Bills Digest no. 165 2008–09
Carbon Pollution Reduction Scheme Bill 2009
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Abatement
|
Reduction of greenhouse gas (GHG) emissions
|
The
Authority
|
Australian Climate Change Regulatory Authority
|
AAU
|
Assigned
Amount Unit is a unit issued out of a country s initial assigned
amount and allocated as an assigned unit amount, expressed as a
tonne of CO2 by the Authority.
|
ACCI
|
Australian Chamber of Commerce and Industry
|
AEU
|
Australian Emissions Units
|
AIG
|
The
Australian Industry Group
|
BCA
|
Business
Council of Australia
|
Carbon
dioxide-equivalent (CO2-e)
|
The basis for comparing the warming effect of
a greenhouse gas as compared to carbon dioxide. It is calculated as
the global warming potential of a given mass of a non
CO2 GHG (based on its ability to absorb heat and its
lifetime in the atmosphere) compared to CO2.
|
CER
|
Certified Emission Reduction units are credits generated from Clean
Development Mechanism (CDM) projects, each equivalent to one tonne
of CO2e.
|
Carbon
leakage
|
The
transfer of emissions offshore, as industries relocate to markets
with lower or unregulated carbon pricing.
|
CDM
|
The
Clean Development Mechanism is a means by which developed countries
may sponsor clean development projects in developing countries to
help meet their emissions reduction commitments.
|
EITE
|
Emissions intensive trade exposed industries
|
ERU
|
Emission
Removal Units
|
ETS
|
Emissions trading scheme
|
GHGs
|
Greenhouse gases
|
GreenPower
|
Refers
to power from renewable sources that electricity customers can opt
to subscribe to.
|
IPCC
|
Intergovernmental Panel on Climate Change
|
Mt
|
Million
tonnes
|
NETT
|
National
Emissions Trading Taskforce
|
REDD
|
Refers
to reduced emissions from deforestation and forest degradation.
|
RET
|
Renewable Energy Target
|
RU
|
Removal
Units are units corresponding to emissions or removals of GHGs from
land use, land use change and forestry activities, which are
accounted for as part of each country s emissions commitments under
the Kyoto Protocol.
|
Sequestration
|
Refers
to the removal of greenhouse gases from the atmosphere and their
storage in a sink .
|
Sink
|
A
natural, enhanced or human designed system that absorbs greenhouse
gases from the atmosphere and keeps them in a long term store.
|
UNEP
|
United
Nations Environment Program
|
UNFCCC
|
United
Nations Framework Convention on Climate Change
|
WMO
|
World
Meteorological Organisation
|
Passage history
Date introduced:
14 May 2009
House: House of Representatives
Portfolio: Climate Change &
Water
Commencement:
Royal Assent for sections
1 and 2 and the 28th day after receiving Royal Asset for sections 3
to 397, contingent on whether certain other Acts also receive Royal
Assent.
The
other Acts required to receive Royal Assent for sections 3 to 387
to come into effect are:
- the
Australian Climate Change Regulatory Authority Act
2009
- the
Carbon Pollution Reduction Scheme (Charges Customs) Act
2009
- the
Carbon Pollution Reduction Scheme (Charges Excise) Act
2009
- the
Carbon Pollution Reduction Scheme (Charges General) Act
2009, and
- the
Carbon Pollution Reduction Scheme (Consequential Amendments)
Act 2009.
If
the above Acts do not receive Royal Assent on or before the 28th
day after the day on which the CPRS Bill receives Royal Assent,
then section 3 to 387 do not commence at all. The relevant Bills
for the above Acts are also before Parliament and are being treated
as a package.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The CPRS Bill
sets up an emission trading scheme (ETS) as part of a framework
designed to reduce pollution caused by emissions of carbon dioxide
(CO2) and other greenhouse gases, collectively known as
GHG emissions and measured in parts per million of carbon dioxide
equivalent[1] (or ppm
CO2e). The ETS provides economic incentives for
achieving reductions in GHGs. The objectives of this Bill,
according to Clause 3 in Part 1,
are:
- to give effect to Australia s obligations under the United
Nations Framework Convention on Climate Change (UNFCCC) and the
Kyoto Protocol to that Convention. [2]
- to support the development of an effective global response to
climate change, and
- to take action to enable the reduction of Australia s GHG
emissions to meet its emissions reduction targets. If a
comprehensive international agreement to which Australia is a party
is reached to stabilise atmospheric GHG concentrations at 450 parts
per million CO2e or lower, this target is a 25 per cent
reduction in emissions below 2000 levels by 2020.[3] Otherwise, the target is to reduce
emissions to 60 per cent below 2000 levels by 2050 and by between 5
and 15 per cent below 2000 levels by 2020, with the larger
reduction dependant on whether a strong international agreement on
GHG emissions control is reached.
This last point specifies the current
Australian targets for GHG emissions reduction. These targets are
important for setting the trajectory of the proposed scheme (see
below).
Australia s GHG emissions were 552.7 million
tonnes (Mt) of CO2e in 2000 according to the emissions
accounting rules for the Kyoto Protocol.[4] 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 (at five per cent reduction on 2000 levels)
and 414.5 ( at 25 per cent reduction on 2000 levels) Mt
CO2e emissions in 2020, and
- 221.1 Mt CO2e in 2050 (at 60 per cent reduction on
2000 levels in 2020).
The Kyoto Protocol targets for emissions
reduction were based on the level of GHG emissions in 1990.
Consequently, some commentators will call for emission reduction
targets based on 1990 emission levels. According to the Department
of Climate Change, Australia s GHG emissions levels in 1990 were
546.3 Mt CO2e.[5] This is only slightly less than the actual level of such
emissions in 2000 noted above, so the distinction under the Kyoto
accounting rules is only about one percentage point. However, the
Kyoto rules apply special treatment to emissions from deforestation
in the base year (1990) that leads to a larger emissions total for
that year than under other accounting rules.[6] The difference between using 1990 or
2000 may therefore become significant under future accounting
rules.[7]
Scientific concern about the possible build up
of carbon dioxide in the atmosphere commenced as far back as 1861.
However, it was not until the latter half of the twentieth century
that improvements in technology allowed for more precise
measurements of the level of GHGs in the atmosphere. From the 1980
s onward scientific concern about the possible long term
consequences of the increase in GHGs in the atmosphere
accelerated.[8] At
the beginning of the twenty first century the effects of such a
build up, as predicted by scientific modelling, were being
increasingly observed. These effects include increasing average
global temperatures, sea level rise, accelerated glacial melting,
intense and prolonged droughts and increased storm
severity.[9] The
projected environmental and consequent economic impacts of
continued adverse changes in these areas are severe to
catastrophic, and form a compelling case for significant global
policy action to mitigate or reverse these trends.[10]
The development of Australian emissions
trading policy took place against the background of increased
concern about climate change in various international bodies.
Between 1979 and 1988 a series of
international conferences convened by the World Meteorological
Organisation (WMO) and the United Nations Environment Program
(UNEP) raised concerns about the ramifications of the mounting
evidence that human activity was causing potentially dangerous
increases in GHGs in the atmosphere. In 1988 the WMO and UNEP
jointly established the Intergovernmental Panel on Climate Change
(IPCC). The IPCC s role is to provide independent scientific advice
on the complex and important issue of climate change. The Panel was
asked to prepare, based on available scientific information, a
report on all aspects relevant to climate change and its impacts
and to formulate realistic response strategies. It has issued four
major assessment reports to date as well as a number of special
reports on various topics.[11]
The findings of the first IPCC Assessment
Report of 1990 played a decisive role in leading to the UNFCCC,
which was opened for signature in the Rio de Janeiro Summit in 1992
and entered into force in 1994 (Australia is a signatory to this
Convention). The IPCC Second Assessment Report of 1995 provided key
input for the negotiations of the Kyoto Protocol in 1997 and the
Third Assessment Report of 2001. Special and Methodology Reports
provided further information relevant for the development of the
UNFCCC and the Kyoto Protocol.[12]
The Fourth Assessment Report of the IPCC in
2007 has provided the essential scientific background for the
negotiations leading up to a new global agreement on climate
matters to be finalised in Copenhagen at the end of 2009. The
increasing wealth of scientific evidence presented in each new IPCC
report has heightened concern about the rate of climate change and
increased the urgency of a coherent policy response at a global
level.
Australia is currently responsible for only
about 1.5 per cent of global GHG emissions, but suffers the full
effects of global warming arising from the emissions of other
countries.[13]
Hence, it has a strong interest in seeing effective global policy
action to address climate change issues. Australia is also one of
the largest per capita emitters in the world, which places
additional pressure on it to implement substantial domestic
mitigation measures and contribute its fair share towards a global
mitigation effort.
The choice of a
cap - and - trade scheme is generally consistent with efforts in
many other countries.[14] The significance of being consistent lies in the
ability to link internationally with minimal compliance and
transaction costs. The European Union (EU) has had an ETS in place
since 2005. New Zealand already has legislation for an ETS in
place.[15] Japan is
currently exploring options for replacing its voluntary ETS with a
mandatory ETS.[16]
In early 2007, seven US states and four Canadian provinces created
the Western
Climate Initiative, as a collaborative effort to develop ways
of reducing GHGs, with a focus on a market-based cap and trade
scheme.[17] The
United Sates has had a number of subnational schemes operating for
a few years, and the United States Congress is making serious
progress in developing a national cap-and-trade scheme.[18] Also, so-called major
emerging emitters have or are in the process of developing a range
of domestic policies and measures to reduce their greenhouse gas
emissions.[19]
Details of other
schemes and how they compare to the scheme proposed in the Bill are
provided below.[20]
The broad outline of current government policy
appears to have been formulated in the period leading up to the
2004 election. During the 2004 election campaign Australian Labor
Party (ALP) policy documents carried the following words:
Labor will establish a National Emissions
Trading Scheme, to allow market based mechanisms to deliver lowest
cost greenhouse gas emissions reductions, and seek linkages with
international trading arrangements.[21]
Another policy document from the 2004 campaign
stated on 7 October 2004, that a Federal Labor Government would
ratify the Kyoto Protocol and introduced an ETS that was
operational no later than 2010.[22]
These themes were carried over into the 2007
election where ALP policy was to introduce an ETS commencing in
2010.[23] During
the 2007 election campaign the then Labor opposition stated that a
Rudd Labor Government would:
Ensure that Australia's international
competitiveness is not compromised by the introduction of emissions
trading.
