Australia's Carbon Pollution Reduction Scheme: An ETS by any other name

By Brendan Bateman.

Key Points:
The Federal Government's Green Paper on the proposed Carbon Pollution Reduction Scheme promises the largest transformation of the Australian economy. While in many respects the Green Paper adopts design elements for the Scheme similar to those advocated by Professor Ross Garnaut, there are also some significant departures. The economic transformation will come at a price. What that price will be will not be known until later this year when the emissions cap and interim target will be revealed.

On Wednesday 16 July, Senator Penny Wong, the Minister for Climate Change, released the Government's widely anticipated Green Paper on the design of the proposed emissions trading scheme which will come into operation in Australia in 2010, the Carbon Pollution Reduction Scheme.

It sets out over its 516 pages the options which have been considered by the Government in respect of the various design elements of the Scheme including sectoral coverage, where in the supply chain the point of obligation will be imposed, the method of allocating permits and the contentious issue of compensation, particularly for the trade exposed emissions intensive and stationary energy sectors.

The Government has spent much of 2008 in extensive consultation with key stakeholders and the public generally on the design of the Scheme with the aim of releasing its White Paper on final Scheme design later this year. Despite this, the ambitious timetable that the Government has set to implement the Scheme suggests that the preferred options identified in the Green Paper will largely represent its key elements. This is likely to significantly influence the developing forward market for permits under the Scheme in advance of its commencement.

Key inputs into the Government's Green Paper, which we've previously commented on, were the Garnaut Climate Change Review's ETS Discussion Paper and most recently, its Draft Report. This is the first time that the Government has flagged its position in relation to some of the strong views expressed by Professor Ross Garnaut, such as his preference for full auctioning of permits, and denying compensation to the stationary energy sector, particularly, coal fired power stations, for any diminution in asset value.

Key design features

As part of its election policy, the Government committed to a 60% reduction in Australia's GHG emissions by 2050 and the implementation of an emissions trading scheme in Australia by 2010. This continues to represent the cornerstone of the Government's overall policy to respond to climate change. In the absence of any detailed design or analysis, the Government previously announced that the emissions trading scheme would be shaped by a number of key principles.

Those principles have set the framework for the Green Paper and explain many of the Government's preferred position on key design elements.

The key design elements of the Scheme are:

• a cap and trade Scheme involving a limit or cap on the amount of emissions by covered sectors, and permits issued up to that cap. There will be an ability to trade permits for the right to emit covered greenhouse gases measured in carbon dioxide equivalent values (CO2-e);
• the Scheme will have broad coverage applying to all sources and sectors but excluding agriculture (at least until 2015) and deforestation. Forestry included but on a voluntary "opt-in" basis. A threshold will be prescribed in respect of each sector or particular activities/sources within sectors. it is anticipated that the Scheme will cover 75% of all of Australia's GHG emisisons;
• the point of obligation to acquit permits within any supply chain will be a combination of direct obligations on facilities with large emissions, and obligations on upstream fuel suppliers for indirect emissions. As a consequence, it is estimated that 1,000 entities will have obligations under the Scheme, or less than 1% of all registered businesses;
• permits (called Australian Emission Units - AEUs) will be personal property capable of being held by any person (even those with no obligation to acquire and surrender AEUs under the Scheme) and fully transferable. AEUs will be a financial product under the Corporations Act 2001;
• unlimited banking of permits will be permitted and limited borrowing;
• reporting under the Scheme will be under the National Greenhouse and Energy Reporting Scheme with a single report to be lodged on or before 31 October each year in respect of the preceding financial year. AEUs equivalent to emissions must be acquitted within six weeks of lodgement of the report;
• large emitters (125,000 tonnes of CO2-e or more) will be required to have their annual emission reports assured by an independent accredited third party;
• allocation of AEUs at least in the first phase will be through a combination of free allocation to eligible Emission Intensive - Trade Exposed Industries (EITEIs), subject to a limit, possible free allocation to "strongly affected sectors", with the rest to be auctioned. Allocation will progressively move to 100% auctioning with auctions to be held quarterly with four vintages of AEUs available for auction at any one time;
• all money raised through the Scheme will be used to help households and business adjust to the Scheme and invest in clean energy options;
• eligible EITEIs to receive free allocations at the beginning of each compliance period, in respect of part of emissions depending on certain thresholds, subject to an overall cap of 20% of available AEUs, or 30% if agriculture is included from 2015;
• coal-fired electricity generators likely to fall with the "strongly affected sector" category. Electricity Sector Adjustment Scheme will be used to provide assistance with possible "once and for all" payment or allocation of AEUs;
• a cap on the price of AEUs will be imposed during the initial phase of the Scheme (2010-11 to 2014-15, with the cap set high above the expected price of AEUs to minimise risk of application. Cap will be reviewed;
• limited scope for domestic offsets given broad sectoral coverage. Government will consider scope for domestic offsets from non-covered sectors in 2013. Liable entities will be able to meet their Scheme obligations using Kyoto units subject to limits.

A table summarising in more detail the Government's preferred options in respect of the salient design features of the Scheme is here. The table contrasts these preferred positions with those advocated by Professor Garnaut in his Draft Report.

Conclusion

In many respects the Green Paper represents a balanced approach between the urgent need to reduce emission of greenhouse gases through broad sectoral coverage and early Scheme commencement, against the international uncertainty that presently exists regarding future emission commitments by both developed and developing countries post 2012.

By providing transitional assistance for TEEIIs and a price cap, the Government has sought to reduce price uncertainty for liable entities and thus foster broad cooperation for the introduction of the Scheme. In addition, by providing support for the coal-fired electricity generators, even if only a one-off, there is a recognition that Australia's energy security is presently guaranteed by our large coal reserves and existing energy infrastructure stock.

Ultimately, the making or unmaking of the Scheme will be the determined by the price that business and the broader community will be made to bear and that precise liability will not become clear for several months yet.

For further information, please contact Brendan Bateman.