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Client Update: Climate Change – 4 July 2008Garnaut Climate Change Review draft report releasedIn brief: The
eagerly awaited draft report of the Garnaut Climate Change Review was released
at lunchtime today. Partner Grant Anderson
BackgroundProfessor Ross Garnaut has been commissioned by the Commonwealth, state and territory governments to report on the likely effect of climate change on Australia's economy and environment, the scope for international policies to ameliorate that effect (including the role that Australia can play in the development of those policies), and the policies that Australia should adopt to address the climate change challenge. The draft report by the Climate Change Review (the Review) identifies an urgent need to reduce greenhouse gas emissions. While it does not specify actual emissions trajectories that should be adopted (these will depend on the economic modelling that the Review is currently undertaking in conjunction with Commonwealth Treasury), the draft report does state that:
In addition, although the draft report recognises that the risks of dangerous climate change can only be held to acceptable levels through a comprehensive global agreement that includes both developed and major developing countries (such as China, India and Indonesia), it acknowledges there is only a 'slender chance that ... the world will manage to develop a position that strikes a good balance between the costs of dangerous climate change and the costs of mitigation'. However, striking such a balance is particularly important to Australia given its vulnerability to climate change, and the draft report highlights the role that Australia can play in contributing to an effective global climate change agreement. At the domestic level, one of the principal tools that the draft report identifies for addressing the climate change challenge is:
In its discussion paper released in March, the Review outlined the parameters of a proposed emissions trading scheme for Australia. The draft report reinforces many of the proposals contained in the discussion paper, albeit with some small modifications. Set out below are some of the key recommendations contained in the draft report.
Emissions trading schemeThe draft report recommends that the emissions trading scheme should be as broadly based as possible and, in particular, should include transport and petroleum products. It also recommends that waste and forestry should be included within the scheme as soon as practicable, and that agriculture should be included to the extent that this is the most cost effective means of encouraging biosequestration and reducing net emissions from that sector. In the absence of coverage, it is suggested that alternative policies need to be developed to encourage emissions reduction in any uncovered sectors. As foreshadowed in the March discussion paper, the draft report has a strong predisposition to the auctioning of permits rather than allocating them for free. This is because free permit allocation requires highly complex methodologies, entails a degree of arbitrariness and may subject government decision making processes to pressure from different interest groups. In this regard the draft report states that:
It reinforces this view with the warning that it will not be practical to develop and administer a free permit allocation scheme in time for the introduction of emissions trading in 2010. While this outcome is not unexpected, it will serve to heighten the concerns of domestic industries (such as fossil fuel fired generators) about the impact on them of a carbon price. The draft report does, however, come out in favour of payments to trade exposed emissions intensive industries pending the negotiation of global sectoral agreements. In doing so, the draft report suggests that there is a need for fairly high materiality thresholds (based on industry processes rather than industry sectors) so as to ensure that assistance is only given where there is a 'genuine risk of large, excessive reductions in domestic production'. It further suggests that these payments should be limited to permit costs in excess of this threshold, ie that the compensation would not be full compensation for all costs imposed by the emissions trading scheme. On this basis, the draft report indicates that aluminium smelting, cement production, iron and early stage steel manufacturing and (to the extent they are included within the emissions trading scheme) cattle and sheep products would be candidates for such assistance. While the draft report favours cash payments as being a more transparent way of providing this kind of assistance, it recognises that this assistance could take the form of free permits that have the same value as these cash payments. In either case, it suggests that no more than 30 per cent of permits (or permit value) should be allocated for this purpose.
Transitional arrangementsAlthough the draft report is in favour of an unconstrained carbon price with effect from 2013 (this being regarded as important for Australia to be a credible party to international negotiations on any post 2013 climate change agreement), it does accept that there are some advantages in imposing a fixed permit price (but not a price cap) to the end of 2012. In such a case, it would be necessary to preclude pre 2013 permits being banked for use after 2013 so as to avoid post 2013 prices being artificially depressed.
Low-emissions technologiesThe draft report emphasises the need to develop and commercialise low emissions technologies on a global basis. In this regard it recommends that there be a global agreement under which countries commit to minimum levels of investment for this purpose – in Australia's case, around $3 billion per year. Indeed, the draft report recognises that the future of coal based electricity generation depends on carbon capture and storage becoming commercially feasible and that Australia has a potentially significant leadership role in testing and deploying this technology. Conversely, the draft report considers that mandatory renewable energy targets, such as the 20% Renewable Energy Target that is being proposed by the Commonwealth Government, should be phased out once the emissions trading scheme becomes fully operational.
Other measuresWith the emissions trading scheme being the centrepiece of Australia's approach to managing climate change, the draft report is concerned to ensure that its efficiency is not compromised by other measures. As the draft report states:
On this basis, the draft report supports government funding for improvements to network infrastructure so as to facilitate the connection of renewable energy generators to the grid and the deployment of large scale carbon capture and storage. Similarly it also supports schemes that promote information about distributed generation and energy saving opportunities in appliances, buildings and vehicles. The draft report also recognises that the introduction of a carbon price will result in potentially substantial increases in the price of petrol, electricity and gas, as well as in the price of products and services that contain embodied energy (eg because they are manufactured using energy intensive processes or are transported significant distances). It therefore recommends that about half of the revenue derived from the auctioning of permits could be used in the early years of an emissions trading scheme to offset the regressive effects of a carbon price on low income households.
The next stepsOn 16 July 2008, the Federal Government will release its Green Paper on the design of an Australian emissions trading scheme and it will be interesting to see to what extent the recommendations of the draft report are incorporated in this paper. The Garnaut Review will also be releasing a supplementary report in August and its final report in September. The supplementary report will contain the results of the joint modelling being undertaken by the Review and Commonwealth Treasury on the economic impact of an emissions trading scheme under various emissions reduction scenarios. This will be an important input into the recommendations made by the Review as to the emissions trajectories that Australia should follow, as well as into the decisions that the Federal Government will need to make about the annual caps that are to be imposed. Interested parties are invited to make submissions on the draft report. If you would like assistance in preparing such submissions, or further information about the proposed Australian emissions trading scheme and the opportunities and risks it presents for your business, please contact any of the people below.
For further information, please contact:
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