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Client Update: Climate Change – 16 July 2008Green Paper on Carbon Pollution Reduction Scheme releasedIn brief: At lunchtime today, the Minister for Climate Change and Water, Penny Wong, released a much-anticipated Green Paper that sets out the Federal Government's preferred model for Australia's proposed emissions trading scheme, to be known as the Carbon Pollution Reduction Scheme. Allens Arthur Robinson's Climate Change Group provides initial commentary on the key reforms proposed in the Green Paper.
Coverage and liable entitiesAs expected and as recommended in the Garnaut draft report (released on 4 July 2008), the Green Paper on a Carbon Pollution Reduction Scheme (the Green Paper) confirms that the Carbon Pollution Reduction Scheme (the scheme ) will be broadly based in terms of the greenhouse gases and economic sectors that are to be covered. The scheme will cover all six Kyoto Protocol gases and will apply to stationary energy, industrial processes, fugitive emissions, waste and transport (other than international transport). It will also cover forestry on an 'opt in' basis, under which forests established after 1990 will be eligible to create Australian emission units where they increase the net quantity of carbon dioxide that is stored in the forest, but will also attract a liability under the scheme where there is a net reduction in the quantity of carbon dioxide that is stored in the forest (eg as a result of the forest being harvested). However, no credits will be issued for avoided deforestation. The only sector that will be excluded from the scheme from the outset will be agriculture, with the result that non-energy emissions from this sector will not be covered. The Federal Government has committed to making a final decision on the application of the scheme to agriculture in 2013, but in any event agriculture will not enter the scheme until 2015 at the earliest. The broad coverage of the scheme means that there is little scope for offsets to be produced in the uncovered sectors. In addition, offsets will not be allowed to be created in the agriculture sector unless a decision is made in 2013 to exclude that sector from the scheme. The scheme will impose liability on entities that emit more than 25,000tCO2-e of greenhouse gases per annum, except that as yet to be determined thresholds will apply to emissions in the waste sector and also to those who import or manufacture synthetic greenhouse gases. Liability will also be imposed on liquid fuel suppliers and importers to cover the downstream combustion of petrol products, on gas retailers to cover the downstream combustion of natural gas, and on the manufacturers of coal related products for the downstream combustion of those products. This will require the development of an offsetting/crediting scheme so as to avoid double counting. On this basis, the Federal Government expects that about 1000 companies will incur direct liabilities under the scheme. The Federal Government is proposing that liability to acquire and acquit Australian emissions units will be imposed on the entity that has 'operational control' over the covered facilities or activities (this being a concept that is used for the purposes of the national greenhouse and energy reporting system legislation). Where multiple entities have operational control over a covered facility or activity (as may occur where there is a joint venture), the Federal Government is proposing to require a single responsible entity to register and meet the obligations imposed under the scheme. This is likely to be of some concern because one joint venturer is unlikely to wish to assume responsibility for discharging the emissions related obligations of its fellow joint venturers. Although petrol will be included in the scheme, the Federal Government will reduce the fuel tax on a cent-for-cent basis to offset the price impact of the scheme. This measure will be reviewed after one year in the case of heavy vehicle road users, and after three years for other road users. An equivalent rebate will be provided to businesses in the agricultural and fishing industries, as the excise system effectively does not apply to this sector.
Annual capsThe Federal Government is proposing that annual emissions caps generally be set on a rolling five-year basis, with gateways being set every five years for the 10-year period beyond the scheme caps. So, for example, the Federal Government would set initial annual caps for each year in the period 2010-15, with a gateway (ie a range within which caps for those years may fall) for each of the years 2020 and 2025. In the White Paper, to be released by the Federal Government by the end of this year, the Federal Government will set out both a medium-term target range (for 2020) and an emissions trajectory for the 2010-2013 period (this trajectory will be extended for a further two-year period in 2010 when the Federal Government is able to take account of any progress made in the negotiation of an international climate change agreement), and will explain the approach that is to be adopted for setting caps for the first five years of the scheme.
