Client Update: Federal Government's CPRS offer
25 November 2009
In brief: Partner Grant Anderson (view CV) looks at the changes proposed by the Federal Government to its Carbon Pollution Reduction Scheme and compares them with the demands made by the Federal Opposition.
Yesterday, the Federal Government released the details of the amendments to its Carbon Pollution Reduction Scheme (CPRS) legislation that it is willing to agree with the Federal Opposition. Today, the newspapers are full of the ructions that are racking the Opposition as it debates whether to accept the Government's offer. The Government, which is very keen to ensure that it can go to the Copenhagen Climate Change Conference with a sealed deal, has stated that its offer only stands so long as the CPRS legislation is voted on before Parliament rises in this sitting. This note sets out the key changes proposed by the Government and compares them with the demands made by the Opposition.
Last week, the Government announced its agreement to exclude agricultural emissions from the CPRS. This was a relatively easy concession to make, as agricultural emissions were not intended to be covered by the CPRS until 2015 at the earliest (and, in any event, there is no such thing in politics as 'never'). In yesterday's announcement, the Government has made some further concessions, although these appear to be relatively minor when taken in the context of the Opposition's initial demands and given that the Government was always going to make some changes (in particular, to the assistance given to coal-fired electricity generators).
The principal concessions are to increase the assistance to emissions-intensive trade-exposed industries, coal-fired electricity generators and coal mines. However, a number of the new measures (including part of these assistance measures) are to be funded by reallocating money that has already been set aside as part of the Climate Change Action Fund.
Disappointingly, significant issues regarding the imposition of liability on partially-owned subsidiaries and the division of CPRS liability between participants in unincorporated joint ventures have not been addressed. Instead these issues will be consulted on, with a view to making any resulting amendments before July 2011. While these matters are of less political interest than the other components of the Government's proposed amendments, they are of considerable practical significance, and the delay in addressing them means that there will be a further period of uncertainty as parties seek to deal with carbon pass-through issues arising out of existing contracts in the interim period.
Set out below is a comparison of the major changes being proposed by the Government and the Opposition's initial bargaining position.
|Area||Original Government position||Opposition's demands||Revised Government position|
Emissions-intensive trade-exposed assistance program
[Legislative amendments required to mandate review of assistance rates]
|Highly emissions-intensive activities (those producing more than 2,000tCO2-e/$m) are eligible for assistance at an initial rate of 94.5% and moderately emissions-intensive activities (those producing between 1,000tCO2-e /$m to 2,000tCO2-e /$m) are eligible for assistance at an initial rate of 66%. These assistance rates include a 5% global recession buffer to be removed after 2015/16 and a 1.3%pa decay rate.||All activities producing more than 850tCO2-e/$m to be provided with assistance at the rate of 94.5% until 2015/16 and thereafter at the rate of 90%. The assistance rate is only able to be reduced when 80% of Australia's competitors have a carbon constraint.||The assistance rates for highly emissions-intensive and moderately emissions-intensive activities are retained, but with the global recession buffer also being retained, so that these rates simply decay from their initial rates of 94.5% and 66% at the rate of 1.3%pa. |
The assistance rates are to be reviewed after Australia signs a new multilateral climate change agreement, with any changes to the CPRS to be made on five years' notice.
