On 16 July 2008 the Minister for Climate Change and Water, Senator Wong released the government's Carbon Pollution Reduction Scheme Green Paper. This document outlined the government's initial thinking on the establishment of an Australian emissions trading scheme (ETS).

On 15 December 2008, the government released its White Paper entitled Carbon Pollution Reduction Scheme—Australia’s Low Pollution Future. This document sets out the Australian Government's decisions on the design and operation of a proposed Australian ETS. The features of the proposed ETS were based on the abovementioned Green Paper, reactions to that document, further consultation with affected parties and the Garnaut Climate Change Review.

The key features of the proposed Australian ETS are set out in the White Paper's Summary of Policy Decisions.

On 4 May 2009 the Government announced changes to the key policy decisions set out in the above mentioned White Paper. These changes delayed the start date of the scheme, increased the compensation for affected industries and increased the medium term target for the reduction of Australia’s greenhouse gas emissions by 2020.

ISSUES AND ARGUMENT

The Carbon Pollution Reduction Scheme Bill 2009 (CPRS Bill) was introduced to Parliament on 14 May 2009. It passed through the House of Representatives on 4 June and was introduced into the Senate on 15 June 2009. The major features of the Bill now before the Senate are summarised below.

Commencement date
Targets
Trajectory
Coverage
Exemptions
Basis of operation
Number of AEUs issued/auctioned
AEU price cap
Market information
Penalties and compliance
International linkages
Assistance and compensation
Assistance with coal fired power generators
Voluntary action
Independent review
Comparison with other schemes

Commencement date

The proposed scheme will commence on 1 July 2011 and operate on an Australian financial year basis (1 July to 30 June in the following calendar year).

Targets

The overall aim is to contribute to stabilising the concentration of greenhouse gases (GHG) in the atmosphere at 450 parts per million (ppm). No date was set for the achievement of this aim. The Garnaut Climate Change Review suggested that this overall objective be reached by 2100.

The initial target is to reduce Australia’s annual GHG emissions by five per cent of 2000 levels by 2020, if no overall global agreement to reduce these emissions is reached.

If a global agreement to reduce GHG emissions is reached, including all major economies, then Australia will aim to reduce its annual GHG emissions by up to fifteen per cent of 2000 emissions levels by 2020.

If a comprehensive global agreement is reached, including both developed and developing countries, consistent with the long-term stabilisation of atmospheric GHG concentrations at 450 ppm, then Australia will aim to reduce its annual GHG emissions by up to twenty-five per cent of 2000 emissions levels by 2020.

The government has previously noted that its overall goal is to reduce Australia's GHG emissions by 60 per cent of 2000 levels by 2050. This overall target was repeated in the CPRS Bill.

Australia’s GHG emissions were 552.7 million tonnes (Mt) of CO2 in 2000 according to the emissions accounting rules for the Kyoto Protocol. The government has not explicitly stated which accounting rules its emissions reduction targets will be based upon, but presumably if a global agreement is reached then the accounting rules associated with that agreement will be used for Australia’s domestic targets. Using the Kyoto accounting rules as a guide, the targets to which Australia’s GHG emissions must be reduced are approximately:

• between 525.0 Mt CO2(at five per cent reduction on 2000 levels) and 414.5 Mt CO2 (at 25 per cent reduction on 2000 levels) emissions in 2020, and
• 221.1 Mt CO2 in 2050 (at 60 per cent reduction on 2000 levels in 2020).

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Trajectory

The trajectory of any emissions control regime is the rate at which GHG emissions are reduced. Following is the indicative emissions trajectory for the Australian ETS:

• 109 per cent of 2000 GHG emissions in 2010–11 (602.6 Mt)
• 108 per cent of 2000 levels in 2011–12 (597.0 Mt)
• 107 per cent of 2000 levels in 2012–13 (559.5 Mt).

The specific trajectory for a given year will be announced a year in advance.

Each following year's trajectory will lie within a declared range. This range of possible annual trajectories will be declared for five years, in advance. That is, the upper and lower limits on each year's range of possible trajectories will be declared for the five following years. The trajectory for each annual period will be reviewed each year. There will be a strategic review of the scheme's range of annual trajectories every five years.

The government reserves the right to adjust the scheme's trajectory as circumstances change.

Coverage

The proposed ETS will cover all six GHGs mentioned in Annex I to the Kyoto Protocol from its commencement (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons).

