Who does this affect?

Fundamental structured adjustment affects the economy but specifically Australian energy producers, manufacturers, industrial and mining companies, and financial institutions.

What do you need to do?

Begin assessing impact of the scheme and closely monitor any further developments in emissions trading.

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Louis Chiam  
Partner
T +61 3 9643 4086

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Professor Garnaut today released his much anticipated ETS discussion paper, which sets out a design that broadly follows previous NETTs and the Prime Minister’s Task Group proposals with the following departures and new features.

Coverage

As expected, the design includes all six Kyoto Greenhouse gases and its initial coverage includes stationary energy, industrial processes, fugitive emissions, transport and waste sectors while including a recommendation to incorporate agriculture and forestry as soon as possible.

Allocation of permits and compensation

NETTS and the PM’s Task Group proposed the free allocation of permits to parties, such as power stations that are adversely affected under the ETS. Garnaut, however, has watered down his Interim Report position (which abandoned compensation for capital losses in relation to structural reform) proposing a restricted form of compensation. Further, Garnaut proposes incentivising links between allocation and accelerating uptake in carbon abatement technologies.

Carbon Bank

Garnaut’s scheme provides the first draft of the proposed creation of a Reserve Bank style “Independent Carbon Bank” that will be responsible for the overarching management of the trading scheme including monitoring and compliance.

Make good provision

While NETTs and the PM’s Task Group proposed a “safety valve” mechanism, Garnaut opposes this. Instead, he proposes parties with a permit shortfall to both pay the penalty and make good the shortfall at a later date.

Borrowing

Despite NETTs and the PM’s Task group’s resistance to “borrowing”, Garnaut introduces a facility whereby the Independent Carbon Bank may lend permits to private companies.

How does this affect me?

Together, the NETTs, PM Task Group and Garnaut ETS proposals largely complete the library of elements from which the final design will be assembled. However, while the Federal Government has indicated that the Garnaut Review will be an influential input, it has also left the door open to introduce its own elements that may appear for the first time in the July green paper design. In this regard, unless the Federal Government imposes an even more ambitious scheme, the Garnaut paper may loosely be considered the high watermark for an aggressive emissions reduction scenario. As such, parties that are affected by the scheme should now be in a stronger position to pick, from these elements, the least favourable ETS design for their circumstances and begin narrowing their economic modelling by providing a ceiling to their investment responses.

The full discussion paper can be found here.