The Australian scheme

The Australian scheme

The following table compares the major features of the Carbon Pollution Reduction Scheme (CPRS - as rejected by the Senate on 2 December 2009), the emissions trading scheme recommended by the final report of the Garnaut Climate Change Review, the scheme proposed by the National Emissions Trading Taskforce (NETT), and the scheme discussed by the Prime Ministerial Task Group on Emissions Trading (see: National reviews). All of these schemes are ‘cap-and-trade’ style emissions trading systems.

Generally, the surprising factor is the overall similarity of these proposals, rather than the differences between them.

Issue CPRS
Garnaut
NETT PM Task Group
Long term emissions reduction targets Reduce GREENHOUSE GAS (GHG) emissions by 60% below 2000 levels by 2050 Unconditional target of 60% reduction on 2000 levels by 2050. Conditional target of between 60 and 90% on 2000 levels by 2050, depending on prevailing international agreements 60% below 2000 levels by 2050, long term target consistent with achieving economy wide goals No specific target set. Government to set long term aspirational goals
Short term emissions reduction targets Between 5 and 25% reduction by 2020, depending on strength of international agreements Consistent with unconditional policy commitment to achieve 60% reduction by 2050, reduction of 5% on 2000 levels by 2020. Conditional reduction targets for 2020 of between 5 and 25% No target announced. Annual limits set for first 10 years of scheme Government should set a series of short-term annual quantity limits for first 10 years - initially to 2020. Five-yearly reviews to allow for calibration of sequence of short-term emissions limits
Emissions trajectories - Limit duration level and extension periods Limits set for five years in advance. These limits will be extended by one year, every year, to maintain 5 year horizon Emission limits expressed as a trajectory of annual emissions targets over time - which will define the above long term budgets. In period up to 2012 Australia's emissions should be based on its Kyoto Protocol commitments. Beyond 2012 limits linked to outcome of international negotiations. Two different trajectories based on overall stabilisation of global emissions levels at either 550 ppm or 450 ppm. Five years notice provided by government before moving to another emissions trajectory Each year, a firm limit set for an additional year. Every five years the upper and lower emission limits (called gateways) would be updated and extended for a further five years At commencement of the scheme Government could set indicative medium term upper and lower limits (bands of gateways) to provide guidance to the likely path of future individual year limits. Gateways set five-yearly intervals from start of scheme
Greenhouse gases covered All six Greenhouse Gases noted in Annex to Kyoto Protocol All six Greenhouse Gases noted in Annex to Kyoto Protocol All six Greenhouse Gases noted in Annex to Kyoto Protocol All six Greenhouse Gases noted in Annex to Kyoto Protocol - but could include additional greenhouse gases
Sectors covered Stationary energy, transport, fugitive emissions, industrial process, waste. Forestry on an 'opt in' basis. About 75% of Australia's GHG emissions covered. About 1000 emitting facilities covered initially As broad as possible, stationary energy, industrial process, fugitive and transport emissions. Waste and forestry covered as soon as possible Stationary energy, transport, industrial processes and fugitives (possibly excluding open-cut coal mines) Maximum practical coverage of all sources and sinks
Exemptions Agriculture and:
•GHG emissions from the combustion of biofuels and biomass for energy, including emissions from the combustion of methane from waste land fill facilities
•emissions from landfill sites closed on or before 30 June 2008
•emissions from operating land fill sites due to waste deposited on or before 30 June 2008.
•emissions from decommissioned underground coal mines, and
•offshore emissions from exported fuels and materials.
Deforestation is not included in the proposed scheme. Forestry operators may opt into the scheme for reforestation credits but participation is not compulsory
Inclusion of agriculture subject to progress on measurement, administration and cost effectiveness of emission abatement from this sector Waste and agriculture to be initially excluded. Their eventual inclusion to be further investigated Practical considerations suggest initially excluding agriculture and land-use emissions (which probably means agriculture)
Definition of liable entity Generally, entities with operational control over covered facilities or activities will be liable under the scheme. For corporations, obligations will be placed on the controlling corporation or a company group where either the controlling group or company group member has operational control over a covered facility. Obligations can be transferred within corporations No specific definition of liable entity Individual firms would most likely be the covered parties under the scheme, in accordance with their responsibilities under the National Greenhouse and energy Reporting System. Firms would be required to monitor and acquit permits where the total emissions met or exceeded the threshold for emissions liability No specific comment made
Point of obligation/emissions threshold for obligation • Stationary energy, industrial process, fugitive emissions some waste emissions: direct emission of 25,000 CO2-e or more annually.
• Some waste emitters: 10,000 CO2-e or more annually.
• Large users: 25,000 CO2-e or more from a single source annually.
