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Focus: Senate standing committees report on CPRS legislation and US greenhouse legislation passes House

7 July 2009

In brief: The Senate Standing Committee on Economics and the Senate Select Committee on Climate Policy have handed down their reports on the Federal Government's legislation to implement its proposed Carbon Pollution Reduction Scheme. These reports reflect the seemingly entrenched views of political players who will determine the fate of the legislation when it is voted on in August, and underscore the likelihood that the Senate will not pass the legislation in its current form – at least this time around. We also look at the greenhouse gas legislation that has recently been passed by the US House of Representatives. Partner Grant Anderson (view CV), Senior Associate Charlie Harrison and Law Graduate Fergus Green report.

How does it affect you?

  • The Government-dominated Senate Standing Committee on Economics and the Coalition-dominated Senate Select Committee on Climate Policy have predictably made diametrically opposed recommendations on the Federal Government's draft Carbon Pollution Reduction Scheme legislation, with one committee recommending its immediate passage and the other committee recommending that alternative schemes be evaluated, that further modelling of the economic impact of the Scheme be undertaken and that the vote on the legislation be deferred until after the Copenhagen climate change conference in December this year. Notwithstanding this, the Coalition has stated that it supports Australia signing up at Copenhagen to the Government's proposed 2020 emissions reduction target of an unconditional reduction of 5 per cent from 2000 levels and a reduction of up to 25 per cent from 2000 levels if there is a comprehensive global climate change agreement.

Background

On 11 March 2009, the Government referred the exposure draft of its Carbon Pollution Reduction Scheme (CPRS) legislation to the Senate Standing Committee on Economics (the Standing Committee). The Standing Committee reported to the Senate on 14 April 2009. Following the Government's announcement of further changes to the legislation on 4 May 2009, the amended legislation was referred to the Standing Committee with its report due by 15 June 2009. The Standing Committee comprised three Government senators, two Coalition senators and one independent senator (Senator Nick Xenophon), with the Government senators controlling the majority vote by virtue of the chair being a Government senator.

The Select Committee on Climate Policy (the Select Committee) was established on 11 March 2009, with terms of reference that required it to consider the choice of an emissions trading scheme as the central policy to reduce Australia's greenhouse gas emissions, the design and environmental effectiveness of the CPRS, and the role of complementary measures. The Select Committee was originally due to report by 14 May 2009, but this deadline was extended to 15 June 2009 to enable it to consider the changes announced to the CPRS on 4 May 2009. The Select Committee comprised four Government senators, four Coalition senators, one Australian Greens senator and Senator Nick Xenophon, but this time with the chair being a Coalition senator and the Coalition senators therefore controlling the majority vote.

Standing Committee Report

Not unsurprisingly the Government members of the Standing Committee endorsed the 4 May changes to the CPRS, which included a 2020 target of reducing Australia's greenhouse gas emissions by 25 per cent from 2000 levels (conditional on there being a comprehensive international climate change agreement), the incorporation of a five year 'global recession buffer' into the emissions-intensive trade-exposed assistance program (so as to mitigate the risk of carbon leakage and the impact of the global financial crisis), the unlimited provision of Australian emissions units (AEUs) during the first year of the CPRS at $10 per AEU, and a delay in commencement of the CPRS from 1 July 2010 to July 2011. While also supporting the Government's encouragement of voluntary action to reduce emissions (through the establishment of the $25.8 million Energy Efficiency Savings Pledge Fund and the requirement to take into account additional GreenPower purchases when setting the annual emissions caps), the Government senators nevertheless urged the Government 'to continue to promote and monitor voluntary action by households and individuals, with a view to taking these emission reductions into account when setting future caps and gateways'.1

The Government senators also highlighted one issue that does need to be addressed by the Government. This issue is that the National Greenhouse and Energy Reporting Act 2007 (Cth), which requires an entity (or the controlling corporations of an entity) that has operational control over a facility to report the greenhouse gas emissions, energy production and energy consumption associated with that facility, does not currently allow those reporting obligations to be transferred either to another group member or to a non-group member who has financial control over the facility. This is in contrast to the CPRS legislation, which will permit CPRS liabilities (and the associated reporting obligations) to be transferred from one entity to another using the liability transfer certificate mechanism. The consequence of this is that, pending the CPRS legislation coming into operation, entities that have reporting obligations which, under the CPRS legislation, could be transferred to another entity will nonetheless have to establish reporting systems that may only be needed until 30 June 2011.

