Allens

Climate Change

Client Update:  White Paper on Carbon Pollution Reduction Scheme released

15 December 2008

In brief: At midday, the Prime Minister, Kevin Rudd, released the much-anticipated White Paper that outlines the Federal Government's Carbon Pollution Reduction Scheme and the medium-term target for reducing national emissions. While the White Paper is broadly similar to the Green Paper, several important changes have been made and the Government has adopted Professor Garnaut's recommendation for a gradual start to emissions reduction targets. Partner Matthew Skinner , Senior Associate Suzanne Westgate and Lawyer John Henderson report.

Medium-term target and caps

In releasing the White Paper, the Federal Government has emphasised that the current global financial crisis highlights the 'need for a prudent and balanced approach' to an emissions trading scheme for Australia. 

Consistent with Professor Garnaut's recommendation (Allens Client Update: Climate Change - 30 September 2008), the Government proposes a 'gradual start' to emissions reduction targets of between 5 per cent and 15 per cent by 2020.  This range represents:

  • a minimum (unconditional) commitment to reduce emissions to 5 per cent below 2000 levels by 2020 (projected to be a 27 per cent reduction in per capita terms); and
  • a commitment to reduce emissions by up to 15 per cent below 2000 levels by 2020 (projected to be a 34 per cent reduction in per capita terms) in the context of a global agreement under which all major economies commit to substantially restrain emissions and advanced economies take on reductions comparable to Australia.

The Government also concedes that achieving a global commitment to more significant emissions reductions in the near term is 'unlikely'.

The White Paper leaves open the possibility of a 25 per cent reduction by 2020, however this is contingent on whether other countries are willing to commit to reductions on a similar level. 

The Federal Government's long-term target remains a 60 per cent reduction by 2050.

The indicative emissions trajectory for the first two years of the Carbon Pollution Reduction Scheme's (the Scheme's) operation has been set and will involve an annual reduction of 1 per cent from 2000 levels (so, in 2011-12 emissions will be 108 per cent of 2000 levels and this will decrease to 107 per cent of 2000 levels in 2012-13).  The emissions trajectory for 2010-2013 will be extended for a further two years in 2010, or alternatively an indicative trajectory to the end of any new international commitment period will be provided.

Consistent with the Green Paper, the Federal Government will fix the cap on the number of permits to be issued under the Scheme for at least five years in advance so as to provide certainty to industry.  Caps will be set on a rolling five-year basis, with gateways (ie ranges within which caps for those years may fall) being set every five years for the 10-year period beyond the Scheme caps.  So, in early 2010, the Federal Government will set initial annual caps for each year in the period 2010-15, with a gateway for each of the years 2020-25.  

In terms of the carbon price, the Treasury modelling undertaken (Allens Focus: Climate Change – November 2008) suggests that an initial permit price in 2010 of around $A23/t CO2-e in the context of a stabilisation concentration of 500 ppm. 

The White Paper also confirms that the cost of permits under the Scheme will be capped at $40 for the period of 2010-11 to 2014-15 to promote a smooth transition.  Should the carbon price reach the $40 cap, liable entities will have access to an unlimited store of additional permits which the Government will issue at that price.  However, any additional permits will not be tradable or bankable for future use.  The level of the price cap is predicted to rise in real terms by 5 per cent per year. 

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Coverage

The Scheme coverage remains unchanged from the Green Paper, being all six Kyoto Protocol gases: carbon dioxide, methane, nitrous oxide and three categories of synthetic greenhouse gases. It will cover emissions of these gases from the production of stationary energy, industrial processes and transport (but not international transport). The Scheme will apply to fugitive emissions, such as methane emissions from black coal mining and emissions from flaring during the extraction and processing of oil and gas. 

The Scheme will cover waste (eg landfill and sewerage treatment), however emissions from landfill waste sites that closed prior to 30 June 2008 will not be included.  Moreover, emissions from waste deposited prior to 1 January 2009 will be excluded from the Scheme until 2018.

As proposed in the Green Paper, agriculture will be excluded from the Scheme at the outset.  However, the Federal Government is disposed to include agriculture emissions in the Scheme by 2015.  Commencing in 2009, it proposes to undertake a work program in consultation with the agriculture industry to enable a decision to be taken in 2013 on the inclusion of agriculture emissions in 2015.

Forestry will be included in the Scheme on an 'opt in' basis as proposed in the Green Paper.  Forest managers will be able to generate credits as a result of carbon stored in their forests, but will also become liable for any reduction in that stored carbon.  The Scheme will only cover domestic emissions sources and sinks that are counted in Australia's Kyoto protocol national account, so in order to be eligible for the Scheme, forests must have been established since 1990 on cleared land.  Should a forest manager wish to opt out of the Scheme, they will first be required to surrender sufficient carbon pollution permits to cover all potential liabilities (eg for any subsequent deforestation).