Consult with industry about the potential
impact of emissions trading on their operations to ensure they are
not disadvantaged.
Establish specific mechanisms to ensure that
Australian operations of emissions intensive trade exposed firms
are not disadvantaged by emissions trading.[24]
The development of Coalition policy on
emissions trading occurred alongside increased public concern about
climate change matters. In response to increased public concern,
the then Coalition Government commissioned an inquiry in 2006 into
the development of an Australian ETS. The report of this inquiry
concluded that it would be in Australia s interests to develop a
cap and - trade style ETS, even if a global climate change
agreement had not been reached. This scheme was recommended to
commence trading by 2011, or at the latest by 2012.[25]
In the subsequent election, official Coalition
party policy stated:
To reduce domestic emissions at least economic
cost, we will establish a world-class domestic emissions trading
scheme in Australia (planned to commence in 2011). We are also
committed to capturing the opportunities from being among the first
movers on carbon trading in the Asia Pacific region.[26]
In 2004, Australian state and territory
governments established the National Emissions Trading Taskforce
(NETT) to develop ideas for a multi jurisdictional ETS as part of a
policy response to the challenge of reducing greenhouse gas
emissions, and potentially to link Australia to international
carbon markets. The NETT played a formative role in building
Australian commitment to an ETS.[27] NETT s final report strongly endorsed the
establishment of a national emissions cap-and-trade scheme as soon
as possible.[28]
The Garnaut Climate Change Review was
commissioned in April 2007 by the then Leader of the Opposition,
Kevin Rudd, and by the premiers of the six states and the chief
ministers of the two territories of Australia. The Commonwealth
Government joined the Review in January 2008 after the change of
government in the 2007 election. The Review was required to examine
the impacts of climate change on the Australian economy, and to
recommend medium to long term policies and policy frameworks to
improve the prospects of sustainable prosperity.[29] Its draft and final reports,
released in July and September 2008 respectively, also strongly
recommended the establishment of an Australian cap and trade
scheme.
The Rudd government responded to these
developments by releasing a Green Paper on an Australian ETS, which
would be called the Climate Pollution Reduction Scheme (CPRS). This
paper put forward a possible design for the proposed scheme and
invited comments in July 2008.[30] This was followed by the release in October 2008
of detailed Treasury economic modelling of the Australian economy
under a reference scenario and two scenarios incorporating
assumptions consistent with the CPRS.[31] The final government decisions on the
broad outline of the proposed CPRS were released in a White Paper
in December 2008.[32] An exposure draft of the CPRS legislation and
associated commentary was released on 10 March 2009, with comments
invited by 14 April 2009.[33] In response to submissions and feedback on the draft
legislation, the Government announced substantial changes to the
CPRS on 4 May 2009,[34] before introducing the revised legislation into
Parliament on 14 May 2009.
The following outline includes the announced
changes of 4 May 2009 as well as the changes to the Exposure Draft
contained in the Bill itself.
The proposed CPRS is a modified cap-and-trade
scheme. Generally, in cap-and-trade arrangements:
- the government sets an annual limit for GHG emissions
- the government then either sells or issues emission permits
(called, interchangeably, emission units) to liable entities or
other parties
- liable entities may reduce their emissions in line with the
number of emissions units they possess; sell surplus emissions
units if their emissions are lower than their current number of
units; or if they have insufficient units in relation to their GHG
emissions, buy additional units on a secondary market
- each liable entity then surrenders the number of emissions
units equal to its emissions over the relevant accounting period
(for Australia this will be the standard financial year running
from 1 July to 30 June the following year)
- entities who do not surrender sufficient emissions units in
relation to their emissions are subject to a penalty, and
- there is generally no upper limit on the price of an emissions
unit.
The proposed CPRS departs from the classical
cap and trade model in respect of this last point as it sets a
fixed price on an emissions permit for the first year and an upper
limit on the price for the following four years (see below).
Significantly, it has been drafted to dovetail with the
National Greenhouse and Energy Reporting Act 2007 (NGER
Act).
In order to meet the specified national
emissions targets (see above) a trading scheme has to follow a set
GHG emissions trajectory. The trajectory is governed by annual
limits or caps on the total emissions that will be allowed.
Following is the initial indicative national emissions trajectory
that was proposed in the CPRS White Paper to meet
Australia s target under the Kyoto commitment period:
- 109 per cent of 2000 greenhouse gas emissions in 2010 11
- 108 per cent of 2000 levels in 2011 12, and
- 107 per cent of 2000 levels in 2012 13.[35]
Given the delayed start under the amended
scheme and the fixed permit price in the first year, there will now
be no emissions caps for the years 2010 11 and 2011 12, and
Australia will need to achieve the above emissions reductions
through other mechanisms to meet its Kyoto commitment (which may
include purchasing international offsets).
Under the CPRS, emissions caps will be set in
the Regulations. Specific emission caps for the years 2012 13 to
2014 15 are to be announced by 1 July 2010. Thereafter, national
emissions limits will be specified at least five years in
advance.[36] In
addition, guidance may be provided for emissions limits for
additional years beyond the five year caps. This will be through
gateways that may be prescribed in the Regulations to specify upper
and lower limits to the caps for each year in the extended period.
The White Paper stated that the Government intends to provide up to
ten years of gateways beyond the five year caps.
The emissions limit for each annual period
will be reviewed each year. There will be a strategic review of the
scheme s gateways every five years. The Government reserves the
right to adjust both the scheme s annual limits and gateways as
circumstances change.
In the CPRS an emissions permit will be known
as an Australian Emissions Unit (AEU). The number of AEUs issued
each year will be lower than the national emissions limits required
to meet the specified emissions trajectory. This is because about
25 per cent of Australia s emissions sources are not covered by the
scheme (see below) principally the agricultural sector, facilities
that emit less than 25 000 tonnes of CO2e per year and
emissions from deforestation.
The CPRS will cover all six GHGs mentioned in
Annex A to the Kyoto Protocol from the scheme s
commencement.[37]
Generally, direct obligations will apply to
entities (i.e. companies, trusts, partnerships and the like), or
individuals, that:
- have at least one facility that directly emits at least 25 000
tonnes CO2e per year or an equivalent amount on a pro
rata basis if the facility is not controlled by the entity through
the whole of the relevant year
- the International Energy Agency says that average Australian
emissions from coal fired electricity and heat generation are about
1060 grams CO2 per kWh.[38] This means that one large coal-fired
power station (1000 MW capacity) may emit about 9.3 million tonnes
of CO2 per year, or about 370 times the 25 000 tonne
threshold.
- import or manufacture synthetic GHGs of at least 25 000 tonnes
of CO2e or an equivalent amount on a pro rata basis,
or
- have a landfill operation that directly emits at least 10 000
tonnes CO2e per year and that facility is within a
prescribed distance of another landfill facility accepting the same
classification of waste, which itself emits at least 25 000 tonnes
CO2e per year
All major industrial sectors, excluding the
exemptions outlined below, will be included in the scheme.
Initially the scheme will cover about 75 per cent of Australian GHG
emissions and about 1000 emitting facilities.[39]
If an entity or individual has a facility, or
facilities, that each emit less than the above limits, they are not
liable under the proposed scheme, even if the combined total of GHG
emissions from all facilities under their control exceeds 25 000
tonnes CO2e per year.
Exemptions from the proposed scheme
include:
- the agricultural sector. The government is disposed to include
the agricultural sector directly in the scheme in 2015, but a final
decision will not be made on this matter until 2013
- 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
- deforestation is not included in the proposed scheme. Forestry
operators may opt into the scheme for reforestation credits but
participation is not compulsory
- emissions from decommissioned underground coal mines, and
- offshore emissions from exported fuels and materials.
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. Each permit will cover the emission of one tonne of
carbon dioxide or its equivalent in terms of global warming
potential for non CO2 GHGs
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.
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).
Liable entities may save unused AEUs from any
one financial year for use in respect of a later financial year.
They may borrow up to 5 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.
Individuals may 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.
It is proposed that the scheme's governing
body the Australian Climate Change Regulatory Authority (the
Authority) 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 Scheme. Directors and officers
of a company found to be in breach of certain provisions of the
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 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 CO2e 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 year (2011 2012)
this penalty will be $11 per unit. The penalty in later year 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. Alternatively a liable entity may undertake
to surrender additional permits at a later date (the next year) if
they do not surrender enough permits by 15 December in any one year
(this is called a make good provision).
In 2011 2012 an unlimited number of AEUs will
be available at a fixed price of $10 per tonne CO2e.
Fixed price permits from the first year of the proposed scheme s
operation cannot be banked or saved for use in later years.[40]
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 (Subclause
89(1)). 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.
The proposed scheme will allow the unlimited
acceptance of the following
Kyoto Protocol emissions credits (or units) to acquit emissions
obligations:
- Certified Emission Reduction Units (CER) generated under the
Clean Development Mechanism (but not temporary or long term
CERs)
- Emission Removal Units (ERUs) generated under the Joint
Implementation Mechanism, and
- certain Removal Units (RMU).
- Notably, an Assigned Amount Unit (AAU) arising
under the Kyoto Protocol will not be accepted for CPRS
purposes.
AAUs are units corresponding to emissions
allocated to Annex I countries under the Kyoto Protocol for the
commitment period 2008 2012. The permits created under the CPRS and
issued to Australian liable entities are domestic units, and are
distinct from Australia s AAUs. The Authority will create both sets
of units, but they will not be interchangeable. Furthermore, AAUs
from other countries will not be accepted for compliance under the
CPRS. This policy will be reviewed for further international
commitment periods in the light of international developments.
Initially, other non Australian emissions
credits, such as those traded on the voluntary carbon market, will
not be accepted for CPRS purposes. Nor will emission permits from
other country s schemes, such as the New Zealand ETS or the
European Union ETS. However, acceptance of these emissions credits
or permits will be reviewed on a case by case basis.