Generally, the proposed ETS direct obligations will apply to entities (i.e. companies, trusts, partnerships and the like) with a facility that emits at least 25 000 tonnes of the above gases per year. All major industrial sectors will be included in the scheme.

Initially the scheme will cover about 75 per cent of Australian GHG emissions.

Exemptions

Exemptions will apply to the following areas.

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Basis of operation

Scheme participants will be required to purchase the necessary number of Australian Emissions Units (AEU) to cover their emissions. Each AEU will cover the emission of one tonne of carbon dioxide or its equivalent in terms of the global warming potential of the GHGs emitted.

Enough AEUs (or an equivalent number of international emissions credits—see below) covering a participant’s annual emissions must be surrendered by 15 December following the end of the preceding financial year. The first surrender of units will occur on 15 December 2012.

During the first year of operation (2011-2012) an unlimited number of permits will be sold at a fixed price of $10 per unit. After the first year of fixed permit prices, each directly covered participant will be required to purchase the necessary number of AEUs via an auction (save those who are eligible for direct assistance or compensation—see below). Auctions will be held monthly. Auctions are to commence in 2010–2011 for the 2012–2013 year.

The AEUs bought at auction will be personal property with no limit on parties who may hold them (i.e. investment banks and individuals may buy and hold these permits and later sell them on a secondary market). These permits may also be banked (that is, held over for use in later years). However, fixed price permits from the first year of the scheme’s operation cannot be ‘banked’ or saved for use in later years.

Liable entities may borrow up to five per cent of their current year’s obligations from the next year’s entitlement. However, they have to ‘make good’ or repay this borrowed amount.

Free AEUs will also be issued in relation to participating eligible reforestation projects and the destruction of synthetic greenhouse gases. Should they choose to participate, forestry operators may begin to accumulate AEUs in relation to carbon stored in forestry projects from 1 July 2010.

Individual emittersmay request the cancellation of their AEUs and other emissions units. Alternatively, this may be done through the proposed Australian Carbon Trust (see below).  Such requests will be granted providing they do not breach either the Regulations or Kyoto Protocol rules.

Number of AEUs issued/auctioned

The annual number of permits either issued or auctioned will be closely related to the annual emissions trajectories noted above.

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AEU price cap

Scheme participants will have to pay the market price for permits from 1 July 2012 subject to the following price caps. In 2012–13, an AEU’s price will not be above $40 plus five per cent real growth for each of the years 2010–11 and 2011–12. The proportional increase in the price cap is known as the indexation factor. In each of the three years thereafter, the price cap will rise by this indexation factor for that particular year, applied to the previous year’s price. The price cap for a particular year will apply until 15 December of the compliance year, and caps will cease on 15 December 2016.

The government will sell an unlimited amount of permits at the price cap to liable entities only. The permits sold under these arrangements cannot be resold or banked. They are automatically surrendered after issue and can only be used to acquit that entity’s liability for that year.

Market information

The the Australian Climate Change Regulatory Authority (the Authority) will be required to release market relevant information on the supply of AEUs and liable entities’ requirements for these units in a timely manner.

Penalties and compliance

The scheme's governing body, the Authority, will be provided with a range of compliance, anti–avoidance, investigative and enforcement powers and a range of mechanisms, including civil penalty and criminal provisions, to respond variously to non–compliance with the CPRS. Directors and officers of a company found to be in breach of certain provisions of the proposed CPRS Act may also be fined. Fraudulent conduct in relation to the issuing of AEUs, may result in the offender being required to relinquish those units (see Part 13 of the CPRS Bill). Anti–avoidance provisions are also proposed in relation to the exemptions from liability for small facilities (generally, those emitting less than 25 000 tonnes of CO2 per year). These are designed to capture entities that pursue artificial means to keep their facilities below this threshold so as to avoid CPRS liability.

A limited financial penalty will apply if the required number of emissions units is not surrendered to the Authority by the appropriate time. In the first years (2011–2012) this penalty will be $11 per unit. The penalty in later years will be fixed by regulation but will be limited to no more than 110 per cent of the average auction price for the particular financial year. Thus, liable entities have an incentive to buy any necessary units through a secondary market rather than simply paying a penalty if they do not surrender enough AEUs. These penalties will not be tax deductible.

