-and-trade systems to curb emissions.

The plan, announced on Tuesday, is for mutual recognition of carbon units between the two cap and trade systems by July 1, 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.

To facilitate linking the two systems, the Australian government said it will make two changes to the design of the Australian carbon price. It will not implement a price floor; and, while polluters 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.

“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,” said the Australian minister for climate change and energy efficiency, Greg Combet.

“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,” added the European Commissioner for Climate Action, Connie Hedegaard. “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.”

As they negotiate the terms of a full two-way link, an interim link will be established, which will allow Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme starting July 1, 2015 until a full link is established in 2018.

Combet noted that, starting Tuesday, Australian entities can purchase EU allowances for future compliance in Australia.

“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,” he said, noting that the arrangements would provide flexibility to businesses with operations in both Australia and Europe, which could reduce compliance costs.