Assistance to emissions-intensive, trade
exposed (EITE) industries will be dependent upon the assessed
industry wide weighted average emissions intensity of an activity.
In February 2009, the Department of Climate Change released a
Guidance Paper titled Assessment of activities for the purposes of
the emissions-intensive trade-exposed assistance program.
According to this paper, and the changes announced to the CPRS
announced on 4 May 2009, for the first year of the scheme emissions
intensive trade exposed (EITE) industries will receive either:
- 94.5 per cent of required emissions permits free of charge
- for activities that have an emissions intensity above 2000
tonnes CO2e per million dollars in revenue or 6000
tonnes CO2e per million dollars value added in the
specific assessment period, or
- 66 per cent of required emissions permits free of charge
for activities that have an emissions
intensity between 1000 tonnes CO2e and 1999 tonnes
CO2e per million dollars of revenue or between 3000 and
5999 tonnes CO2e per million dollars value added in the
specific assessment period. [41]
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.[42]
Rates of assistance will decline by 1.3 per
cent per year from the second year onwards. Furthermore, the above
assistance rates reflect changes announced on 4 May 2009 which
boost assistance by five per cent for the most emissions intensive
category (from 90 to 94.5 per cent) and 6 per cent for the less
emissions intensive category (from 60 to 66 per cent). This boost
(the global recession buffer ) will cease after five years. The
EITE assistance will be phased out completely if and when Australia
s major trade competitors also impose similar emissions restraints
on their own industries, but five years advance notice of any
changes will be given.
Trade exposure is to be assessed in relation
to trade shares (being the ratio of traded quality of a product to
domestic production) being greater than 10 per cent in any one of
the years 2004 05, 2005 06, 2006 07 or 2007 08, or the existence of
a demonstrated lack of capacity to pass through costs due to the
potential for international competition.
Eligibility of activities for EITE assistance
has not yet been assessed. The Government s guidance paper called
for industry information, which will be used in the Government s
decision on EITE eligibility.[43] Final details of eligibility and rates of
assistance will be provided in the Regulations.
The EITE assistance program will be subject to
five-yearly reviews. The Expert Advisory Committee will consider a
range of matters in conducting those reviews.[44]
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 make windfall profits in the 2013 2014 or 2014 2015
years. Such assistance will be available for five years after the
commencement of the scheme (i.e. up until the financial year
commencing 1 July 2016).
A $2.75 billion 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.
The coal industry will receive $750 million in
transitional assistance through the Coal Sector Adjustment
Fund.
Petrol Fuel Excise and other taxes will be
reduced to take account of the impact of the proposed ETS on petrol
in the first three years of the scheme.
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.
These measures will be implemented in separate
legislation.
An Australian Carbon Trust will be
established; comprising of 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.[45] Under the proposed
Pledge Fund, individuals can calculate their savings from their
investment in energy efficiency measures and buy/retire AEUs from
the scheme.[46]
Contributions to the Pledge Fund will be tax deductible. Further,
purchases of power from renewable sources (i.e. GreenPower ) will
be recognised under the proposed scheme. Limits on the annual issue
of AEUs will be reduced in recognition of voluntary purchases of
GreenPower above 2009 levels.
An independent expert advisory committee will
periodically undertake a public review of the CPRS.
The Australian Climate Change Regulatory
Authority will be established to administer the proposed CPRS. This
Authority will establish a register of all emissions units relevant
to the CPRS scheme as well as other emissions units. The Authority
will have related information gathering and inspection powers and
enforcement powers as outlined above. Its decisions are subject to
review by the Administrative Appeals Tribunal.
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.
The proposed scheme is to commence on 1 July
2011.
The proposed measures are based on the above
mentioned government White Paper entitled Carbon Pollution
Reduction Scheme: Australia s Low Pollution Future released by
the Government on 15 December 2008.
Generally, the Australian government s policy
response to climate change comes under three broad categories:
- mitigation
- adaptation, and
- helping to shape a global solution.
The proposed CPRS is the main policy response
under the mitigation heading. The Government also argues that the
CPRS contributes to shaping a global solution by indicating
Australia s preparedness to make a firm commitment to emissions
reductions as part of a global agreement. Others, however, argue
that the proposed emissions reduction targets do not represent
Australia s fair share in an ambitious global agreement or are
overly conditional, and hence may inhibit the chances of such an
agreement being reached. Other policy responses under the three
headings include:
- an expanded national Renewable Energy Target (RET) requiring
that 20 per cent of Australia s electricity supply come from
renewable sources by 2020.
- increased investment in low emissions energy research and
development, for example the Commonwealth has made a substantial
contribution to the Global Carbon Capture and Storage
Institute[47] and
Cooperative Research Centre for Greenhouse Gas Technologies, and
recently announced the Clean Energy Initiative[48]
- increases in energy efficiency for buildings, transport and in
other fields, for example through the Green Building Fund, the
Retooling for Climate Change Program, and the Climate Ready
Program
- adaptation measures such as the National Climate Change
Adaptation Research Facility (this particular policy response is
less advanced than other responses), and
regional and bilateral agreements for GHG
emissions reduction action in support of the realisation of a
global solution, such as the Indonesia/Australia Forest Carbon
Partnership.[49]
The CPRS Bill and related bills have been
referred to the Senate Standing Committee on Economics for inquiry
and report by 15 June 2009. Details of the inquiry are at
http://www.aph.gov.au/Senate/committee/economics_ctte/cprs_2_09/index.htm.
The Senate Standing Committee on Economics
completed its inquiry and report on the Exposure Draft of this Bill
on 16 April 2009. Details of the inquiry are at
http://www.aph.gov.au/Senate/committee/economics_ctte/cprs_09/info.htm.
The
exposure draft legislation is also being considered under broader
terms of reference by the Senate Select Committee on Climate
Policy, which is due to report by 15 June 2009. Details of this
inquiry are at http://www.aph.gov.au/SENATE/committee/climate_ctte/index.htm.
The
Senate Select Committee on Fuel and Energy s terms of reference
also include inquiry into the impact of an emissions trading scheme
on the fuel and energy industry. The Committee released an interim
report on 7 May, before its final report due by 21 October 2009.
Details of the inquiry are at http://www.aph.gov.au/SENATE/committee/fuelenergy_ctte/index.htm.
The Joint Standing Committee on Treaties
released its Report 100 on the Kyoto Protocol on 19 March 2009. The
report gives recommendations relating to the extent and type of
mitigation action and targets that Australia should adopt post
Kyoto. Details of the inquiry are at http://www.aph.gov.au/HOUSE/committee/JSCT/25june2008/index.htm.
Throughout the legislation drafting process,
comments from business and industry groups have been primarily
negative, although progressively less so. Generally financial,
insurance and investment organisations are in favour of the scheme,
and for details and timetables to be finalised sooner rather than
later. Renewable energy groups are strongly in favour of the
proposed scheme.[50] Many carbon intensive industry groups are also
generally supportive of the scheme and its timetable; they cite the
need to establish certainty for investment and forward
planning.[51]
The Business Council of
Australia (BCA) considers that any final design for an
Australian ETS should have bipartisan support. The BCA is
supportive of the amended legislation announced on 4 May 2009, but
stresses that further alterations should be made to the exposure
legislation with regard to the criteria for granting assistance to
EITE industries. This should be broadened to include
competitiveness measures. Compensation should also be increased for
asset value loss for the coal fired power sector. Importantly, the
BCA requests independent reviews of the scheme to be undertaken by
the Productivity Commission, or a board that includes a member of
this commission. The BCA urges the government to finalise the
details of the scheme, and for the Senate to pass the proposed
legislation to provide investor certainty.[52] & [53]
The Australian Industry Group
(AiG) supports the introduction of a cap and trade scheme and the
swift passage of legislation in 2009 to provide investment
certainty to business. [54] However, it would like to see broader eligibility
criteria for firms to be classed as EITE to qualify for assistance,
and increased amount of free permits issued to these firms. In
particular, the AiG would support reducing the minimum target (i.e.
the five per cent reduction by 2020) as an insurance against the
breakdown of international negotiations.[55] It has flagged that it still needs to
consider its position on the Coalition s call to delay the passing
of legislation.[56]
The Australian Chamber of Commerce and
Industry (ACCI) also supports the introduction of an
Australian ETS, and has noted that the changes announced on 4 May
2009 were much needed . However, the ACCI has concerns that the
proposed 25 per cent target may be too ambitious and has sought
additional details on the assistance available for small and medium
sized industries.[57] & [58] Acting chief executive Greg Evans has stated that
more needs to be done to assess the financial impacts to small
businesses, in terms of energy costs.[59]
- The Minerals Council of Australia (MCA) has
several key reservations over the proposed CPRS. It claims that the
scheme design is out of step with other schemes being implemented
globally, is not calibrated with the availability of low emissions
technologies, and will impose the world s highest carbon costs. It
suggests that the proposed $40 price cap for emissions permits is
too high and will not prevent damaging carbon price volatility. It
is concerned that these design features will make meeting the
proposed 2020 target very challenging.
- Although the MCA welcomed certain aspects of the changes
announced on 4 May, it is still concerned that the auctioning of
AEUs will not be gradually introduced, and that the scheme will
distort domestic economic activity by imposing different carbon
costs on various sectors of the economy.[60] It is wary of a complex scheme design
with critical elements (including the treatment of
emissions-intensive trade-exposed firms) being dealt with in
regulations, which adds uncertainty and imposes high compliance
burdens.
