01 June 2007
A domestic emissions trading scheme commencing in 2011 with a set of complementary policies and measures was the recommendation made in a report released to the public today by the Prime Ministerial Task Group on Emissions Trading.
After what has been called "lively discussions" with representative groups and individuals, the Task Group, a joint Government-business initiative, has concluded that Australia should commit to a longer term emissions constraint, but that the Government should be cautious in adopting the targets proposed internationally. Instead, it has proposed that the Government establish a long-term aspirational goal for emissions reductions that commences moderately, progressively stabilises and then results in deeper emissions over time.
While the Government has yet to respond to the report, the release of the report is a significant step in achieving certainty as to the long term framework for Australia to respond to climate change. While the basic features of the scheme are such that it could provide an effective mechanism for trading of emissions and abating Australia’s CO2 emissions, the effectiveness of the scheme will depend on the detailed proposals developed particularly in relation to:
The exclusion of agriculture and land use emissions will clearly make it more difficult for Australia to achieve the long term goals in relation to climate change.
Further, the ten year period for which permits will be allocated may make it difficult for substantial projects to be developed and financed as investments and financing of these types of projects often occur on the basis of time horizons in excess of ten years. Investors and financiers may be unwilling to accept the risks to project viability which may occur as a result of the periodic reallocation of permits following such a review.
Key conclusions
The key design feature of the proposed scheme is that it should be based on a cap and trade model. The report recommends that the scheme apply to emitters above a threshold of 25kt CO2-e per annum.
Initially excluded from the scheme would be agriculture and land use emissions, leading the Report to recommend maximum "practical" coverage of all sources and sinks.
A wide range of both domestic and international offset regimes will be recognised with offsets undertaken before the start of the scheme also recognised.
The proposed trading scheme also includes a "safety valve" or cost control mechanism. The Task Group states that there will be times when emitters will not be able to acquire permits in the market and the cost becomes excessive. The safety valve will effectively be a pre-set fee for every tonne by which emissions exceed the permits held by a company. This will operate by requiring companies to pay a set fee if they try to not acquire the necessary number of permits in respect of their emissions. The level of this fee would initially be set near the expected permit price and over time be increased.
Other key aspects of the scheme are the recommendation that permits be allocated through a mixture of free allocation to redress losses due to reductions in asset value caused by the introduction of the Emissions Trading Scheme and through auctioning of the balance of permits.
Further, transitional arrangements will be developed for trade exposed emissions intensive industries which allocate permits every five years to existing participants in those industries equivalent to the carbon costs. Over time these allocations could be calculated as if the relevant participant was using world’s best practice. Further permits would be allocated in respect of new investments in these industries to offset direct emissions from those investments as if the investments were using world’s best low emissions technologies.
Permits will be able to be "banked" – that is permits from an earlier year will be able to be used in respect of later year emissions. Emissions will not be able to be "borrowed" – that is, permits from later years used in respect of emissions in earlier years.
The Task Group recommended that schemes that are already being run at a State level should be abolished or phased out unless they clearly address policy gaps. Further, all Australian schemes that set mandatory targets for deployment of particular technologies would be wound up.
Federal versus State
In the absence of Federal action in 2006, the State Governments requested the National Emissions Trading Taskforce to issue a discussion paper outlining a design for a National Emissions Trading Scheme ("NETS") to issue.
The NET paper released in August 2006 suggests a cap and trade system, initially only covering the stationary energy sector. NETS will initially only apply to those generators who have a capacity of 30 MWe nameplate rated electrical output capacity or more. After five years of operation, NETS would expand and apply to all facilities emitting more than 25 kt of CO2-e a year from the stationary combustion of gas, oil, coal, and other fossil fuels as well as gas retailers, whose imputed emissions from gas sales are more than 25 kt of CO2-e a year, and gas transmission and distribution companies for their fugitive emissions.
In broad terms, the NETS proposal and the scheme outlined in the Task Group's report are quite similar.
A few differences are the broader application of the Federal scheme advocated in the report where the report proposes that all emitters other than those relating to agriculture land use and waste. In contrast, the NETS proposal would only apply initially to the stationary energy sector, to be expanded to facilities with emissions from the statutory combustion of gas, oil, coal or other fossil fuels and gas retailers and pipeline operators.
What next?
The Government is expected to respond to the report this Sunday at the Liberal Party conference where Prime Minister Howard will outline the climate change policy the Government will take to the election to be held later this year.