Taking these matters into account, the Government senators recommended that the CPRS legislation should be passed without delay, citing the need to provide certainty to business and to bolster Australia's credibility at Copenhagen. As to those who advocated tougher emissions reduction targets, the Government senators adopted Voltaire's words in pleading that they not 'make the perfect the enemy of the good' by opposing the CPRS, because they did not consider it sufficiently strict, thereby ending up with no scheme at all.

The Coalition senators strongly dissented from this recommendation. They criticised the CPRS as too costly (particularly given the global financial crisis), detrimental to Australia's international competitiveness (because it pre empts both the United States cap and trade scheme2 and any international greenhouse gas reduction agreement), ineffective to achieve meaningful reductions in greenhouse gas emissions (because it fails to encourage abatement in the agriculture and commercial building sectors) and unnecessarily complex.

The Coalition senators therefore recommended that the CPRS legislation be deferred pending the outcome of the Copenhagen meeting and its further evaluation and modification. However they did offer bipartisan support for Australia to propose at the Copenhagen meeting an unconditional reduction in emissions of 5 per cent from 2000 levels by 2020 and a conditional reduction in emissions of up to 25 per cent from 2000 levels by 2020 (the condition being the negotiation of a comprehensive international climate change agreement). In the interim the Coalition senators suggested that the Government could authorise the establishment of a voluntary carbon market for the trading of offsets and efficiency gains derived from sources such as agriculture, biosequestration and the commercial building sector.

Senator Xenophon joined the Coalition senators in recommending against the passage of the CPRS legislation, and calling for the modelling of alternative schemes to the CPRS, on the basis that an intensity-based model was, in his view, likely to be a superior approach. Senator Xenophon repeated these views in his report as part of the Select Committee (see below).

The Select Committee

The Select Committee report is of some interest because it details the current objections of the non-Government parties to the CPRS. Encouragingly, all but one senator accepted that the balance of scientific evidence is that climate change is occurring, that it is the result of anthropogenic factors, and that it is imperative to address this challenge.3 Nonetheless, the majority of the Committee (with only the Government senators dissenting) recommended that the CPRS legislation not be passed in its current form. The reasons for this recommendation are described below. The diversity of reasons for this recommendation illustrate the difficult task the Government faces in negotiating the passage of the CPRS legislation through the Senate.

Further modelling and alternative schemes

The Coalition senators were concerned that the Treasury modelling of the economic impact of the CPRS did not accurately estimate the likely cost and employment impacts of the CPRS because it failed to take into account the global financial crisis and the possible absence of international action on climate change. In particular, its focus on the long-run macroeconomic impact of the CPRS ignored the potentially significant adjustment costs that would arise as Australia transitioned from a high to a low carbon economy, and overlooked the effect of the CPRS on individual sectors and regions.

Finding common ground with Senator Xenophon, the Coalition senators contended that the failure of Treasury to model alternative schemes (such as a production-based carbon tax, a consumption-based carbon tax, a baseline and credit scheme, an intensity-based scheme and the McKibbin-Wilcoxen hybrid model) meant that it was not possible to conclude that the CPRS would achieve emissions abatement at the lowest possible cost. In this regard Senator Xenophon advocated the adoption of an intensity-based scheme on the grounds that, in his view, it would reduce the costs inherent in the CPRS (because only emissions in excess of the baseline would need to be covered by carbon permits) and minimise adjustment costs (by reducing the volatility of the carbon price, including cushioning any price fall during an economic downturn).

Although a cap and trade scheme such as the CPRS does have some drawbacks, this is also the case with the alternative schemes considered by the Select Committee, and many industry participants would sympathise with the Government senators' view that 'the time for more reports, more modelling, more debate, has passed, and... the time for action in the national interest is upon us'.4 Consistently with this, the Government senators argued that Australia should not defer the CPRS pending an international agreement, pointing out that delay would not only increase uncertainty (thereby deterring investment in energy supply), but would also increase the costs of subsequently taking action and would delay the emergence of 'green'-related jobs, technologies and activities.

Emissions reduction targets

The Coalition senators avoided making any direct comment on the appropriateness of the Federal Government's target of a 5 to 25 per cent reduction in year 2000 emissions by 2020, merely reiterating that the CPRS legislation should not be considered until an international agreement on greenhouse gas emissions targets has been finalised. Conversely, the Australian Greens senator considered this emissions reduction target to be too low, recommending instead that the Federal Government should commit unconditionally to reducing 2020 emissions by at least 25 per cent below 1990 levels and should be willing to adopt a 40 per cent reduction in the context of an international climate change agreement. Senator Xenophon also considered that the adoption of a lower cost model (such as his proposed intensity-based scheme) would permit the adoption of more ambitious emissions reduction targets.