• Transport fuels use -upstream point of obligation
Point of obligation should be set at emissions source where efficient. Otherwise, an upstream or downstream point of obligation should be preferred when transactions costs are lower, accuracy of emissions measurements higher or coverage greater Direct emitters above 25,000 CO2-e annual emissions. Some upstream liability (gas retailers, petroleum refineries and refined petroleum importers). Voluntary opt-out for those emitting less than 25,000 CO2-e annually who purchase gas from retailers Permit liability placed on direct emissions from large facilities and on upstream fuel suppliers for other energy emissions
Domestic offsets Domestic offsets will be available from forestry, the destruction of synthetic greenhouse gases, some other agriculture-based offsets (mainly soil management) will be considered once certain technical problems are overcome Domestic offsets allowed from uncovered sectors if it is cost effective to do so. Unlimited offsets credits for net sequestration should be accepted from forestry and possibly soil management practices. Appropriateness of offsets from agriculture assessed in light of coverage of that sector No restriction on liable parties’ use of domestic offset credits to meet their compliance obligations. The ability to create offsets to be clearly stated, and subsequently treated as a transitional measure until broader scheme coverage is achieved Recognition of a wide range of creditable domestic and international carbon offset regimes
BANKING and BORROWING of permits Unlimited banking of permits. Limited borrowing from a future year's permit entitlement (up to 5% of next year's total) Unlimited banking. Lending or borrowing of permits from a central carbon bank within a 5 year period Limited 'administrative flexibility' permitted for compliance - i.e. 1 per cent of liable entities' permits can be borrowed from next year's entitlements Unlimited banking. Borrowing not permitted. There should be no 'make good' provisions in scheme
Emissions permits price limits Emission permits fixed price of $10 for first period (1 July 2011 to 15 December 2012). An upper price limit of $40 per permit (indexed) for next period (succeeding 4 years) Price controls not supported except for a transition period to end in 2012. During transition period permit price fixed at $20 and increasing at 4% per annum plus the rate of inflation A civil penalty (in lieu of surrendering enough emissions permits) set at a level to encourage compliance and limit scheme costs. Penalty level should be fixed and set when firm limits on annual emissions are decided During the initial, or settling-in period of the scheme an emissions fee (a de-facto cost cap which represents a pre-set fee for every tonne by which emissions exceed the permits held by the firm) should be set at a relatively low level. Beyond that, the level of the fee should move away from expected permit prices in order to reinforce the abatement incentive and ensure tighter compliance with the desired emissions limit
Assurance (verification) Mainly self reporting, but supervised by scheme regulator.
Large emitters will be required to have their annual emissions reports assured by an independent third party.
Scheme regulator will have power to conduct assurance audits. The regulator will also have power to review an annual emissions report for up to four years after its submission, except in cases of fraud where the review period will be unlimited
In order for a sector to be covered by an emissions trading scheme there must be a reliable and accurate way to monitor, measure or estimate and verify emissions from that sector The scheme regulator should develop a creditable verification requirement for all covered parties under the scheme. The requirement should specify whether every covered party will be required to have third-party verification of its emissions reports, and how often its verification will be required A new 'fit for purpose' monitoring reporting and verification system would be required
Linking to international schemes/markets In the longer term , the Government has a preference for open linking within the context of an effective global emissions constraint Opportunities for international linking of the Australian scheme should be sought in a judicious and calibrated manner due to variable quality of mitigation approaches in other countries and the risk of price volatility due to the small relative size of the Australian market. It makes sense to link the Australian and New Zealand markets Linking with the Kyoto flexibility mechanisms (with possible exceptions). Possible linking with overseas schemes in the future Capacity, over time, to link to other national and regional schemes in order to provide the building blocks of a truly global emissions trading scheme
Acceptance of international emissions permits/credits No acceptance initially of non-Kyoto emissions permits/credits. Unlimited amount of specific types of Kyoto Flexibility Mechanism credits, mainly those generated by the Clean Development Mechanism and the Joint Implementation Mechanism Accept Kyoto units associated with the Clean Development Mechanism. Revaluate if this mechanism is changed or expanded after 2012 In the short term, unilateral links to Kyoto Protocol flexibility mechanisms recommended. Only certain types of Clean Development Mechanism and Joint Implementation Mechanism units accepted - not temporary units from this source Clean Development Mechanism units should be accepted. Only accept non-Kyoto units if they are robust (i.e. actually reliable reduction of GHGs in atmosphere)
