The Climate Change Group of the Department of Prime Minister and Cabinet last week announced a series of public consultations in relation to its discussion paper on early abatement incentives. The public consultations, to be held in late October, will take place in Sydney, Canberra, Melbourne and Perth.

While the caretaker period triggered by the Federal election will preclude significant new policy developments in emissions trading, both major parties have committed to implementing emissions trading schemes which share many similar design features. Under each policy, incentives for early abatement are critical priority issues. In this context, the discussion paper provides a useful guide to the challenges in early abatement.

The paper outlines proposed incentives for firms to undertake abatement prior to the commencement of the emissions trading scheme (ETS) without being disadvantaged in the allocation of permits under the scheme. The paper also addresses the definition of an asset “in existence” for the purposes of determining whether a firm will be allocated free permits at the commencement of the scheme.

Early abatement incentives

The abatement incentives differentiate between abatement in sectors to be covered by the ETS (early abatement credits) and abatement in sectors outside the ETS compliance net (offset credits).

To be eligible for either type of credit, abatement projects must have actually occurred, and be:

• additional ie beyond business as usual;
• permanent;
• measurable; and
• verifiable.

Additionality will be difficult to prove for covered sector projects as the project may have been undertaken in any event to mitigate impending ETS liability.

The treatment of early abatement is summarised in the following table:

How will the proposals work - is there an incentive?

The effect of these proposals on early abatement is illustrated in the following case studies.

Case study 1: manufacturing firm

In preparation for the start of the ETS in 2011, a manufacturing firm proposes to carry out an abatement project in its production process to generate 5,000 tonnes CO₂-e per annum abatement for the start of the ETS. It is now considering accelerating the start of the project to get the benefit of the early abatement incentives.

Establish additionality

As it is in a covered sector under the ETS, the project may be eligible to generate emission abatement credits if additionality can be shown. Using a “but for” test of additionality, only the early abatement attributable to the acceleration would qualify.

Obtain approval and registration of the abatement project

The abatement must be approved and registered to be traded. Currently there is no approval process for this type of early abatement project and no register to track credits. It is proposed that a register of credits be established as soon as possible and that approval processes be developed in priority areas. As part of the approval process, the firm will need to establish its emission baseline.

Consider financial incentive

Early abatement credits would be converted in 2011 to emission permits dated for the year 2011. The firm needs to consider whether these emission abatement credits represent an incentive to accelerate the project, given that the permit fee may be low in the early years of the ETS and that it may take some time to establish a functioning carbon market if it wishes to trade.

No affect on permit allocation

Carrying out the abatement under the incentives should not affect the allocation of permits to the firm, given the Government’s assurance that firms which undertake abatement between 3 June 2007 and 2011 will not be disadvantaged upon permit allocation.

Case study 2: offset credits - forestry projects

A trading firm is considering undertaking a forestry sink project under the abatement incentives. As forestry is outside the ETS compliance net, the project may be eligible to generate offset credits if it satisfies the relevant test. The discussion paper proposes that the existing AGO Greenhouse Friendly protocol for this type of project be used as the approval process for forestry sinks once the government reaches a final decision on abatement incentives. It is proposed that offset credits generated prior to the start of the ETS be recognised under the ETS. A public register of AGO approved abatement currently does not exist so trading cannot yet occur.

Case study 3: offset credits - avoided deforestation

A large land owning firm is considering an avoided deforestation abatement project. No AGO Greenhouse Friendly protocol currently exists for this type of offset credit project to be used as an approval process. It is proposed that approval processes be developed for this type of offset credit project as measurement methodologies become available. However, this is likely to take some time.
If the project meets the requirements, it would qualify to create offset credits.

Public consultations

Public consultations in respect of the discussion paper will be held at the following locations:

Sydney – Wednesday 24 October 2007, 9.00am – 10.30am at the Mercure Hotel, 820 George St, Sydney

Canberra – Monday 29 October 2007, 9.00am – 10.30am at the Rydges Lakeside, London Cct, Canberra

Melbourne – Tuesday 30 October 2007, 9.00am – 10.30am at the Novotel Melbourne on Collins, 270 Collins St, Melbourne

Perth – Wednesday 31 October 2007, 9.00am - 10.30am at the Sheraton Perth Hotel, 207 Adelaide Terrace, Perth

Submissions close on 1 December 2007.