Upcoming Mallesons seminarsAn emissions trading scheme will affect all parts of the Australian economy.
What do you need to do?Understand the impact of the Government’s opinions canvassed in the green paper. Written submissions can be made in writing and are due by 10 September 2008.
Louis Chiam
Partner
Louis Chiam
Partner
T +61 3 9643 4086
Sydney
Vishal Ahuja
Dominic Bortoluzzi
Scott Farrell
Martin James
Perth
Tim Warman
Canberra
Adam Bartlett
Hong Kong
Christopher Tung
(董彥華)
The Australian Government today released its much-anticipated policy paper on carbon trading, reiterating its earlier election policy to establish a broad-based “cap and trade” emissions trading scheme by 2010. Framed as a green paper (or options paper), today’s report canvasses a number of policy options, as well as flagging the Government’s preferred policy.
A 2010 start
The Government intends that the scheme will commence in 2010.
Coverage
The Government favours broad coverage of greenhouse gas emissions and sectors. It estimates that there will be around 1,000 Australian companies compulsorily covered by the scheme.
The scheme would cover the 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. In general, the emissions threshold for direct obligations under the scheme would be set at 25,000 t CO2-e or more a year. The Government concedes that different thresholds may be required for the waste sector and synthetic greenhouse gases.
The inclusion of transport would involve a transitional measure of fuel tax cuts on a cent for cent basis, with periodical assessment. It is proposed that reforestation would be included on an opt-in basis from the scheme commencement but deforestation would not.
The Government is disposed to include agriculture in the scheme by 2015 but will make a final decision in 2013. Stakeholder views on this are sought by the Government.
Price cap
The Government has flagged a preference for a price cap in the scheme at least until 2015. The cap, which will be set later in 2008, is intended to be higher than the expected carbon price.
The impact of a cap (also called a safety valve) is to set a theoretical ceiling on the price of carbon because affected businesses could choose to pay the penalty rather than buy more expensive permits. The effective price cap will depend on a variety of factors, including whether the penalty is deductible for tax purposes and corporate reputational concerns about being seen to pay a penalty.
A price cap is contrary to Professor Garnaut’s recommendation and is inconsistent with the EU ETS.
Coal-fired power stations will receive compensation
In a move that will no doubt draw many column inches of both strong support and criticism, the Government has indicated it will provide compensation to the coal-fired power sector. The Government has couched the issue as one of sovereign risk, explaining that the compensation, which could take the form of free permits, is necessary to avoid adversely affecting the investment environment in the power sector.
However, the Government has also flagged a number of important restrictions.
- The compensation will only be available for coal-fired power stations. Other carbon-intensive sources such as gas-fired power stations appear to be excluded.
- The compensation will be calculated on a very broad benchmark basis, with differentiation based only on generation capacity and whether the generator uses brown coal or (less carbon intensive) black coal.
- The compensation would be provided on a once-and-for-all basis, with no further compensation available once the scheme commences (although it could be reviewed to prevent windfall gains).
Emission Intensive Trade Exposed Industries
As expected, the Government proposes providing assistance to the traded sector. The green paper proposes a threshold for (the newly branded) Emission Intensive Trade Exposed (EITE) industries of 1,500 t CO2-e /$ million revenue, an increase on previous proposals. For example, the National Emission Trading Taskforce (established by the States) proposed an emission intensity of 1,200t CO2-e /$ million revenue as the first threshold in qualifying a company for assistance under the Trade Exposed Emission Intensive Industry (TEEII) compensation mechanism.
Overall, around 30% of carbon pollution permits will be allocated to EITE industries. While a free allocation will be provided to the most emission intensive industries, a sliding scale of compensation based on industry benchmarks has been proposed.
- For companies that have an emission intensity above 2,000 t CO2-e /$ million revenue, the assistance level will be set at 90% of industry average emissions per unit of output.
- For emission intensities between 1,500-2,000 t CO2-e /$ million revenue, the assistance level will be 60%.
Climate Change Action Fund
To assist the transition to a cleaner economy, the Government proposes a Climate Change Action Fund, which would provide funding for activities including new low emissions processes, industrial energy efficiency projects with long payback periods and dissemination of best and innovative practice among small to medium sized enterprises.
Carbon Capture and Storage
The green paper recognises that Australia has a vital interest in the successful commercialisation of CCS because of the importance of coal for power generation and as an export commodity. Contrary to prior speculation, the paper makes no additional commitment to fund CCS technology. It does state that further contributions to the National Clean Coal Initiative should address technical and institutional hurdles to CCS development and implementation.
Financial services regulation
Carbon permits would be treated as financial products and regulated under the financial services rules in Chapter 7 of the Corporations Act. This will require significant re-tooling of the regulatory framework and financial services licences. For some participants this will introduce a substantial new regulatory requirement. However, many participants are already subject to financial services regulation and therefore face only an incremental obligation. In addition, much trading of permits (for example by forward contracts or derivatives) would be caught by the existing regulations and therefore it makes sense to avoid a duplicate regime for carbon trading.
Offsets
Affected companies will be able to use internationally recognised Kyoto offsets, including certified emission reduction units (CERs), emission reduction units (ERUs) and removal units (RMUs) to satisfy their domestic compliance obligations. However, this will be subject to some restrictions, possibly including a cap on Kyoto imports.
The Government is also considering the export of Australian ERU credits generated under the Kyoto joint implementation mechanism. This may provide opportunities for Australian companies to develop additional revenue from future projects.
Trajectories
By the end of 2008, the Government will announce a range of 2020 trajectories and the indicative national emissions trajectory for the period from 2010-2011 to 2012-2013, following the release of modelling undertaken by Treasury in October and further work of the Garnaut Climate Change Review.
The green paper suggests that emissions caps could be set every five years in advance or longer depending on international obligations. Significantly, the caps would be legislated on a non-binding basis giving future governments more flexibility in setting and amending targets.
The language of carbon
In addition to setting the agenda for carbon policy, the green paper also seeks to set a new agenda for carbon nomenclature in Australia. The emissions trading scheme is now the Carbon Pollution Reduction Scheme, while emissions-intensive, trade exposed industries, previously referred to as TEEII, are now “EITE”. Meanwhile, the “carbon pollution permits” will be referred to in the legislation as “Australian Emissions Units”, although it is yet to be seen whether the strict acronym "AEU" succumbs to the less accurate but more romantic "EMU".
The green paper can be found here.