Although petrol will be included in the Scheme, the Federal Government will reduce the fuel tax on a cent-for-cent basis for motorists to offset the price impact of the Scheme and will periodically assess the adequacy of this measure for three years and adjust accordingly.  It will also provide a 'CPRS fuel credit' payment equal to the fuel tax cut to agriculture and fishing businesses for three years and to heavy vehicle on-road transport businesses for one year.

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Liability

The Federal Government expects that about 1000 companies will incur direct liabilities under the Scheme.  As outlined in the Green Paper, the Scheme will impose liability on entities in respect of facilities that emit 25,000tCO2-e per annum.  However, a lower participation threshold of 10,000tCO2-e will apply to landfill facilities that are operating in proximity to another operating landfill facility.  In addition:

  • Liability will also be imposed on liquid fuel suppliers and importers to cover the downstream combustion of their petroleum products; on gas retailers, coal producers and the manufacturers of coal-related products to cover the downstream combustion of their products by small users; and on entities that import synthetic greenhouse gases (including in airconditioning and refrigeration equipment).
  • Importantly, large users (with emissions of greater than 25,000tCO2-e) and other eligible entities will be able to 'net out' (purchase without a carbon price) their fuel purchases and directly manage their Scheme obligations.
  • Carbon that is transferred to carbon capture and storage (CCS) facilities will not be counted towards the originating entity's gross emissions. 
  • Scheme obligations will also not apply to emissions from combustion of biofuels and biomass for energy.  This includes CO2-e emissions from combustion of methane which will receive a 'zero rating'.

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Trade-exposed emissions-intensive industries

The most significant changes to the Scheme since the release of the Green Paper are to the levels of transitional assistance that will be provided to emissions-intensive, trade-exposed industries (EITE).  In general, coverage over EITE has been substantially broadened in terms of eligibility and assistance provided.

The White Paper confirms that assistance will be provided to EITE entities through the allocation of free permits, to reduce the likelihood of 'carbon leakage' and ensure that the Scheme does not significantly harm Australia's international competitiveness (see Allens Focus: Climate Change – July 2008).  Since the release of the Green Paper however, intense stakeholder debate has resulted in several changes to the amount of assistance that will be provided to EITE industries, as well as changes to assistance design and the method of eligibility.  Most importantly:

  • The White Paper proposes that around 25% per cent of permits will be freely allocated to EITE entities (or 35 per cent if agriculture is included).  This is expected to rise to around 45 per cent by 2020.  This has increased from the 20% allocation (30 per cent with agriculture) proposed in the Green Paper.
  • Consistent with the Green Paper, activities that have an emissions intensity above 2000tCO2-e/$million revenue ('Category 1 activities' – including aluminium smelting, cement and steel manufacturing) will initially receive permits that cover around 90 per cent of their emissions per unit output.  However the lower level for Category 2 activities (including ceramic production, alumina refining, some oil and gas production) proposed in the Green Paper has been extended from activities with an emissions intensity of between 1500 to 2000tCO2-e/$million revenue, to activities that have at least 1000tCO2-e/$million revenue.  Category 2 activities will initially receive permits of around 60 per cent of their emissions per unit output.  This will probably now capture LNG and other industries that are trade exposed but would have missed out on direct assistance under the Green Paper formulation due to their lower emissions intensities. 
  • A further key change to the eligibility threshold is the emissions intensity eligibility test.  Highly emissions intensive activities were proposed in the Green Paper to be on the basis of emissions-to-revenue of an activity.  The White Paper now includes the alternative of using emissions-to-value-added of activities as a measure of emissions intensity (with applicable thresholds of 6000tCO2-e/$million for Category 1 activities, or between 3000t and 5999t CO2-e/$million for Category 2 activities).  Eligibility is still to be determined using industry average estimates of emissions intensity.
  • The data used for eligibility assessment has been extended.  The Green Paper proposed two years data for use in assessing eligibility.  The White Paper expands the assessment of revenue/value added data to four and a half years of data from 1 July 2004.
  • The Green Paper only proposed that assistance be provided in respect of an activity's direct emissions and for the indirect emissions associated with its use of electricity. The White Paper expands this list to include emissions from the use of steam, and emissions associated with the extraction and production of natural gas and its derivatives such as methane and ethane when used as a feedstock.
  • The assistance is now proposed to be reduced by 1.3 per cent each year – which is said to be broadly in line with the rate of reduction in the national cap for 5 per cent below the 2000 trajectory.  This is said to ensure that the EITE sector will share the task of meeting the national commitment to reducing emissions. 
  •  Finally, an 'electricity allocation factor' is now proposed to be introduced, which is to determine how many tonnes of emissions will be included in the allocation baseline for electricity consumed.  This is now proposed to offset, in part, the increase in electricity costs for EITE entities associated with the Scheme.

Permits will be allocated at the beginning of each compliance period.  The assistance provided to EITE industries is still to be reviewed every five years, and is to cease in the event that a global agreement is achieved.  In that case, five years' notice will be given to changes in the program (although subject to changes being required for Australia to comply with international obligations).