- The Council has voiced concerns over results of modelling
undertaken by Concept Economics showing that, under the proposed
CPRS, almost 24,000 jobs would be lost from the minerals sector by
2020. In light of this, the Minerals Council believes that a phased
approach to the introduction of full auctioning of permits would
save thousands of jobs while still delivering the required
environmental benefits.[61] & [62]
The Australian Coal
Association considers that the announced changes are
positive, but is seeking the coal industry s inclusion as an EITE
industry so that it may access the proposed assistance
measures.[63]
& [64]
The Australian Petroleum Production
and Exploration Association (APPEA) and the
Australian Institute of Petroleum (AIP) have
concerns over the extensive use of regulations to provide
additional details of the proposed CPRS operation. The AIP
considers the differing levels of assistance provided to the EITE
sector unsatisfactory.[65] The APPEA would also like to see more assistance for
the liquefied natural gas industry.[66] & [67]
The Australian Bankers
Association has also expressed concerns over the use of
regulations to provide details of the proposed scheme (see main
provisions section for further discussion).[68] Further, the association is concerned
that the changes announced on 4 May 2009 will create additional
complexity, uncertainty and costs for business and other market
participants, as well as inhibit the development of carbon
markets.[69]
- The Energy Supply Association of Australia
supports the introduction of an ETS as essential for promoting
investor confidence, however it claims that even a five per cent
emissions reduction target will cause several coal fired power
stations to close or scale back power production. It feels that a
five year range of scheme emissions caps is too short for certainty
for the power industry. It also suggests that the proposed
assistance to strongly affected industries (i.e. coal fired power
stations) is inadequate.[70]
The Australian Pipeline Industry
Association notes that the proposed legislation does not
allow liable entities who have entered into long term contracts
fixing the price of their product, to pass any cost increases
arising from the CPRS through to their customers.[71]
Both the Australian Aluminium
Council (AAC) and the Cement Industry
Federation (CIF) are concerned about the gradual
withdrawal of assistance to EITE industries over time, in the
absence of similar emissions restraints being imposed on its major
competitors. Further, the AAC wishes to see 90 per cent of the
necessary permits being made available to all such industries (of
which it is one) instead of between 60 and 90 per cent. The AAC
notes that some activities necessary to its continued operation are
not capable of receiving assistance as either strongly affected or
EITE activities. The result of this is that the proportion of its
free permits for the aluminium industry is well below the 90 per
cent mark.[72] The
CIF proposes that highly EITE industries should all receive 100 per
cent of permits free.[73]
The Australian Plantation Products and
Paper Industry Council noted potential shortcomings with
the forestry related components of the proposed scheme.
Principally, certain aspects of the draft provisions may actually
discourage forestry operators from opting to participate in the
CPRS.[74]
The Australian Landfill Owners
Association (ALOA) has raised concerns that the
measurement techniques for estimating GHG emissions from landfill
operations is not yet sufficiently accurate, with possible error
margins of 30 percent. Further, it argued that the inclusion of
emissions from waste deposited in the past (legacy waste
provisions) creates significant difficulties and unfairness for the
sector and should be removed, and the scheme should be aimed at
future behaviour.[75] These concerns have been largely addressed by the
changes made to the exposure draft legislation in the CPRS Bill
introduced into Parliament, and have been well received by the
Australian Industry Group.[76]
Some environmental groups feel that the
proposed Australian targets are not consistent with Australia s
fair share on the overall global emissions reduction task and
should be increased to at least an unconditional 25 per cent
reduction on 1990 levels. They are also concerned over the proposed
assistance to EITE, claiming it should be reduced and over time
withdrawn altogether. Importantly, all environmental groups
highlight the fact that the proposed scheme does not allow the
achievements of voluntary or additional action by individuals,
communities or states to reduce overall emissions limits.
Generally, environmental groups did not
support the proposed CPRS as outlined in the exposure draft
legislation. However in the wake of the changes announced on 4 May
2009 many environmental, social welfare and union groups, such as
the Southern Cross Climate Coalition, now support the scheme and
are calling for the passage of enabling legislation in
2009.[77] Other
groups find the changes to the targets disingenuous and the slower
start and increased compensation to EITE industries counter
productive.[78]
The Total Environment Centre
has expressed concerns mainly over the proposed GHG emissions
targets. It claims that in combination with unlimited use of
non-Australian emissions permits they may see Australia s GHG
emissions rise, instead of fall (initially this may well be the
case). It is also concerned that as Australian emissions permits
will be property rights there will be a massive transfer of wealth
from the public to the private sector. Combined with the proposed
assistance to the EITE industries (which it claims discriminates
against recycling industries), polluters will achieve windfall
profits. The Total Environment Centre also calls for emissions from
all closed landfill sites to be included in the scheme and claims
that proposed emissions measurement methods for land fill sites are
inaccurate, and need improvement. [79]
The Australian Conservation
Foundation (ACF) shared many of these concerns and also
considered that the draft legislation did little to promote
renewable energy, energy efficiency and healthy eco
systems.[80] The
ACF did not support the introduction of the CPRS legislation to
Parliament as outlined in the exposure draft, however, the ACF has
changed its position following the changes announced on 4 May
2009.[81] It
continues to push for amendments to the legislation but welcomes
the new 25 per cent target and calls for the Senate not to delay
passing the bills.[82]
Generally, the Climate
Institute (TCI) has been an ongoing supporter of an
Australian ETS. It released a report detailing the effect of
proposed climate policies on Australian jobs. The results of the
modelling demonstrated that more than 26,200 jobs might be created
by renewable energy projects.[83]
TCI welcomed the 4 May change to the
legislation enabling an Australian emissions reduction target to be
set at 25 per cent reduction on 1990 levels, commensurate with an
appropriate global agreement being reached. In its submission to
the Senate Economics Committee inquiry into the exposure draft
legislation, TCI also said that it would like to see EITE
industries required to improve emissions performance by four per
cent per annum, and for assistance to EITE industries to be
automatically reduced once an effective international agreement
enters into force. Also, TCI suggested that assistance be
contingent on recipients publishing an annual, externally audited
report on emissions abatement opportunities in their operations. It
recommended the legislation should include a commitment to move
towards full auctioning of all permits with resulting revenue
channelled towards the following priorities: vulnerable low income
communities; research, development and deployment of clean
technologies; and support for adaptation and mitigation in
developing countries.
Additionally, an organisation, such as the
Productivity Commission, should be empowered to annually report to
the Parliament on real, proxy and shadow carbon prices in
competitor countries.[84]
The Coalition
remain wary about the proposed CPRS and along with Senator
Xenophon, have expressed concern that the inquiry into the exposure
draft legislation by the Senate Economics Committee was rushed. As
a result, they say, it did not give proper consideration to
alternative schemes which may be operationally superior such as:
carbon taxes, baseline and credit schemes, hybrid and intensity
based schemes based on the McKibbin Wilcoxen Hybrid Model.[85] The Coalition also
raised concerns about the cost impact of the CPRS and queried the
accuracy of the Treasury modelling, suggesting that the impact on
GDP had been underestimated, especially given the context of the
global financial crisis.[86]
The Coalition has decided to oppose the CPRS
in its current form as they consider it to be poorly designed.
However, the Coalition maintains that it supports well designed
policy, including a market based approach such as the CPRS, to
significantly reduce Australia s and the world s GHG
emissions.[87]
The Coalition commissioned the Centre for
International Economics to review the proposed CPRS. Its major
findings in relation to the scheme include:
- the proposition that the CPRS generates abatement at lowest
possible cost has not yet been demonstrated;
- there is no clear understanding of the transitional costs of
the CPRS and there is a risk that, if these are not properly
understood, unexpected transitional costs may derail the
policy;
- the non-trade neutrality of the CPRS poses a major challenge
for a number of important industries this non-neutrality brings no
environmental benefit; and
- the scheme potentially threatens the balance sheets in a number
of key industries.
Importantly, however, from the information in
the public domain, it is not clear that the proposed CPRS will
produce higher net benefits than will other available alternatives.
At the very least, more consideration should be given to
complementary energy efficiency measures. Many of the major aspects
of the CPRS have not been modelled and, therefore, neither have the
tradeoffs inherent in particular design choices. There is no single
a priori best approach, so sound benefit cost analysis is
appropriate.
None of these issues should ultimately be
allowed to be an impediment to establishing a carbon price in
Australia. There are a variety of options by which these issues can
be resolved.[88]
The Coalition has taken the above conclusions
on board. However, their stance as at 26 May 2009, is to defer the
CPRS legislation until after global UNFCCC negotiations in
Copenhagen in December 2009. [89]&[90] Furthermore, the Coalition has suggested that the
Government ask the Productivity Commission to undertake a broad
review of the CPRS. As at the time of writing this digest, the
Government had rejected the Coalition s proposal.
The Australian Greens support the use of
market based policies, such as the proposed CPRS, to reduce
Australia s GHG emissions. However, they wish to see no Australian
GHG emissions by 2050 at the latest.[91] They also call on the Government to
rethink its plans to allocate compensation on what they see as the
basis of lobbying power rather than sound economic theory and
environmental policy. The Greens endorse the efforts of the
Australian Greens Senators in highlighting the fundamental flaws in
the CPRS and promoting the benefits of investing in energy
efficiency, renewable energy, public transport and protecting
forest carbon stores.[92]
Their specific criticisms of the proposed
scheme relate to the high level of assistance to EITE industries
and coal-fired generators; the lack of recognition for voluntary
action; and the unrestricted acceptance of certain international
Kyoto credits.[93]
The Greens were not impressed by the announced changes on 4 May
2009, but have written to the government offering to support the
proposed scheme if satisfactory amendments are made to it.[94]
Specifically, the Greens support an
unconditional emissions reduction target of 25 per cent below 1990
levels by 2020, with a commitment to move to 40 per cent cuts by
2020 compared to 1990 emissions levels, depending on the outcome of
the international climate change negotiations in Copenhagen in
December 2009.[95]
Given the inflexibility of the Government on these requests, the
Greens position as at 26 May 2009 is to oppose the legislation, and
push for more targeted national initiatives towards renewable
energies, energy efficiency and public transport.[96]
In the House of Representatives, Mr Robert
Oakeshott, supported by fellow independents Mr Tony Windsor and the
Hon. Bob Katter, proposed amendments to the bill that called for an
independent authority to be established to administer key
components of the CPRS, analogous to the role of the Reserve Bank
in delivering monetary policy.[97] Despite both the Government and Opposition
acknowledging merit in the idea, the amendments were defeated. The
Government argued that maintaining the administrative components
such as caps and gateways in the Regulations allowed them to be
subject to Parliamentary scrutiny, which is preferable to being set
by an independent regulator. [98] The Opposition stated that they couldn t support
the amendments given their position on deferring the vote on the
scheme. [99] Mr
Oakeshott supported the passage of the bill through the House,
while Mr Windsor and Mr Katter voted against the bill.