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International linkages

The proposed scheme will allow the acceptance of the following Kyoto Protocol emissions credits to acquit emissions obligations:

Some limits apply on the acceptance of these Kyoto Protocol units. Notably, an Assigned Amount Unit (AAU) arising under the Kyoto Protocol will not be accepted for CPRS purposes.

International non-Kyoto units (such as units meeting the ‘Gold Standard’) will not be accepted for compliance in the Scheme for the period from 2010–11 to 2012–13. This position will be reviewed for the period after 2012–13 in the light of future developments in international negotiations.

The sale and transfer of Australian permits to international markets will not be permitted in the initial years of the scheme.

Initially, the proposed Australian scheme will not be linked with any other ETS, such as New Zealand's or the European Union's. This position may change in later years.

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Assistance and compensation

Emissions Intensive Trade Exposed Industries (EITE) will receive either:

In February 2009, the Department of Climate Change released a Guidance Paper to aid in the Assessment of activities for the purposes of the emissions-intensive trade-exposed assistance program.

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. Rates of assistance will decline by 1.3 per cent per year from the second year onwards.
Strongly affected industries may receive either:

• direct financial assistance, or
• a one-off allocation of emissions permits free of charge.

A Climate Change Action Fund will be established to ease transition costs for businesses, community sector organisations, workers, regions and communities changing to an operating environment that includes a price on carbon.

Fuel excise and other taxes will be reduced to take account of the impact of the proposed ETS on fuels.

Low and middle income households, and social security benefit and pension recipients will received additional payments to offset the impact of the proposed ETS on utilities bills.

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Assistance for coal fired power generators

The coal fired power generation industry will receive assistance contingent on whether individual facilities pass a power system reliability test and/or whether individual facilities will make windfall profits in the 2013–2014 or 2014–2015 years. Such assistance will be available for five years after the commencement of the CPRS (that is, up until the financial year commencing 1 July 2016).

Voluntary action

An Australian Carbon Trust will be established comprising a $50 million Energy Efficiency Trust and a $25.8 million Energy Efficiency Savings Pledge Fund. A particular feature of assistance available through the Energy Efficiency Trust is that it will provide loans for businesses to undertake energy efficiency measures. These loans would be repaid from the energy savings achieved by this investment. Under the proposed Savings Pledge Fund, individuals can calculate their savings from their investment in energy efficiency measures and buy/retire AEUs from the scheme. Contributions to the Savings Pledge Fund will be tax deductible. Further, purchases of power from renewable sources (i.e. ‘Green Power’) will be recognised under the proposed scheme. Limits on the annual issue of AEUs will be reduced in recognition of voluntary purchases of Green Power above 2009 levels.

Independent review

An independent expert advisory committee will periodically undertake a public review of the CPRS.

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Comparison with other schemes

The proposed carbon pollution reduction scheme has several features in common with other emissions trading schemes around the world, most notably the European Emissions Trading Scheme (EU ETS). The common elements are:

However, the proposed Australian CPRS is arguably in 'advance' of other emissions trading schemes in some areas:

That said, the proposed US emissions trading scheme, covers a larger number of gases, and potentially a wider range of economic sectors, than the Australian scheme.

A significant difference between the proposed Australian ETS and the EU ETS is that the former has an emissions permit price limit. The EU ETS has no such limits.

Further, the proposed Australian ETS will accept both a greater quantity and wider range of Kyoto Protocol emissions credits than the EU ETS.

Australia is in a different position to the EU and other schemes in that:

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Further reading:

Department of Climate Change, Carbon pollution reduction scheme green paper, Australian Government, 16 July 2008.

Department of Climate Change, Carbon Pollution Reduction Scheme—Australia’s Low Pollution Future, Australian Government, 15 December 2008.

L. Nielson, The European emissions trading system—lessons for Australia, Research paper, no. 3, 2007–08, Parliamentary Library, Canberra, 20 August 2008.

L. Nielson, Emissions—who is trading what?, Background note, Parliamentary Library, Canberra, 15 August 2008.

N. Markovic and N. Fuller, Climate change discussions and negotiations: a calendar, Background note, Parliamentary Library, Canberra, 26 August 2008.

L. Nielson, J Styles, A. Talberg and J. Tomaras, Carbon Pollution Reduction Scheme 2009, Bills Digest, No. 165, 2008–2009, 15 June 2009, Parliamentary Library, Canberra.

See also:

Emissions trading

EU ETS