|Emissions-intensive trade-exposed assistance program to be reviewed in 2014.||The 2014 statutory review will consider the 1.3% pa decay rate on an industry-by-industry basis. If the review recommends that the decay rate be increased, then five years' notice of any increase must be given. If the review recommends that the decay rate should be decreased, then the decrease will take effect immediately.|
|LNG production treated as a moderately emissions-intensive activity entitled to an initial assistance rate of 66%.||Free AEUs to be allocated to LNG producers to 'top up' the then-current assistance rate to 50%, with emissions for this purpose including emissions from the entire LNG production process (eg extraction, transportation and energy use in compression).|
|Primary food processing does not qualify as an emissions-intensive trade-exposed activity.||Primary food processing to be treated as an emissions-intensive trade-exposed activity.||$150 million reallocated within the Climate Change Action Fund to fund emissions reduction measures in primary food processing.|
[Legislative amendments required]
|Inclusion of agricultural emissions in the CPRS to be considered in 2013 and to be included at the earliest from 2015.||Agricultural emissions to be permanently excluded from the CPRS.||Agricultural emissions to be indefinitely excluded from the CPRS, with consideration being given to other measures to achieve emissions reductions in the agricultural sector.|
|[Legislative amendments required to recognise activities that can create AEUs]||Offsets to be considered in 2013.||Emissions reduction activities such as soil sequestration and grazing/ crop management to be able to generate AEUs.||Offsets to be able to generate AEUs to the extent those offsets count towards Australia's international obligations. Until then, it will be possible to create voluntary carbon offsets under the National Carbon Offsets Standard. This is really a reiteration of the Government's existing position. The issue with the creation of voluntary carbon offsets is that their price is likely to be adversely affected as the CPRS cannibalises the voluntary market. It will also be necessary to develop robust methodologies for the measurement and verification of such offsets.|
|[Legislative amendments required]||AEUs will be able to be created for regrowth forests, and (from 2013) for soil carbon, on land cleared between 1990 and 31 December 2008.|
|$50 million in funding to assist in the development of offsets.|
[Legislative amendments required]
|Gassy coal mines (>0.1tCO2-e/t coal) to be provided with $500 million assistance.||Fugitive emissions from coal mining to be excluded from the CPRS.||$1.23 billion worth of free AEUs (9.72 million AEUs pa over five years) to be provided to gassy coal mines (this equates to covering 60% of fugitive emissions from gassy coal mines during 2008-09).|
|$250 million to fund coal sector abatement projects.||$270 million to fund coal sector abatement projects.|
The increased assistance to coal (as described above) is to be provided through the reallocation of funds within the Climate Change Action Fund.
[Legislative amendments required]
|130.7 million free AEUs to be provided in equal instalments over five years at an estimated cost of $3.4 billion.||390 million free AEUs to be provided over 15 years at an estimated cost of $10 billion.||228.7 million free AEUs to be provided over 10 years at an estimated cost of $7.3 billion.|
|[Legislative amendments required]||Generators not to receive future instalments of free AEUs where they reduce their capacity and that reduction threatens system reliability.||Generators to be able to reduce their capacity and continue to receive future instalments of free AEUs if that capacity is replaced with low emissions technology (ie technology with an emissions-intensity that is less than the current best practice coal-fired generating capacity in Australia).|
|Windfall gains test applied in 2013-14 and could potentially result in all of the remaining two years' free AEUs for a generator being withheld.||Windfall gains test applied in 2017-18 and could only result in a maximum reduction of half of the remaining three years' free AEUs for a generator being withheld.|
|Electricity prices||Emissions of electricity generators treated in the same way as emissions from other activities for the purposes of liability under the CPRS.||Baseline intensity scheme for generators under which the most emissions-intensive generators are liable to acquit AEUs to cover their emissions above the baseline, and electricity generators with an emissions-intensity below the baseline are entitled to generate AEUs.||Transitional Electricity Cost Assistance Program established under which $1.1 billion over two years will be provided to manufacturing and mining facilities that consume more than 300MWhpa of electricity. This is funded in part by a reallocation of $300 million within the Climate Change Action Fund.|
Deferred payment for AEUs sold at auction
[Legislative amendments required]
|Under consideration.||Deferred payment mechanism to be available for future vintages that are sold at auctions between 1 January 2011 and 31 December 2013. A 10% deposit will be payable and the AEUs will only be issued on final payment.|
|Complementary measures||Voluntary action to be taken into account in setting annual emissions caps.||Voluntary action beyond that projected as a result of the CPRS to be taken into account in setting annual emissions caps (including all emissions savings from the use of GreenPower).|
|Energy efficiency measures to be reviewed.||A white certificate energy efficiency scheme to be introduced.||A new energy efficiency mechanism is to be developed in 2010.|
- Grant AndersonPartner,
Ph: +61 3 9613 8928
- Chris SchulzPartner,
Ph: +61 3 9613 8772
- Jim ParkerPartner,
Ph: +61 2 9230 4362
- John GreigExecutive Partner - Energy, Resources & Infrastructure,
Ph: +61 7 3334 3358
- Ben ZillmannPartner,
Ph: +61 7 3334 3538