Exporting Australian Emissions Units Not initially - maybe in the future Not under a fixed price. But perhaps later Not Initially - perhaps later No comment
Permit allocation/auctioning Free permits issued to emissions intensive, trade exposed (EITE) industries, coal fired powered stations and other entities. All other liable entities to buy permits at auction. Move gradually towards 100 per cent of emissions permits auctioned All permits should be auctioned other than in initial period when permits sold at a fixed price Some free permit allocation, reminder of permits auctioned Those permits that are not freely allocated to strongly affected or trade-exposed emissions -intensive firms could be progressively auctioned
Use of auction revenue All revenue recycled to compensate for effects of scheme All revenue should be returned to households or business. Half of permit revenue returned to households, twenty per cent used to support research, development and commercialisation of low-emissions technologies. Cash reserves used to purchase international permits/emissions credits to reconcile domestic emissions with international commitments Priority use for revenue may be R&D in low emissions technology or support for groups adversely affected by the scheme Revenues used, in first instance, to support emergence of low-emissions technologies and measures to improve energy efficiency
Treatment of households Substantial assistance to low and middle income households, pension and beneficiaries households also assisted. Specific compensation of rise in petrol prices in first few years of the scheme Assistance could be provided through the tax and welfare systems, and to facilitate greater efficiency in energy use and reduce dependence on emissions intensive goods and services. A focus for this should be in the bottom half of the income distribution Assistance warranted for households, in particular low-income households, to manage higher energy prices as a result of the scheme. A wide range of measures should be considered, including energy efficiency. Important to ensure that any assistance is applied in a manner that does not dampen the incentive for behavioural change Does not identify a preferred method of assistance, but notes that households should not be shielded from the price incentive to change behaviour
Mechanisms for emissions-intensive, trade-exposed industry (EITE) assistance Receive either 94.5% or 66% of required emissions permits free of charge. Number of free permits to decline by 1.3% a year, unless evidence of 'unfair' international competition emerges. About 25 per cent of the total pool of permits will be allocated to EITE industries, rising over time with EITE sector growth. There will be no upper limit on the share of free permits provided to EITE industries. But no facility may receive more than 100 per cent of their direct and indirect electricity and steam emissions costs, in terms of the number of permits required, free of charge.
Liquefied Natural Gas (LNG) will receive at least 50 per cent of their required emissions permits free of charge
Global and sectoral arrangements to achieve comparable treatment of emissions in important competitors should be pursued as a priority. If not reached by 2012, transitional assistance should be provided to EITE firms by way of cash or cash equivalent emissions permits towards a liable firm’s obligation to acquit permits at the end of each compliance period Free permit allocations made annually based on previous year’s output, subject to annual adjustment. Assistance linked to output, based on baseline levels of energy-intensive (direct and indirect emissions). Closing firms must hand back unused permits Allocate free permits every five years to existing EITE sectors, equivalent to the carbon costs flowing both from their direct (industrial process) and indirect (energy and embodied production inputs) post tax costs
Assistance to strongly affected industries Provide substantial assistance to coal fired power generators. Coal mines (in relation to fugitive emissions), transitional Electricity Cost Assistance Program and other assistance to meet costs for medium and small business arising from introduction of the scheme A $1 to 2$ bn fund proposed to support new investments that reduce emissions in coal-based generation, as a form of pre-emptive structural adjustment assistance. No direct assistance for generators as compensation for losses arising under an emissions trading scheme A once-off up-front, allocation of permits free of charge to firms that can demonstrate the likelihood of experiencing disproportionate loss, that are not trade exposed, that are emissions intensive, that have very large sunk capital costs and are unable to pass on costs in the domestic market Annual permits, each dated for a given year, would be issued free of charge to compensate firms for a disproportionate loss in asset value from the introduction of the scheme
Complementary measures Complementary measures to continue to address market failures that an emissions price alone cannot meet, including continued assistance in R&D and renewable energy schemes Complementary measures (e.g. renewable energy target schemes) continue in parallel Complementary measures continue in parallel Government support for technology beyond R&D stage needs to be carefully targeted and designed to ensure that it builds on, and does not conflict with, price singles provided from an emissions trading market

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19 November, 2010

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