Once the Scheme has commenced, firms may make representations to the Government to request that the Productivity Commission makes an assessment of the Scheme's impact on their industry. The Government will not necessarily refer all requests to the Commission; it will take into account the nature and details of the request. The Commission will then make recommendations to the Government about whether it should provide additional support to the industry, and the appropriate mechanism for that support.

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Strongly Affected Industries

The Green Paper suggested limited support would be provided to 'strongly affected industries', such as coal-fired electricity generators.  In summary, the White Paper provides that:

  • Coal-fired electricity generators will receive an allocation of permits to the value of $3.9 billion over five years, based on a $25 carbon price.  This will be in the form of a once-and-for-all allocation to the most emissions-intensive electricity generators under an electricity sector adjustment scheme, to be determined upfront.  Assistance will be determined in relation to the historic energy output of each generator between 1 July 2004 and 30 June 2007, and the extent to which the generator's emissions intensity exceeds the industry average for fossil-fuel based generation.  This is to be reviewed in 2013, to ensure that generators do not earn windfall gains.
  • Importantly, the assistance will be conditional on the generator retaining the same level of generation capacity as at 3 June 2007, to protect against the threat to security of energy supply.

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Banking and borrowing

As foreshadowed in the Green Paper, unlimited banking of carbon pollution permits will be allowed under the Scheme (except for any additional permits which are issued in the event that the carbon price reaches the $40 cap).

Limited short-term borrowing is permitted under the Scheme allowing liable entities to discharge up to 5 per cent of their obligations by surrendering carbon pollution permits dated from the following year.

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International linkages

As also foreshadowed in the Green Paper, the Scheme will be designed so that it can be linked with other international schemes and carbon trading markets.  While the Federal Government's primary motivation in creating international linkages is to support a global climate change solution, international linkages will also ensure that liable entities can access low-cost international pollution reductions to offset their domestic liabilities under the Scheme. Initially, these international offsets will be in the form of certified emission reductions (CERs) and emissions reduction units (ERUs), each of which are created under the Kyoto Protocol flexibility mechanisms and result from emissions abatement projects that are undertaken in developing and developed countries respectively.

There will be no quantitative restrictions on the use of eligible international offset credits that liable entities would be able to surrender for compliance with the Scheme.  This is a modification of the position in the Green Paper.  This provides an additional safety valve on compliance costs and should help lower the carbon price. 

The sale and transfer of Australian permits to international markets will not be permitted in the initial years of the Scheme.  The Federal Government will give at least five years' notice of a decision to allow the export of Australian carbon pollution permits to international markets.  This notice period may be shortened:

  • when establishing a bilateral link with another country's scheme and an independent review finds that establishing the bilateral link will not have a significant impact on the permit price in the Scheme; or
  • (or waived) by the responsible Minister.

The prohibition on exporting Australian permits should reduce upside carbon price risk.

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Reporting and compliance

The functions of the Greenhouse and Energy Data Officer, the Renewable Energy Regulator and the Carbon Pollution Reduction Scheme Regulator are to be amalgamated into a single regulator.  The combined regulator's responsibilities will include monitoring, reporting and assurance under the National Greenhouse and Energy Reporting System, as well as enforcement, auctioning permits, allocating free permits and maintaining the national registry.

In addition, an independent expert advisory committee will be convened to conduct strategic reviews of the Scheme, with the first review to be completed in 2014. 

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Other assistance

The Federal Government will provide assistance to small businesses and community organisations by creating a $1.4 billion Climate Change Action Fund. The small business package includes incentives to invest in innovative, energy-efficient, low-emissions processes, intended to aid small businesses to become accustomed to emissions cuts. A similar fund will be available to community-based organisations. In addition, a small business innovation fund will assist small businesses in cutting their energy usage by providing grants to contribute to the cost of low-emission processes and energy-saving projects. These grants will have long payback periods so as to minimise the impact on small business. 

The Federal Government will also provide assistance to low-income households by making periodical remittance on energy bills.  The total size of the Australian Government's assistance package for households is estimated to be $6.0 billion in 2011-12. 

The Government will continue to protect motorists by a 'cent for cent' reduction in fuel tax, to be reviewed every six months for three years. 

The White Paper provides that all funds raised for the Australian Government from the Scheme (estimated to be $11.5 billion in 20110-11), and $23.5 billion over the forward estimates will be used to help households and businesses adjust to the scheme.

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Next steps

An exposure draft of the Scheme legislation is proposed to be released for public comment in late February 2009.
The Government intends to introduce the bills into the Australian Parliament in the winter session of 2009, with a start date for the Scheme of July 2010. 

It is intended that the Climate Change Action Fund will be partly rolled out before the Scheme commences to smooth the transition.

Predictably however, the success of the Scheme will depend on there being a comprehensive global climate change agreement – that provides for an allocation of emissions right that take into account relative mitigation costs and allow countries to meet their targets by being free to purchase offsets from countries where mitigation costs are lowest.  To that end, the Government has accepted the Garnaut Report finding that achieving a global commitment to emission reductions to 450 parts per million or lower in the near terms will be 'unlikely in the next commitments period'.

For further information, please contact:

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