On the question of targets Senator Fielding
has noted that Family First supports a cautious approach to
emissions trading and welcomes a less extreme initial target
.[100]
It is not clear whether Senator Fielding is
seeking a less extreme target for GHG emissions than the one
proposed by the government, or by other parties in this debate.
However, he has expressed concern that families will bear the brunt
of the costs of the proposed scheme.[101] In particular, he has noted that
food costs will rise under the proposed scheme.[102] He is reported as supporting a
delay in the commencement date by six months, has expressed
concerns about the prospect of jobs being relocated offshore and is
doubtful that voluntary action by households would not, of itself,
reduce GHG emissions.[103] He has also expressed doubts about the link between
GHG emissions and climate change, and therefore questioned whether
any emissions constraints are necessary.[104]
Senator Xenophon has been reported as opposing
the proposed CPRS.[105] He has suggested that an ETS based on the energy
intensity of covered industries, similar to that proposed for
Canada, is a more appropriate model for Australian conditions.
[106] &
[107]
Senator Xenophon s view of the exposure draft
legislation, is that it will prove ineffective in creating
sustainable domestic reform in the realm of climate change policy
and therefore reducing emissions.[108] He believes it is high cost with
numerous transitional issues that have not been adequately modelled
economically.[109]
The changes announced on 4 May 2009 to the
proposed CPRS have not altered Senator Xenophon s attitude toward
the proposed scheme.[110] However, he does not support the Coalition s motion to
defer until after the UNFCCC Copenhagen discussions in December. He
has stated that while the Senate should be given until the Spring
sitting period to properly consider the proposed legislation, a
suspension until after December cannot be justified. Senator
Xenophon s position on this issue is critical, given that Senator
Fielding s vote is likely to support the delay.[111]
Given both the short- and long-term
implications of the proposed CPRS, this Bill is one of the most
significant pieces of legislation to come before Parliament in
recent times. Its implications are nothing less than a re
configuration of the Australian economy towards a low GHG emissions
stance. Where there is a deadlock between the House of
Representatives and the Senate, section 57 of the Australian
Constitution provides for a double dissolution (of the House of
Representatives and the full Senate) as a procedure to resolve such
a deadlock, subject to certain conditions being met.[112] Should the
Government be unable to get the Bill passed by Parliament and its
various rejections satisfy the constitutional requirements of
section 57, it would offer the government a trigger for a double
dissolution election. Once the requirements for a double
dissolution are met, the government does not have to use the double
dissolution trigger immediately. The government has up until six
months before the maximum term of the House of Representatives
expires. Thus in theory, a double dissolution election on this
issue could take place as late as 16 October 2010. [113]
The following table outlines the potential
financial impact on the federal budget of the proposed scheme.
Year
|
2010 2011
|
2011 2012
|
2012 2013
|
Revenue
from selling permits
|
n.a.
|
4.5
|
13.0
|
Source: Explanatory Memorandum[114]
The size of these revenue impacts are less
certain than usual as the proposed scheme may be subject of
extensive amendment before being passed by Parliament and the price
of AEUs is uncertain in the 2012 2013 and later years.
The government intends to recycle all revenue
generated by the selling of AEUs to assist both households and
business adjust to the introduction of the proposed scheme.[115] The overall project
fiscal outcome after this redistribution is shown in the following
table.
Year
|
2009 2010
|
2010 2011
|
2011 2012
|
Net
impact on Federal Budget
|
-0.3
|
0.8
|
-0.5
|
Source: Explanatory Memorandum
There are several key issues that emerge from
the above background in respect of the proposed scheme. Briefly,
they are:
- whether a cap and trade scheme is the best instrument to
achieve Australia s emissions reduction targets, in concert with
the government s other measures
- in the light of the identified criticisms of the proposed
scheme, whether to proceed and pass legislation this year or
redesign Australia s approach to GHG emissions control
- if the proposed scheme is to be legislated what is the
appropriate commencement date, 1 July 2011 or some later date
- what are the appropriate targets for Australian GHG emissions
reduction?
- will the proposed scheme cause significant carbon leakage that
is, the movement of industrial activities/additional investment in
emissions intensive activities to a location that is not subject to
emissions constraints
- related to the previous point, does the proposed scheme provide
the right amount of transitional assistance to EITE and the coal
fired power industries? Should the range of industries being
classed as EITE be expanded, most notably to include certain coal
mines and coal fired electricity generation
- does the scheme have appropriate coverage
- should there be an explicit link between the level of GHG
emissions abatement achieved through voluntary action and the
annual emissions caps set by the relevant Minister
- should there be any limits on the use of Kyoto protocol
compliant emissions credits in the proposed CPRS, and
- what is the appropriate level of delegated legislation to be
included in the proposed scheme. That is, how much detail of the
proposed scheme s operation should be left to regulation?
A further issue is whether undue harm to the
prospects of the conclusion of an effective international emissions
control agreement would occur if Australia attended the relevant
negotiations at the end of 2009 without a Scheme in place.
- the cap fixes an overall limit for emissions this is a major
difference between a cap and trade scheme and all other
approaches
- potentially delivers emissions control and reduction at the
least overall cost
- allows for unforseen reductions in emissions across the
economy[116]
- provide the greatest incentive for further technical
innovation[117]
- avoids heavy handed direct regulation, instead allow
participants to tailor their own emissions abatement programs to
their own particular circumstances
- is more flexible, allowing firms to react quickly to unexpected
developments, such as changes in required overall emissions
reductions levels as a result of better measurement of actual
emissions produced
- emissions trading copes with uncertain demand and supply
responses for emissions permits without overt government
intervention
- emission trading schemes allow the signalling of future
emissions permit prices through a forward contract system. This
allows participants to potentially fix their costs in advance
- allows firms to be rewarded for emissions reductions by
enabling their unused permits to be sold to other market
participants (that is, provides a positive incentive for emissions
reduction, as well as a negative incentive), and
- such schemes appear to be the favoured approach for emissions
control. Without an emission trading scheme Australia would forego
the benefits of eventually linking its emissions control efforts to
those of other countries or an evolving international emissions
trading scheme
an international emissions trading
arrangements already exists under the Kyoto Protocol arrangements
through the trading of the emissions credits generate by projects
under the Clean Development and Joint Implementation
mechanisms.[118]
- they are complex to design and administer
- the design of such schemes must be very carefully thought out
to minimise adverse market distortion and economic impacts
- the initial emissions permit allocation decision may be open to
either state or economic sector bias
- their implementation has long lead times, often requiring a
slow start in target emissions reduction. So significant results do
not appear to be achieved over the short term
- there is some concern that emissions trading provides
additional avenues for profit to large financial institutions,
and
- a related concern is that emissions trading may lead to
unjustified third party hoarding of emissions permits.
Economic theory suggests that a government may
control efficiently the price of emissions, or their quantity, but
not both at the same time.[119] Broadly, approaches to GHG emissions control
have favoured either controlling prices, or quantities but not both
at the same time. The cap and trade approach controls the emissions
quantity. Other such approaches are:
- the emissions intensity approach, where a benchmark emissions
intensity of particular production processes is set, in say tonnes
of CO2e per unit of output. Then the government
legislatively reduces the permitted emissions intensity for liable
parties over time[120]
- the hybrid approach, where each country establishes their own
emissions trading scheme without any explicit international target
for emissions reduction. Each scheme features both short term and
long term emissions reductions targets. Individual countries may
then link their schemes if they wish and each scheme features a cap
on the price of its particular permits. In the short term the cap
may be breached if the price of the emissions permits exceeds a
certain pre set level.[121] After its fixed permit price in the first year, the
proposed CPRS has this feature in the next four operating
years.
- the baseline and credit approach where the emphasis is on
offsetting emissions made rather than reducing such
emissions[122],
and
- the regulatory approach, where the government simply sets
targets for emissions and fines those entities whose emissions
breach the set targets.
Of course, the major alternative for raising
the price of GHG emissions is the imposition of an emissions tax.
As the cost of making such emissions is raised then the emitter has
greater incentive to reduce these emissions.
Briefly, a significant weakness of the
emissions intensity, baseline and credit and emissions tax approach
is that they lack sufficient assurance that GHG emissions will
actually be reduced. A second problem is that while it is not
impossible to link these types of approaches with other countries
schemes, it is more difficult given the prevalence of the cap and
trade approach (see following section). Lastly, the regulatory
approach lacks any potential incentive for liable parties to pursue
technical innovation to reduce their emissions beyond that required
by the regulatory limit imposed.
Internationally, the trend in emissions
control regimes has been toward implementing classical cap and
trade schemes. The most prominent example has been the European
Emissions Trading Scheme. Other examples include the sectoral based
Acid Rain Program in the United States and the regionally based
schemes in North America.[123] It may be far easier to link the proposed CPRS
to other existing and proposed cap and trade schemes in other
countries and regions, than it would be to link alternative
schemes.
The emissions reduction targets to which the
caps in the CPRS must aim are between five and 25 per cent by 2020
compared to 2000 levels (minimum unconditional five per cent
target, with higher targets conditional on international agreements
being reached), and 60 per cent by 2050 compared to 2000 levels. It
is important to note that the CPRS will not be solely responsible
for these proposed reductions, but will be supported by other
complementary or transitional measures, particularly in the initial
years of the scheme before it becomes fully operational. This
section aims to provide additional detail on implications of the
proposed and alternative timing of the scheme and various
targets.
The 15 per cent reduction target will only be
adopted if the following occur.[124]
- global action to stabilise atmospheric GHG concentrations
between 510 and 540 ppm CO2e
- emissions reductions in advanced economies that aggregate to
within the range of 15 to 25 per cent below 1990 levels
- substantive measurable, reportable and verifiable commitments
and actions by major developing economies, supported by
international financing and technology transfer but which may not
deliver significant emissions reductions until after 2020, and
- progress towards inclusion of forests (reduced emissions from
deforestation and forest degradation, REDD) and land sector in an
international agreement as well as deeper and broader international
carbon trading and low carbon development pathways.