Industry assistance

The Coalition senators did, however, express the view that, in the absence of a comprehensive global climate change agreement, the CPRS would result in carbon leakage. On this basis, they suggested that the proposed assistance to emissions-intensive trade-exposed activities should not be reduced over time but should instead be maintained at its initial level (94.5 per cent for highly emissions-intensive activities and 66 per cent for moderately emissions-intensive activities). The Coalition senators also advocated that the coal mining industry should be eligible for such assistance, and that 'appropriate recognition' should be given to those industries (such as the LNG industry) which contribute to a global reduction in emissions. Conversely, the Australian Greens senator opposed the proposed emissions intensive trade exposed assistance program as overly generous.

The Federal Government has recently announced a study into the likely effect of the CPRS on Australia's coal-fired electricity generators, who will suffer a decrease in their asset values and a potentially significant asset impairment charge which could jeopardise their financial standing.5 It is conceivable that this study might lead to the Government increasing the number of free AEUs that are allocated to such generators.

Complementary measures

While the Coalition senators considered that any complementary measures (such as feed-in tariffs, grants for emerging technologies, and mandatory building, motor vehicle and appliance energy efficiency standards) needed to be evaluated on a cost-benefit basis, they did recommend that the Government should develop complementary policy measures to encourage greenhouse gas abatement in the agricultural, forestry and land use sectors. These measures include the promotion of activities such as biochar and soil sequestration, backed by a change to the international carbon accounting regime to recognise carbon sequestration in soil, native vegetation and wood products.

In so far as the expanded renewable energy target is concerned, the Coalition senators recommended that the Government should more closely evaluate the costs and benefits of the scheme and the economic impact of (partially) exempting affected emissions-intensive trade-exposed activities from the scheme. However, it seems unlikely that the Coalition will oppose this scheme when it is voted on in August.

Although generally supporting stronger complementary measures, the Australian Greens senator opposed both the promotion of carbon capture and storage (as a technology that had little prospect of competing with low emission energy generation options) and the use of forests to generate AEUs (as this could distort land use decisions).

Waste methane

One area that did attract bipartisan support was the need to clarify the treatment of power generation from waste methane as a result of the proposed termination of the New South Wales Greenhouse Gas Abatement Scheme.

Power generation that combusts methane derived from landfills is currently eligible to create greenhouse gas abatement certificates but will cease to be entitled to do so once that scheme is terminated. In addition, such power generation will not be eligible to create AEUs but, on the contrary, will potentially be liable under the CPRS for the emissions entailed in combusting the methane. However, these kinds of projects can create renewable energy certificates under the Commonwealth Renewable Energy Target Scheme.

The use of coal mine methane for power generation also reduces greenhouse gas emissions. Again such projects will cease to be able to generate greenhouse abatement certificates when the New South Wales Greenhouse Gas Abatement Scheme terminates. But, unlike landfill methane, coal mine methane is not classed as a renewable energy source, and so coal mine methane power generation projects are not eligible to create renewable energy certificates under the Commonwealth Renewable Energy Target Scheme. Despite this, the Select Committee showed little inclination to recommend that the treatment of coal mine methane should be altered in this regard.

The next step

The entrenched positions of all sides of politics, as reflected in the reports of both the Standing Committee and the Select Committee, suggest that it is unlikely that the CPRS legislation will be passed when it is voted on in August6 and, indeed, is unlikely to be passed if the Government were to re-present the legislation prior to the Copenhagen climate change conference. However, there remains scope for negotiation on the legislation early in 2010.

We will continue to monitor and report on developments with the CPRS legislation. If you would like further information, please contact any of the people below.

American Clean Energy and Security Act as passed by US House of Representatives

On 26 June 2009, the US House of Representatives passed a comprehensive climate change bill, the American Clean Energy and Security Act of 2009 (the ACESA), by a narrow majority of 219-212 votes. The Bill's passage was momentous, but its content has been severely diluted since the Waxman-Markey discussion draft bill was released on 31 March 2009.

ACESA sets a nominal target of reducing US greenhouse gas emissions by 17 per cent on 2005 levels by 2020 – slightly weaker than the Waxman-Markey discussion draft target of 20 per cent, slightly stronger than President Obama's campaign pledge to return US emissions to 1990 levels by 2020, and vastly lower than the 25-40 per cent below 1990 levels that is widely considered to be necessary on the part of developed countries for there to be an effective international agreement.

