Upcoming Mallesons seminarsAn emissions trading scheme will put a price on carbon and will significantly affect both risks and opportunities for many businesses.
What do you need to do?Understand the impact of the CPRS on your business and its impact as part of a broader carbon strategy.
Louis Chiam
Partner
Louis Chiam
Partner
T +61 3 9643 4086
Sydney
Vishal Ahuja
Dominic Bortoluzzi
Melbourne
Louis Chiam
Perth
Tim Warman
Brisbane
Matthew Austin
Hong Kong
Christopher Tung
(董彥華)
The Australian Government today committed to reducing greenhouse gas emissions by at least 5% from 2000 levels by 2020, with an offer to increase the cut to 15% if a global agreement on carbon reductions can be reached.
These cuts, which translate to a per capita carbon reduction of between 27% and 34%, comprise the centrepiece of the Government’s much-anticipated White Paper on the national emissions trading scheme. The scheme, to be called the Carbon Pollution Reduction Scheme (CPRS), is Australia’s first comprehensive national greenhouse pollution control and is scheduled to start in 2010.
Emissions target
The Government has accepted the recommendation from its climate change adviser, Prof Ross Garnaut, that the global target should be to stabilise greenhouse gas concentrations at 450 parts per million and reaffirmed its commitment to a long-term target of reducing Australia’s greenhouse gas emissions by 60% from 2000 levels by 2050.
On the crucial topic of medium-term targets, the Government has committed to achieving a reduction of at least 5% below 2000 levels by 2020, with a willingness to move to a 15% target if there is a comprehensive global agreement on emissions reductions.
The White Paper suggests an initial spike in Australia’s carbon emissions, with the initial 2010 annual trajectory set at 109% of 2000 levels, before gradually declining to meet the 2020 target.
Cap and trade scheme
As expected, the Government proposes a “cap and trade” system, similar to the EU emissions trading scheme. The foundation of the scheme is that, from 1 July 2010, each entity in a covered sector will be required to acquire and surrender a permit for each tonne of CO2 equivalent emitted. Failure to surrender the requisite permits will attract a penalty.
Coverage
The Australian scheme will break new ground, covering approximately 75% of Australia’s greenhouse gas emissions. It will cover stationary energy, transport, fugitive emissions, industrial processes, waste and forestry sectors and all six greenhouse gases covered by the Kyoto Protocol, via a combination of direct obligations on facilities with large emissions and obligations on upstream fuel suppliers for emissions resulting from the combustion of fuel.
The scheme will not apply to:
- Agriculture, which is excluded until at least 2015
- Deforestation (but the Government will explore opportunities to allow offset credits for certain reforestation activities on an opt-in basis), or
- Combustion of biofuels and biomass for energy.
Liable entity
The scheme adopts a modified version of the “chimney rule”, where entities are responsible for their own direct (scope 1) emissions, but not for upstream or downstream emissions.
Consistent with the existing National Greenhouse and Energy Reporting (NGER) scheme, the entity with “operational control” of a facility will be liable to acquit permits in respect of the facility’s emissions, with permit liability to be aggregated at the “controlling corporation” level (ie the company at the top of the corporate group in Australia).
Recognising some of the criticism of the NGER structure, the White Paper flags some important modifications, including allowing entities with “financial control” to opt-in as the responsible entity and allowing allocation of permit responsibility within corporate groups. The White Paper also canvasses greater flexibility in relation to netting out fuel supply.
Generally, the emissions threshold for direct obligations under the scheme is 25,000 t CO2-e or more a year. The Government estimates this will result in approximately 1,000 liable entities.
Permit price
Importantly, unlike a carbon tax, the price of permits will be determined by the market, either at the regular Government permit auctions or via the secondary markets, which are expected to be very active.
The Government has signalled it expects an opening permit price of A$25 per tonne. However, to limit the scope of upward pricing pressure, the scheme will include two important safety valves - it will be subject to a five-year price cap (initially $40 per tonne, then indexed annually at 5%) and will not include a make-good obligation. The price cap will be effected by the Government making available an unlimited store of carbon permits at the price cap.
There will be transitional arrangements for fuel, with cuts to fuel excise to offset the forecast CPRS impact.
The carbon market
The annual national emissions target will be converted into a carbon budget, with a corresponding number of permits to be made available to the market. A significant portion of the initial annual budget (in excess of 25%) will be provided free to qualifying entities as compensation (see below). The balance of the permits will be auctioned.