For Australia to adopt a target of a 25 per
cent reduction requires a comprehensive international agreement to
reduce emissions such that atmospheric GHGs stabilise at 450 ppm
CO2e or lower. Such an agreement must specifically
include[125]:
- comprehensive coverage of GHGs, sources and sectors, including
forests (REDD) and the land sector (i.e. soil carbon and biochar if
scientifically demonstrated)
- a nominated early deadline for peak global emissions no later
than 2020
- emissions reductions in advanced economies that aggregate to at
least 25 per cent below 1990 levels by 2020
- slowing and reduction of emissions in major developing
economies, with a combined reduction of at least 20 per cent below
business as usual levels by 2020 and a nominated emissions peaking
year for individual major developing economies, and
- the development of fully functional global carbon markets
facilitated by the mobilisation of financial resources from
developed and major developing economies.
To achieve this 25 per cent target the
government has indicated that it would purchase up to five per cent
of the required reductions in the form of international emissions
trading. Under such an international agreement, the Government
would also seek an election mandate to increase its 2050 emissions
reduction target.
It can be argued that the conditions for the
adoption of the 25 per cent target are, at the time of writing,
unlikely to occur. However, the advantage of this approach is that
overseas participants in the UNFCCC negotiations have greater
clarity of Australia s intentions and requirements in this area.
Given Australia s positive population growth rate, committing to a
25 per cent reduction in emissions would translate into a
comparatively larger reduction in per capita emissions. However,
Australia s per capita emissions would still be higher than those
of most other advanced economies and the rest of the world in
general.
Climate change impacts have been projected
under various mitigation scenarios as well as under a no mitigation
reference scenario. Two mitigation scenarios commonly considered
target GHG stabilisation levels of 450 and 550 ppm CO2e,
respectively (by mid next century in the 450 case, and by 2100 in
the 550 case). These scenarios correspond to warming by 2100 of
about 2 C and 3 C, respectively.[126] The projections under these
scenarios suggest that limiting the amount of warming by 2100 to 2
C or less would be highly desirable in order to reduce the risks of
damaging and potentially catastrophic climate change
impacts.[127]
There have also been suggestions that 450 ppm CO2e and 2
C are too high, and that we should be aiming for a stabilisation
target of 350 ppm CO2e and limiting warming to less than
1.5 C.[128]
Stabilising GHG concentrations at 450 ppm CO2e is
estimated to give a 50 per cent chance of limiting warming to 2 C
above pre industrial levels.[129] Atmospheric GHG concentrations currently stand
at over 450 ppm CO2e, so achieving a 350 or 450 target
will mean substantial and rapid cuts in emissions, and even then
will require initial overshooting of the target.[130]
The amount and duration of overshooting will
influence the likelihood of irreversible climate change impacts
being initiated; for example, one event that is thought to be
particularly vulnerable to tipping points in the climate is
irreversible loss of the Greenland ice sheet, which may be
initiated under relatively moderate warming scenarios and which
would contribute an estimated seven metres of sea level rise over
several centuries.[131]
Of all developed countries, Australia is
perhaps the most vulnerable to the impacts of climate change.
Australia s climate is naturally highly variable and this together
with its limited water resources already place ecosystems and
communities under stress. Australia also has strong economic ties
with surrounding developing nations in the Asia Pacific region, and
the adverse impacts of climate change on these nations would impact
Australia through effects on trade and socio political issues.
The Australian Government has stated its
support for a global stabilisation target of 450 ppm
CO2e or lower, recognising that this would be in
Australia s interests. Minister Penny Wong has said that its
climate change strategy is formulated with this target in mind:
In formulating our approach to climate change,
the Australian Government recognises it is in our national interest
to seek a fair and effective global agreement delivering deep cuts
in emissions, so as to stabilise concentrations of greenhouse gases
in the atmosphere at around 450 parts per million or lower, by
mid-century. [132]
Australia s
emissions trajectories under various mitigation and reference
scenarios
Australia s various proposed and recommended
2020 emissions reduction targets have in general been stated with
respect to 2000 emission levels. The following table illustrates
how they translate to reductions with respect to 1990 levels (which
is the baseline year under the Kyoto Protocol), to 2008 12 levels
(the Kyoto commitment period, during which Australia has committed
and is on track to limit its emissions to 108 per cent of 1990
levels), and the reduction in emissions these targets represent
compared to the business as usual scenario.
Baseline
year/s
|
Baseline year
emissionsa(Mt
CO2e)
|
To achieve
equivalent 2020 reduction targets
(%)
|
2000
|
552.7
|
5
|
10
|
15
|
25
|
40
|
1990
|
546.3
|
4
|
9
|
14
|
24
|
39
|
2008 12
|
590.0
|
11
|
16
|
20
|
30
|
44
|
2020 BAUb
|
774.2
|
32
|
36
|
39
|
46
|
57
|
a
Based on Kyoto Protocol accounting rules, from the Australian
Greenhouse Emissions Information System, National Greenhouse Gas
Inventory Kyoto Protocol Accounting Framework , Department of
Climate Change website, http://www.ageis.greenhouse.gov.au/.
b 2020 BAU is the business as usual
emissions projection for 2020 as modelled by the Australian
Treasury in its report Australia s low pollution future: the
economics of climate change mitigation, October 2008. This
reference scenario includes policy measures in place in 2008 (i.e.
it does not include the expanded renewable energy target, the CPRS
or the Government s 2050 emissions reduction target of 60%).
Source: Compiled by the Parliamentary Library
using data from the Department of Climate Change and the Australian
Treasury.
As the table illustrates, the rate at which
Australia s GHG emissions must be reduced from current (2008 12)
levels is well above the nominal rate generally cited (with respect
to 2000 or 1990 emissions). The emissions reductions below the
business as usual (BAU) scenario are much higher again. Since 1995
the trend growth in Australia s GHG emissions has been 1 per cent
per year, though it has increased by as much as five per cent in
any one year.[133] The Treasury BAU scenario projects an average annual
increase of two per cent per year from 2005 to 2020. In contrast, a
five per cent emissions reduction target by 2020 relative to 2000
levels will require an average annual reduction in emissions of 1.3
per cent per year from 2011 to 2020. The equivalent annual
reductions required for other 2020 targets are shown in table 4
below.
2020 emissions reduction
target (from 2000 levels)
|
5%
|
10%
|
15%
|
25%
|
40%
|
BAU
|
Annual reductions
required from 2011 to 2020a
|
-1.3%
|
-1.8%
|
-2.4%
|
-3.6%
|
-5.7%
|
+2.0%
|
a Calculated for mitigation
scenarios assuming emissions in 2010 are 108% of 1990 levels, or
590.0 Mt CO2e. For the BAU scenario the figure is from
the Treasury modelling.
Source: Compiled by the Parliamentary Library
using data from the Department of Climate Change and the Australian
Treasury.
With business as usual emissions projected to
continue increasing, it is clear that if the mitigation scheme for
a given 2020 emissions reduction target is delayed, much steeper
annual reductions will be required to meet the target. This means
that the economy wide costs of the scheme on its introduction may
increase the longer it is delayed, no matter what particular target
is chosen. Generally, the higher the rate of reduction, the greater
the cost of those reductions to the economy as a whole.
What represents
Australia s fair contribution to global emissions reduction
commitments?
The Garnaut Climate Change Review found that
it would be in Australia s interests to pursue a global agreement
to stabilise GHG concentrations at 450 ppm CO2e, and
that Australia s proportionate contribution to such an agreement
would be a commitment to reduce its emissions by 25 per cent
compared to 2000 levels by 2020.[134]
Garnaut s alternative recommendations for
Australian 2020 emissions reduction targets in the absence of such
an ambitious global agreement were five per cent reduction on 2000
emissions unconditionally, 10 per cent reduction conditional on a
global agreement for GHG stabilisation at 550 ppm CO 2e,
or between 10 and 25 per cent reduction if a global agreement is
achieved for a stabilisation target between 450 and 550 ppm
CO2e.[135]
As a party to the United Nations Framework
Convention on Climate Change, Australia has agreed that developed
countries have a responsibility to take the lead in committing to
climate change mitigation measures. This means that to achieve the
global emissions reductions required for a particular GHG
stabilisation target, developed countries will need to implement
much higher reductions than the global goal, to allow the economies
of developing countries to continue to expand. For example,
stabilisation at 450 ppm CO2e will require global
emissions reductions of 50 per cent by 2050 relative to 2000
levels. Based on the per capita contract and converge principle
advocated by Garnaut, this would require a much steeper reduction
target of 86 per cent for developed countries, while developing
countries would on average reduce their emissions by only 14 per
cent in this time.[136] The 2020 targets for developed and developing
countries consistent with a 450 ppm CO2e stabilisation
target under this allocation principle would be 31 per cent and +85
per cent, respectively, compared to 2000 levels. Garnaut s
assessment of Australia s proportionate contribution to a 450
stabilisation target is a reduction from 2000 levels of 25 per cent
by 2020, and 90 per cent by 2050.
It is worth noting that Garnaut s recommended
2020 and 2050 targets for Australia are lower than other developed
nations when stated in reference to 2000 or 1990 levels, but are
roughly comparable when the Kyoto commitment period of 2008 12.
This means that under Garnaut s allocation scheme, Australia is not
penalised for being one of the few developed countries that was
allowed to increase its emissions under the Kyoto Protocol.
In the 4 May amendments to the scheme, the
Government announced it would adopt an emissions reduction target
of 25 per cent below 2000 levels under certain conditions. This
change in policy reconciles the apparent discord that had existed
between the Government s stated support for a GHG stabilisation
goal of 450 ppm CO2e and its previous maximum emissions
reduction target of 15 per cent. However, the Government has
attached additional conditions to its adoption of the 25 per cent
target regarding the nature of the international agreement (see
earlier). These conditions have been criticised as unrealistic and
in violation of the agreed differentiation of responsibilities
between developed and developing countries embodied in the UNFCCC
and Kyoto Protocol.[137] In addition, specific individual and aggregate
developed country targets that have been proposed for post Kyoto
commitment periods are generally higher than the 25 per cent that
the Government is conditionally nominating.[138]
The Government has argued that an equitable
division of emissions reduction commitments should also consider
the economic costs of mitigation, as well as the impact of
reductions when compared to present day emissions and on a per
capita basis.[139]
Australia s per capita emissions are the
highest among the developed nations, and among the highest in the
world. In addition, unlike most other developed countries,
Australia s population is projected to continue to grow. This means
that absolute emissions reductions translate to relatively higher
per capita emissions reductions for Australia compared to other
developed countries. [140]
Australia is not alone in setting targets for
the reduction of GHG emissions. A comparison with other country
targets is shown in the table below. The table illustrates the 2020
targets in absolute reductions compared to 1990 levels, as well as
per capita reductions compared to 1990 levels. Long term targets
(2050 absolute reduction targets) are also shown relative to 1990
levels. Where a target range is indicated, the low end of the range
is an unconditional commitment, while the high end is a commitment
conditional upon the realisation of an international agreement with
comparable commitments from other developed countries and
implementation of emissions reduction measures from developing
countries.
