National Emissions Trading Scheme: Where are we?

By Claire Smith and Callan O'Neill.

Key Points:
If NETS proceeds it will be important for energy generators to consider strategies for lobbying the administrating body at an early stage so that they can maximise their initial permit allocation.

State Governments have long recognised the need for steps to be taken to control greenhouse gas emissions. Although recent press coverage indicates a shift in the Commonwealth Government's greenhouse policy with its recognition for the need for a Global Emissions Trading Scheme post-Kyoto, it appears to be still some way off sanctioning a national emissions trading scheme in the absence of a new global agreement. This article examines the Australian States and Territories proposal for implementing a National Emissions Trading Scheme ("NETS") in Australia with or without Commonwealth Government support, if necessary.

NETS basics

The National Emissions Trading Taskforce established by the States and the Territories released a discussion paper on the possible design of a NETS earlier this year. The proposed scheme will operate as a cap and trade system for the stationary electricity sector. At this stage, two caps are proposed, either a 176 mega tonne carbon emission cap (which is the same level as electricity generated carbon emissions in 2000) or a 150 mega tonne reduction (a 15 percent reduction on 2000 levels) by 2030.

Key features of NETS include:

• a mandatory requirement for electricity generators with a capacity to generate over 30 megawatts of electricity to participate (with flexibility to include other participants such as large stationary energy users);
• participants must submit a permit for each equivalent tonne of carbon dioxide (1 t CO2-e) they emit;
• permits will be granted free to adversely affected electricity generators and trade exposed energy intensive companies. Remaining permits will be auctioned;
• permits can be traded and banked but not borrowed against future permit allocations;
• there will be a penalty for non-compliance which is likely to underpin the value of the permits;
• carbon offset credits will be available for some activities eg. forestry, carbon capture and storage (such as geo-sequestration), reduced industrial process emissions and methane destruction, as long these methods meet additionality, permanence and measurement criteria eg. the project must actually reduce emissions and be beyond normal compliance under a business-as-usual scenario;
• credits will not be created through the generation of renewable energy; and
• the proposed start date for the scheme is 2010. Ideally the scheme would be administered by the Commonwealth but in the absence of Commonwealth involvement, a Ministerial Council or Forum, Scheme Developer and Scheme Regulator could be established independently.

Reaction

The NETS has provoked strong negative reaction in both Western Australia and Queensland with the Western Australian and Queensland State governments voicing concerns over what they perceive to be the adverse impact of the NETS on the economies of the respective States and in particular the mining industries in those States.

Alan Carpenter, the Premier for Western Australia, has stated that Western Australia "will not commit to any form of national greenhouse gas emissions trading without assurances that there would be no adverse impacts". He also stated that he would seek assurances that "such a scheme would not adversely impact Western Australia's capacity to rely on energy sources such as coal".

Queensland Premier Peter Beattie voiced similar concerns. He stated that while he believed in carbon trading he also believed that Australia needed to "examine technology like clean coal technology". While he acknowledged the importance of reducing emissions, he emphasised that Queensland wanted to play a role in selling its technology in China. In addition, he was also of the view that the effect of the NETS would be to increase the price of electricity for consumers in Queensland stating that the price consumers would be required to pay for electricity as a result of the NETS would increase by approximately 59 cents per week, increasing to an extra $1.33 per week by 2033.

Potential problems

A key issue raised by stakeholders has been the potential for over-allocation of permits. This has been highlighted as a problem in the trial phase of the EU emissions trading scheme and led to a significant fall in the carbon price earlier this year.

As a response the NETS administration has proposed allocating and auctioning permits in three tranches. The first tranche of permits will be for primary energy producers in most need of them (for example, coal fired power generators at the end of asset life). The second tranche is for energy intensive industries (for example, aluminium industry). The third tranche is an allocation of permits for auction. To avoid over-allocation, the number of permits available for auction will be determined by the allocation of permits in the first two tranches, the theory being that restricting the number of permits creates a level playing field for those requiring permits above their allocation.

Another issue that must be addressed is the extent to which existing schemes such as the Greenhouse Gas Abatement Scheme ("GGAS") in NSW and offset credits generated through renewable power generation will integrate with the NETS. Under the current proposal, renewable energy certificates generated in VIC and NSW will not be interchangeable with NETS permits, nor will energy efficiency projects designed to reduce emissions under GGAS. However, it is proposed that participants will save one NETS permit for every mega-watt hour of carbon neutral electricity generated (to help drive demand in the renewables sector) and some other forms of carbon abatement technology used to generate GGAS certificates may be interchangeable.

Looking to the future

In reality the critical question in this debate is not if carbon trading is going to become a reality, but when. Electricity providers and energy intensive industries must be ready for the changes when they occur. Regardless of whether the changes will occur on a state or national level it is important for electricity generators to put in place measures now (if they have not already done so) to ensure all greenhouse gas emissions can be accurately measured and verified.

If NETS proceeds it will be important for energy generators to consider strategies for lobbying the administrating body at an early stage so that they can maximise their initial permit allocation. Further, energy intensive businesses and energy providers should also bear in mind the options for off-setting emissions through NETS.