The Government proposes monthly permit auctions, utilising an online “ascending clock” auction method. The auctions will include both current year and future permit vintages and, reflecting concern about potential funding requirements, the Government is considering possible deferred payment terms.
Permits will be treated as personal property and will be tradeable.
The scheme will allow for unlimited banking (ie surrendering permits from an earlier year in a subsequent year). Borrowing (ie surrendering permits from a subsequent year) will be permitted for up to 5% of an entity’s obligations.
Permits will be regulated as financial products and carbon market participants will, in common with other financial markets, be subject to oversight by the Australian Securities and Investment Commission.
Pass-through rights
Importantly, the Government does not propose to include a statutory right to pass through carbon costs under existing contracts. However, it will continue to monitor this issue.
International links
The scheme will allow unlimited imports of Kyoto credits, creating a new international demand source for Kyoto-based CDM projects. However, as expected, the Government will not permit the Kyoto Joint Implementation projects to be hosted in Australia’s covered sectors and there will be a transitional ban on the export of Australian permits.
Assistance to the traded sector
The Government has expanded the transitional assistance to be provided to emissions intensive trade exposed (EITE) industries, with a package that will now include LNG and basic chemicals. The key features of the assistance package are:
- The assistance level will be based on either a revenue or value-added based measure of emissions intensity (at the entity’s election)
- Average emissions intensity baselines will be determined based on emissions data from 1 July 2006 to 30 June 2008 and revenue/value added data from 1 July 2004 to 31 December 2008
- The assistance level will be set at 90% of industry average emissions per unit of output for activities with emissions intensity of at least 2,000 t CO2-e / A$million revenue or 6,000 t CO2-e/ A$million value added and at 60% for activities with emissions intensities between 1,000-1,999 t CO2-e / A$million revenue or between 3,000 t and 5,999 t CO2-e / A$million value added, and
- Assistance will be provided for direct emissions and indirect emissions in respect of electricity, use of steam and upstream emissions associated with the extraction, production and transportation of natural gas and its components used as feedstock.
Initially, around 25% of all permits available will be allocated to EITE industries (equivalent to 35% if agriculture were included). While this will be reduced by a carbon productivity contribution of 1.3% per annum, it is expected that the allocation will increase to around 45% by 2020.
Assistance for coal-fired power stations
The coal-fired power sector is the only sector that will be eligible for assistance available for ‘strongly affected’ industries. The assistance is to be provided in the form of administratively allocated permits and will be limited to assets ‘in existence’ on 3 June 2007.
The assistance will be:
- calculated based on the historical energy output of the generator between 1 July 2004 and 30 June 2007
- only available to the extent the generator’s carbon intensity exceeds 0.86 t CO2-e / megawatt-hour of electricity generated, and
- provided on a once-and-for-all basis, with the amount of assistance being determined up front, before the Scheme commences (although it will be reviewed in 2013 to ensure that there are no windfall gains).
Applications for assistance will be required to be made within 90 days of the commencement of the Scheme legislation.
Carbon Capture and Storage
The White Paper recognises that carbon capture and storage (CCS) is a key part of Australia’s climate change response. The scheme will recognise CCS on a “net emissions” basis - carbon transferred to a CCS facility will not be counted towards the originating entity’s emissions. The CCS facility will be responsible for any future fugitive emissions.
Existing schemes
The Government has also reiterated other key aspects of its climate change policy, including:
- an expanded Renewable Energy Target (RET) of 20% renewable energy by 2020
- the A$500 million Renewable Energy Fund
- the A$2.15 billion Climate Change Action Fund to assist transition, for example for low emissions technologies, structural adjustment and assistance, and
- a range of CCS initiatives such as the A$100 million per annum Global CCS Institute.
Timetable
The Government proposes to table draft legislation in February 2009, with a view to passing the legislation later in 2009. However, the legislation is likely to face close scrutiny in the Senate, where both the conservative opposition and the Greens have flagged significant, but different, concerns.
The Government hopes to have an interim carbon regulator established early in 2009, with the national permit registry operating by early 2010. The first compliance year will commence on 1 July 2010, with the first permit acquittal date set for 15 December 2011.
How does this affect me?
The CPRS represents one of the most significant economic reforms in decades. By putting a price on carbon it will affect every part of the Australian economy, permanently altering cost structures and competitive positions. At the same time, it will create opportunities for many businesses, from low carbon technologies to carbon trading.
The white paper can be found here.