Adjustment assistance to industryOne of the key elements of the Federal Government's emissions trading scheme proposal is the provision of assistance to industries that are likely to be most impacted by the introduction of the scheme. Specifically, the Federal Government is proposing that up to around 20 per cent of the new Australian emissions units are to be allocated for free to:
The allocation of permits to these activities will be based on industry average emissions rather than the emissions of any particular firm so as to encourage businesses to undertake emissions abatement activities, and will be reduced over time at a rate that has yet to be decided. It is intended that this assistance cover both direct and indirect electricity emissions associated with the covered activity. If agriculture is subsequently brought into the scheme, then around 30 per cent of the annual allocation of Australian emissions units will be quarantined for providing assistance to trade exposed emissions intensive industries. The assistance provided to trade exposed emissions intensive industries will be reviewed every five years. The Federal Government is also proposing to provide some assistance to existing coal fired electricity generators1 through a new Electricity Sector Adjustment Scheme. However, unlike its proposals regarding trade exposed emissions intensive industries, the Federal Government's proposals in this area are not very precisely formulated. Instead, the Green Paper simply notes that different delivery mechanisms are likely to be required for the beneficiaries of the scheme (which will include not just electricity generators but also workers in the electricity generation industry and communities and regions that depend on that industry) and that it will be discussing the appropriate form of support with stakeholders. This does leave open the possibility that existing coal fired generators will receive at least some free Australian emissions units, but the lack of detail at this stage is likely to be of considerable concern to generators. All that the Federal Government has revealed is that this assistance will be allocated to coal fired generators on an asset by asset basis in proportion to their capacity, with the Federal Government splitting the total available assistance into separate pools for brown coal fired and black coal fired plants. The precise amount of assistance will be determined towards the end of 2008 after the Federal Government decides on the medium-term national emissions target range that will apply in 2020. In addition, the Federal Government has indicated that this assistance will be provided on a 'once and for all' basis at the outset of the scheme and will be vetted to ensure that it does not result in windfall gains to any generators. Australian emissions units that are not allocated as described above will be auctioned on a quarterly basis.
Banking and borrowingAs expected, the Federal Government is proposing to permit unlimited banking of Australian emissions units but will impose a percentage limit on the quantity of units that a liable entity may borrow (being something less than 5 per cent of its permit obligations).
Transitional measuresThe Garnaut draft report favoured a direct move to an unconstrained carbon price but acknowledged that there was a case for fixing the price for permits in the period 2010-12 so as to provide a 'soft start' to emissions trading. In the Green Paper, the Federal Government is proposing a cap on the permit price for the period 2010-15 so as to limit the costs of the scheme to business. While seeking input on the form of the price cap (ie whether it should take the form of access to fixed-price permits, a penalty or some other mechanism), the Federal Government has stated that the level of the cap should be set high enough to ensure a very low risk of it being exceeded. The Green Paper also finally puts to rest the previous Federal Government's proposal for an early action credit scheme, preferring to rely instead on the rewards that are built into the Carbon Pollution Reduction Scheme.
International creditsThe scheme will be designed so that it can be linked with other international schemes and carbon trading markets, with the Federal Government's preference being for an open trading scheme in the long term, within an effective global emissions constraint. 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. However, the Federal Government recognises that establishing international linkages will not be without risk and so proposes to limit the volume of international credits that liable entities can surrender for compliance with the scheme to a maximum percentage of that entity's obligation. The precise scope of this limit will be included in the White Paper. Linking arrangements will be subject to continuing review as international markets develop. The Federal Government has committed to investigate direct bilateral linking opportunities with other countries' schemes as they are established.
Licensing requirementsAs flagged in early June, the Federal Government is proposing to classify Australian emissions units as 'financial products' for the purposes of the Corporations Act 2001 (Cth). The effect of this is that those who trade in these units will need to obtain an Australian financial services licence and (particularly to the extent they trade with retail customers) comply with the disclosure requirements contained in Chapter 7 of the Corporations Act. As the law currently stands, Australian emissions units would not be caught by these provisions and it is only those who trade in derivatives based on them (eg options or hedges) who would need to hold an Australian financial services licence. It is important that those who intend to trade in Australian emissions units are aware of this proposal so they can put in the place the necessary licensing arrangements.
ReportingThe scheme will operate on a financial year basis so that the emissions reports that liable entities are required to submit under the national greenhouse and energy reporting system legislation will also meet the reporting requirements under the scheme. In order to ensure that the data that is submitted is accurate, those who emit more than 125,000tCO2-e pa of greenhouse gases will be required to have their annual emissions reports vetted by an independent accredited third party. The Federal Government will consider extending this requirement to smaller emitters in due course.
Other mattersA key component of the Federal Government's proposal is to provide assistance to low-income households as a result of the increased costs of goods and services that will result from the introduction of the scheme. In addition, the Federal Government is proposing to establish a Climate Change Action Fund, which will assist businesses in adjusting to a carbon-constrained economy through funding investment in innovative new low-emissions processes, the development of industrial energy-efficiency projects, and the dissemination of energy efficiency information to small- to medium-sized businesses.
The next stepThe Federal Government has called for submissions on the Green Paper, following which it will release a White Paper and exposure draft legislation in December 2008. If you would like assistance in drafting your submissions or any other information, please contact one of the people below. Footnotes
For further information, please contact:
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