Entity
|
Stated 2020
target
|
2020 absolute
target below 1990 levels
|
2020 per capita
target below 1990 levels
|
2050 absolute
target below 1990 levels
|
Australia
|
5 15% or 25% below 2000
levels
|
3 14% or 24%
|
30 38% or 45%
|
60%
|
European
Union
|
20 30% below 1990
levels
|
20 30%
|
28 37%
|
60 80%
|
United
Kingdom
|
34 42% below 1990
levels
|
34 42%
|
42 49%
|
80%
|
Germany
|
40% below 1990 levels
|
40%
|
41%
|
|
Canada
|
20% below 2006 levels
|
Increase of 24%
|
8%
|
60 70%
|
United
States
|
14% below 2005
levelsa
|
6%
|
27%
|
80%
|
20% below 2005
levelsb
|
8%
|
32%
|
80%
|
Notes: Compiled by the Parliamentary Library.
Conversions to 1990 baseline were calculated based on UNFCCC total
GHG emissions including LULUCF inventory data (http://unfccc.int/di/DetailedByParty.do);
with population data and projections from the UN Population
Division Population Database (http://esa.un.org/unpp/index.asp).
EU per capita reductions are based on the 15 EU member states that
have combined and internally reallocated their commitments under
the Kyoto Protocol. Individual country commitments are from various
sources. [141]
a Target outlined in Barack Obama s
2010 budget proposal.
b Waxman Markey bill (the American
Clean Energy Security Act of 2009) currently under consideration,
economy wide emissions reduction target.
The following figure provides a graphical
illustration of the different targets with respect to 1990 levels
of the countries/communities listed in Table 5.
Figure
1: Absolute and per capita emissions reduction targets for
different countries and the EU with respect to 1990 levels

Notes: Produced by the Parliamentary Library from sources noted
in Table 5. The error bars indicate the range of targets for each
country or community, with the main bars indicating the middle of
that range. The range for the US covers President Obama s budget
proposal and the proposed targets in the Waxman Markey bill
currently under consideration.
In considering the comparisons in Table 5 and
Figure 1, three relevant points should be noted:
- unlike the other countries listed, Australia was allocated an
increase in emissions under the Kyoto Protocol. This means although
Australia s 2020 emissions reduction targets are significantly
lower than targets of European countries when referred to the 1990
baseline, the difference is less pronounced when expressed as a
reduction relative to current emission levels (both Australia and
the EU are on track to meet their Kyoto commitments).
- Australia s absolute targets are lower than those of European
countries, but more ambitious than the current US and Canadian
targets. Australia s economic structure more closely resembles
those of the US and Canada than those of EU countries. Australia,
the US and Canada are all large, resource rich countries that are
relatively sparsely populated. European countries, on the other
hand, are much more densely populated and their economies are
generally more service oriented. These differences are largely
responsible for the difference in energy efficiency and greenhouse
gas intensity relative to growth and population of the two groups
of countries.
- The per capita emissions reduction targets are not as disparate
as the absolute targets. The populations of Australia, the US and
Canada are projected to increase by between 34 and 39 per cent
between 1990 and 2020, while those of the European Community will
on average increase by only six per cent.[142] Hence, a given absolute emissions
reduction will require much steeper reductions per person in the
countries with expanding populations.
Briefly the term carbon leakage refers to
either:
- the relocation of emissions intensive industries away from
regulatory environments that control those emissions, and/or
- the direction of investment funds to facilities in regulatory
environments that do not include controls on GHG emissions or have
less stringent controls.
The emissions continue to be made, or
increase, in the alternative location, rather then being reduced or
controlled in the original site. These relocations occur due to the
activity losing a competitive advantage in international trade.
Concerns about carbon leakage are behind the EITE assistance
package.
Should a company or sector find itself
vulnerable to carbon leakage, and the associated falling profits,
then it may decide to relocate its activities to a jurisdiction
that is not subject to an ETS. In no particular order some of the
considerations when relocating may be:
- whether a facility is the highest cost facility in a globally
integrated industry. For example, the global aluminium industry is
dominated by a few major multinational companies with aluminium
smelters in many locations. Such companies would relocate
production from the highest cost smelters first
- the availability of an alternative location with the necessary
physical attributes, particularly for achieving the necessary scale
of production if establishing a new facility
- whether the alternative location can physically expand
production if the activity in question is already present? For
example, this may require the establishment of additional power
stations
- the availability of less expensive energy in the alternative
location
- the availability of a trained workforce in the alternative
location
- if there are strong nearby markets with low import barriers.
This is particularly important for products where transport costs
to markets are a major cost. Transport costs are not so important
for low volume high value commodities such as aluminium
- whether there is a stable government willing to host the
activity in question without extracting a disproportionate rent in
the form of fees and charges
- whether there are less stringent tax and environmental regimes
in the alternative location, both now and over the economic life of
the new investment
as the income of developing countries
increases, they may well demand enhanced environmental controls.
Further, participation in any new international agreement to limit
GHG emissions may radically affect the decision to relocate
- whether it is less expensive to upgrade an existing facility
compared to the investment required to relocate, and
- whether by relocating, a company risks a major negative impact
on its reputation.[143]
The answers to these questions will be
different for each particular firm and activity. But the important
point is that a decision to relocate an activity due to the impact
of emissions trading is not a simple decision. Some firms may
choose to absorb the additional costs and continue operating within
a region subject to an ETS.
Representatives of heavy industry have argued
that the proposed CPRS will lead to carbon leakage. Some doubts
have been raised whether Australian emissions intensive industries
are really vulnerable to carbon leakage under the proposed CPRS.
Recent Treasury modelling suggests that there may be a minor amount
of carbon leakage at most expected permit prices. Where carbon
prices are double the highest expected price range, significant
leakage may occur. Treasury also concluded that recent concerns
raised about carbon leakage, based on private economic modelling,
may be exaggerated.[144]
However, these conclusions reflect Treasury s
modelling assumptions. One important assumption is that other
countries also adopt GHG emissions control measures within a few
years of the start of the Australian ETS in 2011. In this scenario,
the scope for carbon leakage is lower. Treasury did not model the
outcome in respect of carbon leakage should other countries fail to
adopt GHG emissions control measures.
Recent equity analysis reports on the impact
of the proposed ETS on Australia s largest companies (including
Woodside) suggest that its impact should not have a significant
effect on their financial positions.[145] This conclusion was repeated in the
wake of the release of the Australian Government s white paper
outlining the final design of the proposed Australian ETS.[146] The changes
announced on 4 May 2009, which increase the assistance given to
EITE facilities, are likely to reinforce these conclusions.
The above analysis does not appear to
apply to the aluminium smelting industry. The Garnaut Climate
Change Review noted that Australia s aluminium smelting industry
may well eventually decline due to the introduction of an ETS in
Australia. The review suggested that this industry would relocate
to take advantages of cheaper energy in Africa, Asia and the island
of New Guinea.[147]
As noted above there will be a considerable
amount of assistance in the form of free AEUs to facilities that
fall into this category. The government has published an initial
list of industries that potentially qualify for assistance as EITE,
they are:
- aluminium refining and smelting
- ammonia production
- carbon black production
- newsprint, printing paper, cardboard and carton board
manufacturing
- lime, caustic soda and chlorine gas and soda ash
production
- cement clinker and coke production
- copper, magnesia, zinc, synthetic rutile, titanium oxide,
silicon and pig iron refining and smelting/production
- ethanol and methanol production
- float glass production
- nitric acid and ammonium nitrate production
- ethylene/polyethylene production, and
- petroleum refining. [148]
Of course, whether an individual facility in the
above industries is covered by the proposed scheme, let alone
qualifies for assistance under the EITE program, depends on whether
its emissions exceed the specified limits. Assistance given under
the EITE program would decline over time.
Generally environmental groups would prefer
that this assistance be reduced as quickly as possible. Most
business groups appear to advocate that all emissions intensive
trade exposed industries be sheltered from the full effects of the
proposed CPRS until major competitors have comparable emissions
controls.
From 2013 at least 50 per cent of the
emissions permits issued under European Union s Emissions Trading
Scheme will be auctioned. This proportion rises to 70 per cent by
2020, and to 100 per cent by 2027.
The exceptions to this policy are industrial
sectors (not facilities) that are considered to be at risk of
relocating outside the European Union. All of their allowances,
issued within the declining overall number of permits issued, will
be allocated free of charge. Thus, the amount of permits issued in
this fashion will decline over time. A list of industry sectors
considered to be at risk of relocation will be published at the end
of 2009.
This policy will be reviewed in the light of
any international agreements reached on emissions control and in
particular any international agreements reached in respect of
particular sectors. For example, governments may negotiate a
separate agreement concerning emissions control for the aluminium
sector.[149]
The American Clean Energy and Security Act
of 2009, currently under consideration in the US Congress
(known as the Waxman Markey bill after the members who introduced
it), also provides transitional assistance to EITE industries. The
Waxman Markey bill provides up to 100 per cent free permit
allocations to eligible EITE industries to cover their direct and
indirect costs imposed by the scheme, subject to maximum limits on
the percentage of free allocations out of the total permit pool.
This continues for as long as 70 per cent of global output in the
relevant sector is produced in countries with similar emissions
constraints. The maximum limits on the free allocations may reduce
the level of assistance below the 100 per cent compensation level.
