23 July 2007
Key Points:
One of the main issues for business will be the cost of complying with any new reporting regime.
The competition between the States and the Commonwealth to establish an emission trading scheme in Australia has seen a renewed focus and a sense of urgency surrounding the need for accurate data on greenhouse gas ("GHG") emissions.
One only has to look at the European experience during Phase 1 of the European emissions trading scheme ("EU ETS") (2005-2007) to recognise how inaccurate data can undermine a new market for carbon credits. Poor and incomplete data from European Union member states and industries on their GHG emissions resulted in a significant over-allocation of allowances under National Allocation Plans. Once it became apparent that, contrary to initial expectations, the market would be long for credits, the price of the Phase 1 allowances plummeted. The relatively short first phase of the EU ETS, however, has largely eliminated this problem and the price of EU ETS allowances in the subsequent Phase 2 period of the scheme remains relatively stable.
Both schemes currently under consideration in Australia, the States' National Emissions Trading Scheme ("NETS"), and that proposed in the Prime Minister's Task Group Report on Emissions Trading, have as a design feature short term caps on GHG emissions set for up to 10 years in the future. This period of time was considered necessary to provide certainty for business to make investment decisions.
Given the length of the period, if the embryonic Australian carbon market is to avoid the experience of the EU ETS during its first phase, it is critical that Australia have a comprehensive and robust inventory of its GHG emissions for several years leading up to the commencement of any ETS, which includes verification of the reported emissions.
The States have resolved to implement the NETS by 2010 in the absence of a national scheme, and the PM's Task Group report indicates that an Australian ETS could commence in 2011 or 2012. It is therefore imperative, whichever scheme is ultimately implemented, that an appropriate mechanism for reporting of GHG emissions is developed and implemented as soon as possible.
What type of reporting scheme?
In July 2005, the National Environment Protection Council ("NEPC") commenced the statutory process to make a variation to the National Pollutant Inventory National Environment Protection Measure ("NPI NEPM").
At its meeting on 14 July 2006, in relation to energy and GHG emissions reporting, the Council of Australian Governments ("COAG") agreed that a single streamlined system that imposes the least cost and red tape burden is the preferable course of action. To this end COAG agreed that:
It followed that the draft variation to the NPI NEPM did not include provision for the reporting of GHG emissions.
NPI as an interim measure for GHG reporting
Notwithstanding the agreement reached at the COAG meeting in July 2006, the States and Territories reserved the right to use the NPI as an interim mechanism for the reporting of GHG emissions if the Commonwealth had not introduced legislation in time for the national greenhouse and energy reporting system to be activated by 1 July 2008. As this had not occurred by the time of the last COAG meeting, the NEPC Committee (with the Commonwealth dissenting) directed that GHG emissions reporting be included in the proposed NPI NEPM variation as an option for consideration by NEPC at its June 2007 meeting. This resulted in a hastily convened public consultation period and tight timeframe for written submissions during May 2007.
The proposed triggers that have been drafted for inclusion in the NPI NEPM state that a business entity will have to comply with the reporting threshold for Category 4 substances (which include specified known GHGs) where the activities of the entity involve:
in the reporting period.
The business entity will need to assess whether or not it triggers the reporting requirement by amalgamating emissions from all of its facilities. Reporting however will be made on a facility basis to the State in which a facility is located. Low emission facilities can be aggregated with other facilities. Calculation of emissions will need to include emissions from a transport fleet and emissions from offsite electricity generation consumed by the facility.
National scheme
The Commonwealth government is presently drafting legislation which is intended to give effect to the COAG agreement of July 2006 for a single streamlined system for energy and GHG emissions reporting. It was also one of the recommendations of the PM's Task Group report that a national mandatory system for the reporting of GHG emissions and energy use be put in place during 2007-2008.
It is expected that the legislation will be put before Parliament before the end of the year and require reporting to commence by 1 July 2008. It will require companies emitting more than 50,000 tonnes of CO2 a year in total or 25,000 tonnes from a single site to report their GHG emissions, compared with the more stringent 25,000 tonne threshold under the proposed NPI NEPM variation.
Consistent with the broader application of PM's Task Group model for an ETS compared to the NETS (which would only apply at least initially to the stationary energy sector with a generating capacity above a specified threshold), the likely national scheme will mean that many businesses will be required to report, although it is likely that there will be phasing in of reporting requirements over a number of years. Large energy users, who consume more than 0.5 petajoules of energy per year, an estimated 250 Australian businesses, already have an obligation to assess and report energy use and energy efficiency opportunities under the Energy Efficiency Opportunities Act 2006. These businesses will also have reporting obligations under the proposed NPI NEPM variation, or the alternate national scheme.
Commentary
One of the main issues for business will be the cost of complying with any new reporting regime, with recent criticism from business being directed to the compliance cost associated with reporting under the Energy Efficiency Opportunities Act 2006.
Given the inevitability of the introduction of an emissions trading scheme in Australia, however, and the importance that reporting and verification of GHG emissions will have to the success of any scheme, it is obviously in the interest of business to be proactive when it comes to GHG reporting. Voluntary schemes for reporting GHG emissions presently exist (such as Greenhouse Challenge and the Carbon Disclosure Project) which will provide some advantages to those businesses that already participate.
Although obviously desirable, it remains to be seen whether either scheme will align reporting methodologies and periods, and verification audit regimes, with existing reporting obligations to minimise costs. Further, consideration should be given to ensure that reporting under either scheme is consistent as far as possible with the proposals to require companies to report their carbon footprint under international accounting standards.
Clearly, however, the verification process, which will be an important element to any national reporting scheme, will be another administrative burden for business. The challenge for Government will be balancing the need for verification and robustness of GHG data with the cost of compliance.
For further information, please contact Brendan Bateman.