To achieve this target, the Bill establishes a cap-and-trade scheme that is similar to the CPRS and under which large emitters (capped sources) must obtain tradable 'emissions allowances' in respect of their emissions. Contrary to President Obama's campaign pledge that all allowances would be auctioned, the Bill provides for approximately 80 per cent of annual allowances to be allocated for free until 2025, including around 55 per cent to energy utilities and around 19 per cent to emissions-intensive trade-exposed industries.7 The scheme also permits capped sources to purchase up to 2 billion tonnes of lower-cost 'offsets' from uncapped sources, including domestic agriculture and overseas emissions reduction projects, as a partial alternative to reducing their emissions.

Other international elements of the Bill include provision for additional emissions reductions of up to 10 per cent by 2020 on 2005 (US) levels, to be achieved through the prevention of tropical deforestation in developing countries, for which 5 per cent of allowances have been allocated. A further 2 per cent of allowances have been allocated to finance the transfer of clean technologies to the developing world and to support climate change adaptation in vulnerable countries.

The ACESA also establishes a combined energy efficiency and Renewable Electricity Standard (RES). The Waxman-Markey discussion draft Bill mandated that a nominal 25 per cent of electricity was to be supplied using renewable sources by 2025, subject to certain exemptions. However, this requirement has been watered down during the passage of the Bill through the House. The Bill now requires electricity suppliers to meet a nominal 20 per cent of their load by 2020 with a combination of at least 15 per cent renewable energy and up to 5 per cent energy efficiency savings. This requirement is subject to numerous exemptions, including a provision that allows state governors to elect to further reduce the proportion of renewable electricity required to be sourced by utilities in their state to 12 per cent. The analysis of ACESA undertaken by the US Environmental Protection Agency implies that the RES will have little to no impact on the expansion of US renewable energy compared with business as usual.8

Numerous legislative hurdles must be surmounted before ACESA becomes law. First, a related Bill must pass the Senate, where it will be subject to another process of intensive committee scrutiny, redrafting and renegotiation. Due mainly to the greater prominence of regional loyalties in the Senate, it is widely expected that further concessions to conservative Democrats from the heavily industrialised heartland will need to be made to secure the votes of the required 60 senators.9 A Senate floor vote is not expected to occur until at least September, when Senate committees are due to provide their input.10 If the Senate Bill is passed, it will then need to be reconciled with the House Bill, and the reconciled Bill approved anew by both houses of Congress – a process that could stretch into 2010.

The outcome of the US legislative process will heavily influence the timing and parameters of any post-Kyoto international treaty. Congressional rejection of the bill would eliminate any near-term prospect of an international deal, while extensive delays and resultant uncertainty about the US position would defer any substantive agreement until after Copenhagen. Even if a final Bill is passed prior to Copenhagen, the expected weakness of the targets and mechanisms imposed by it – presaged by those proposed in the version passed by the House – could make it difficult to elicit meaningful commitments from developing and other developed countries and, ultimately, to reach an effective international agreement.

US policy and its implications for Copenhagen in turn affect climate change policy and politics in Australia. As the Coalition has linked its support for the CPRS to the outcomes of the US and international processes, a weak or failed US climate Bill and a resultant poor outcome at Copenhagen would make it unlikely that the present Senate would pass the CPRS legislation in its current form. Even if the CPRS becomes law, the expected shallowness of the US targets – let alone the resultant downward pressure on commitments by other countries – will ensure the non-fulfilment of the Rudd Government's strict conditions for Australia's acceptance of a 25 per cent reduction in emissions from 2000 levels by 2020. The maximum 2020 emissions reduction target Australia is likely to set for the CPRS is therefore 15 per cent on 2000 levels.

Footnotes
  1. p.41.
  2. The addendum to this article sets out some key features of this scheme as embodied in the Bill that was recently passed by the US House of Representatives. Many of the issues raised in the context of the Bill are similar to those being canvassed in relation to the Federal Government's CPRS legislation: see The Australian Financial Review, 'Climate change pain is just a twinge', 25 June 2009.
  3. However, there are still other senators, not on the Select Committee, who do not share this view, such as Senator Steve Fielding: see The Australian Financial Review, 'Emissions scheme's new hurdle', 25 June 2009.
  4. p.190.
  5. The Australian Financial Review, 'Stress test for power generators ', 3 July 2009.
  6. See The Australian Financial Review, 'Opposition still hazy on ETS stance', 25 June 2009.
  7. The precise proportions of allowances allocated for specific purposes vary from year to year: see s.782.
  8. EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress (23 June 2009), available at http://www.epa.gov/climatechange/economics/.
  9. See, eg, Darren Samuelsohn, And Now, Climate Bill's Supporters Try Counting to 60 in Senate (Greenwire, New York Times Online, 29 June 2009), available at http://www.nytimes.com/gwire/.
  10. See previous footnote.

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