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Focus: Climate Change – September 2007

Early abatement incentives for the national emissions trading scheme

In brief: The Prime Minister's Task Group on Emissions Trading has released a discussion paper for public comment on incentives for abatement in the period leading up to the commencement of a national emissions trading scheme in 2011. The Early Abatement Incentives Discussion Paper was released on the same day as the Prime Minister announced the new Commonwealth 30,000 gigawatt hours clean energy target by 2020 and comes amid mounting election pressure to take concrete steps to address climate change. Partner Chris Schulz (view CV) and Senior Associate Meg Lee analyse the impact of the paper.

How does it affect you?

  • Any trade-exposed, emissions-intensive firms that may be eligible for a free allocation of permits at the commencement of the national emissions trading scheme should be ensuring that they are well-placed to take advantage of the free allocation at the commencement of emissions trading. Key steps such firms should take include ensuring:
    • it has accurate and verifiable emissions data for the year 2007-08. Once such data is obtained, this will be the data utilised by the regulator for the one-off free allocation of permits. Submissions are being sought on the types of data the regulator could refer to;
    • it has good documentation of any assets that are 'committed' for construction as at 3 June 2007 to ensure these assets qualify for the no-disadvantage arrangements. Submissions are being sought on the definition of an asset 'in existence' on 3 June 2007 and whether or not 'committed projects' (as defined under the National Electricity Market) should be considered to be 'in existence';
    • any offset activities being undertaken pass the rigorous tests for additionality, permanence, measurability and verifiability. At this stage, accreditation under the Government's existing Greenhouse Friendly arrangements, including the existing protocol for new forest offsets, is the best way of ensuring the offset will pass these tests; and
    • only offset or abatement activities commenced after 3 June 2007 be included in greenhouse accounting.

What are the key concepts in the paper?

The key concepts to understand include:

  • Abatement: an activity that removes greenhouse gases from the atmosphere or reduces emissions of these gases below what they would otherwise have been.
  • Business-as-usual abatement: includes abatement occurring in the normal course of running a for-profit business, including in response to government regulations.
  • Additional abatement: includes activities that abate greenhouse gases that go beyond business-as-usual and involve significant up-front risks and costs or investments in technologies that are not commercially viable. This category expressly includes investment in carbon sink forests. Additional abatement needs to be 'financially additional'.
  • Offset credits: represent abatement activities in sectors that are not covered by the emissions trading scheme in the first instance.
  • Early action credits: represent abatement activities carried out up until commencement of trading in sectors that will be covered by the emissions trading scheme.

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What are the 'no disadvantage arrangements'?

Any entities that have been engaging in early action, or are intending to, will be keen to ensure their actions do not go unrecognised upon the commencement of the national emissions trading scheme in 2011.

The main commitments in the discussion paper include that:

  • trade-exposed, emissions-intensive firms that take abatement action between 3 June 20071 and the commencement of an emissions trading scheme will not be disadvantaged in the 'fee allocation' of permits at the start of trading (no-disadvantage arrangements);
  • the no-disadvantage arrangements apply to 'existing assets', possibly including assets that have been contractually 'committed' as at 3 June 2007; and
  • verified emissions data submitted under the National Greenhouse and Energy Reporting System (NGERS) for the year 2008-09 will be used as a baseline for determining the free permit allocation, together with any verified abatement data from 2007-08 if firms have such records. The legislation implementing the NGERS was outlined in AAR's Focus: Climate Change – August 2007 and it has now been passed with some minor amendments.

The no-disadvantage arrangements are intended to reassure firms and to give certainty for investors; however, the reassurance is only as comforting as the data is sound. That is, for firms without sound data on emissions as at 3 June 2007, any abatement activity undertaken during 2007-08 may not be recognised and the no-disadvantage arrangements give little comfort or certainty for undertaking such abatement activities.

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What offsets will be eligible?

Only offset activities that pass the rigorous tests for additionality, permanence, measurability and verifiability will qualify. Further, only offsets or abatements activities in sectors that are not covered by the emissions trading scheme will qualify for the generation of offsets.

The Task Group has recommended inclusion of credible international offsets, including Clean Development Mechanism offsets; however, there is still yet to be any decision on the categories or vintages of such offsets that will be eligible, so investment in these offsets continues to be at the proponent's risk.

Similarly, the transitional arrangements for those entities that have invested in offsets under existing mandatory programs, such as the NSW Greenhouse Gas Abatement Scheme, are yet to be announced.

Having previously announced that the preferred approach in implementing a national trading scheme was to abolish existing schemes for supporting renewable energy, electricity generators that invest in technologies emitting less than 200 kilograms of greenhouse gases per megawatt hour of electricity supplied, which could possibly include nuclear energy and clean coal, will now be eligible to participate in the recently announced Clean Energy Target scheme. The interaction of this new scheme with the national emissions trading scheme will need to be set out clearly to avoid double counting and to ensure investors have certainty.

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What are the administrative arrangements?

The Government proposes to utilise the existing Greenhouse Friendly program for assessment and verification of abatement and offset activities. It also proposes to develop additional protocols to the existing protocol for assessment of new forest sink offsets to assist with the assessment and verification processes.

The Task Group have recommended in the paper that the Government should consider options for abatement activities that are not yet internationally recognised, including sequestration of carbon in harvested wood products, provided robust methodologies for the carbon accounting can be developed.

A national register for offsets and early-action credits is also proposed to be set up in advance of the commencement of emissions trading to assist with tracking early action. The register is likely to be opened up to the voluntary market to ensure that abatement is not sold more than once and to assist with determining when offsets have been retired or used to meet 'carbon neutral' commitments.

It is proposed that early action credits then be exchanged for emissions permits for use in the first year of the trading scheme. The paper proposes that there be no limits to the number of permits issued in exchange for early action credits; however, equally, it acknowledges that there will be practical limits to the number of permits issued because the offset markets are still in their infancy and demand will be likely to outstrip the supply of quality verifiable offsets in the period from 2007 to end 2010.

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What's next?

The paper is open for public comment until 1 December 2007. Submissions may be sent to emissionstrading@pmc.gov.au The Task Group will also be organising discussions with domestic stakeholders and international partners over the coming months.

Footnotes
  1. This was the date on which the Prime Minister announced his commitment to introducing emissions trading in his address to the Liberal Party Federal Council, 3 June 2007.

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