These limits start at 15 per cent of the permit pool in the first
year of industry liability (2014), and reduce by 1.75 per cent per
year from 2015 to 2020, then by 2.5 per cent per year from 2021 to
2025. The eligibility criteria for EITE assistance under the Waxman
Markey bill appear to be more stringent than under the CPRS, and
petroleum refining is explicitly excluded from eligibility (unlike
under the CPRS).[150]
In 2006, synthetic GHG emissions accounted for
one per cent of Australia s total greenhouse gas emissions in
CO2e, or 20 per cent of Australia s industrial
emissions.[151]
However, there are currently no entities that import or manufacture
more than the liability threshold of 25,000 tonnes CO2e
of synthetic greenhouse gases.[152]
The synthetic greenhouse gases are
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur
hexafluoride (SF6). These gases have a much greater
global warming potential per tonne than CO2 (ranging
from 1000 to 23 000 times more potent over a 100 year timeframe).
Emissions of many of these gases have been rapidly increasing, as
they are used as substitutes for ozone depleting substances
controlled under the Montreal Protocol. They are used or produced
in numerous industrial processes, mainly as:
- Refrigerants for refrigeration and air conditioning
equipment
- Foam blowing agents for some thermal insulation
applications
- Propellants in some aerosols
- Extinguishing agents in some systems
- Insulation gas in electrical switchgear
The CPRS does not cover additional synthetic
greenhouse gases that are emerging as potentially significant
contributors to global warming. There are several such gases whose
use is rapidly expanding in such areas as the electronics industry,
and as replacements for other more potent greenhouse gases that are
controlled under either the Kyoto or Montreal Protocols. Several of
these gases are being considered for inclusion in a post Kyoto
international emissions control agreement, with the support of the
Australian Government.[153]
The CPRS covers reforestation activities on a
voluntary basis. It does not cover emissions resulting from
deforestation.
The Government has already established tax
deductions for establishment of forests for the purposes of carbon
sequestration. The implications of encouraging such activities
through tax incentives apply equally to the incentive provided
under the CPRS, and are discussed more fully in the Parliamentary
Library research paper Tax deductible carbon sink forests? [154]
Reforestation under the CPRS is as defined for
the first commitment period of the Kyoto Protocol. However, the
international accounting rules for land use, land use change and
forestry are currently under negotiation, and the Scheme allows for
a revision of the crediting rules for reforestation to remain
consistent with international accounting. Under the current scheme,
forest harvests are counted as emissions. Therefore, a forest that
is planted for non harvest purposes will be allocated more permits
for emissions removals than a harvested forest, and the Government
expects that non harvest forests will be more likely to participate
in the Scheme:
Scheme participation might not be beneficial
for single rotation plantations, such as those owned through
managed investment schemes, because of the risk that the cost of
obligations under the Scheme for harvest emissions would exceed the
value of permits received for sequestration. The Government
therefore expects that most forests established as a result of the
Scheme will be not for harvest forests grown on marginal or less
productive farm land, rather than plantations. This reduces the
risk that plantation forests would be maintained for carbon, while
native forests are subject to additional harvesting.[155]
Natural disturbances such as bushfires and
pest attacks can result in large transitory emissions from forests.
The CPRS makes allowance for natural disturbances in its coverage
of reforestation activities. Under the policy positions laid out in
the White Paper, those engaged in forestry activities that are
intended to act as carbon sinks will be required to provide an
emissions estimation plan based on intended management practices
(including scheduled harvests). To account for the risks of
emissions resulting from natural disturbances such as fire, wind
throw, insect attack, storms or severe drought, the number of
emissions permits allocated to a forest will be reduced by an
amount commensurate with the risk. Under this approach, the forest
manager is not required to surrender permits in the event of a
natural disturbance.[156]
There have been various concerns expressed
about allowing credits for reforestation activities, including
that
- it may cause agricultural production to be replaced with forest
plantations, thereby potentially impacting rural livelihoods and
food security
- it may encourage harvesting to be shifted from plantation
forests to native forests, to allow plantation forests to grow for
longer and thus gain more credits
- it may impact water resources, as forests have high water use
which may reduce water availability elsewhere in the catchment,
and
- it doesn t make sense to include reforestation in the Scheme if
deforestation is not also covered, and the land use sector should
be treated in an integrated manner to encourage responsible and
accountable land management practices
The Australian Bureau of Agricultural and
Resource Economics (ABARE) modelled the economic potential for
establishment of forests on cleared land under the two CPRS 2020
emissions reduction targets of five and 15 per cent, as well as
under a reference scenario (without the CPRS).[157] The study found that under the
higher carbon pricing of the 15 per cent target scenario, by 2050
timber plantations are projected to increase by 4.5 million
hectares (with further growth limited by distance to processing
infrastructure), and environmental or not for harvest plantings
increasing by 21.8 million hectares. Forestry plantations currently
cover 1.9 million hectares, while the total forest area in
Australia is about 149 million hectares.
The additional plantation areas projected
under the CPRS would replace 6.2 per cent of existing farm area.
Most would occur on marginal agricultural land, with existing
agricultural land uses remaining economic on higher productivity
land. This is consistent with others suggestion that most
Australian farms do not make optimal use of their land, and that 10
to 15 per cent of farmland could be revegetated to absorb carbon
without substantially affecting farm productivity.[158]
The ABARE modelling also suggests that, in
contrast to the Government s expectation (see quote above),
plantation forestry, including short rotation plantations, would
expand under the Scheme, though not to the extent of environmental
plantings. This suggests that existing native forests may not be
unduly threatened by transference of logging from plantations to
native forests.
Deforestation currently accounts for about 11
per cent of Australia s emissions.[159] Given that it is a substantial
emissions source and Australia is liable for emissions from
deforestation under the Kyoto Protocol, there is an argument for
its inclusion in the CPRS. However, due to the intermittent and
often small scale nature of deforestation and the large number of
landholders involved, the Government has decided that it would be
impractical to include it in the Scheme, and to instead explore
alternative incentive based mechanisms to reduce emissions from
deforestation.[160]
Agriculture represented about 16 per cent of
Australia s net greenhouse gas emissions in 2006, making it the
second largest emissions sector.[161] The main sources of agricultural
emissions are methane emissions from enteric fermentation (during
the digestive process) in livestock and nitrous oxide emissions
from soils (associated with application of fertilisers). Additional
emissions occur from manure management (during decomposition of
manure), rice cultivation (from decay of plant material in flooded
fields), and burning of crop residues and pastures. Agricultural
emissions are projected to increase by nearly 15 per cent by
2020.[162]
Agricultural emissions are currently not
covered under the CPRS, but the Government has stated its
preference to include the sector by 2015. The Government intends to
develop a work program in consultation with the agricultural
industry and make a decision on coverage of the sector in
2013.[163]
The main argument for the inclusion of
agriculture is the fact that it is responsible for such a large
proportion of Australia s GHG emissions, and its omission means
that there is no incentive for changes in agricultural management
practices to be adopted to minimise emissions. There have been many
mitigation measures identified within the agricultural sector that
could substantially reduce emissions at low or zero cost,[164] but it is less
likely that such measures would be implemented in the absence of
the direct incentive provided by a price on emissions or equivalent
incentives. It has been suggested that land management to optimise
soil carbon sequestration in agricultural soils together with
reforestation on farmland could contribute 25 per cent of the
mitigation activity required to meet Australia s contribution to a
450 ppm CO2e stabilisation target.[165]
Arguments against inclusion of agriculture in
the scheme are based on excessive compliance costs because the bulk
of emissions in the sector are produced by small farm businesses
that each emit much less than the 25,000 tonnes CO2e
threshold that the CPRS sets for other sectors. There are around
130,000 such farm businesses in total.[166] A very low threshold would need to
be set for the agricultural sector to cover a reasonable proportion
of the emissions, as illustrated in table 6 below. The Department
of Climate Change estimates that covering 80 per cent of direct
emissions from the beef, sheep, dairy and wheat industries would
involve liability imposed upon about 45,000 farm
businesses.[167]
The Government is also considering coverage of the sector through
upstream (indirect) liability or a combination of upstream and
downstream liability.[168]
|
Emissions
threshold (kt CO2e)
|
|
25
kt
|
3
kt
|
2
kt
|
1
kt
|
Number of farms
|
47
|
2700
|
4500
|
18 400
|
Percentage of
agricultural emissions covered
|
2%
|
21%
|
26%
|
52%
|
Source: M Ford, A Gurney, C Tulloh, T McInnes,
R Mi and H Ahammad, Agriculture and the Carbon Pollution
Reduction Scheme (CPRS): Economic issues and implications,
Australian Bureau of Agricultural and Resource Economics, March
2009, Table 2, p. 10.
The farming industry is against inclusion of
agriculture in emissions trading at any time, due to the complexity
of monitoring and verification in the sector, as well as the
negative impact the industry will suffer from increased fuel and
energy costs, even without being directly included in the scheme.
Chief Executive Officer of the National Farmers Federation Ben
Fargher, has suggested that the industry is prepared to contribute
to emissions mitigation, but that the best means for it to do so
may be through alternative, complementary measures rather than
inclusion in the CPRS.[169]
The CPRS allows for offset credits to be
created in sectors not covered by the scheme. However, from the
commencement of the scheme until 2013, these can only be generated
through the Clean Development Mechanism in developing countries
(see section on treatment of international credits below), and can
not be generated in Australia (other than through reforestation
activities as described above). Therefore, the current market in
voluntary domestic offsets will not be incorporated into the Scheme
at its commencement.[170]
The Government has stated that it was
committed to facilitating participation of indigenous Australians
in carbon markets and would consider including offsets from
reductions in emissions from savanna burning under indigenous
management practices. [171] There are currently projects underway to reduce GHG
emissions from bushfires through prescribed burning and management
activities (for example in the Northern Territory s tropical
savannas).[172]
Such projects are designed to provide marketable offsets to
emissions in other sectors, so that they can be formally
incorporated into a carbon trading scheme.
The Explanatory Memorandum to the CPRS Bill
states that the scope for domestic offsets will be considered in
2013.[173]
The issue of whether voluntary abatement
action would be able to contribute to emissions reductions over and
above the targets in the CPRS has been prominently debated in
recent months. One of the issues that fuelled the debate was the
Government s second stimulus package introduced in February, which
included $3.8 billion for the Energy Efficient Homes
Package.[174] The
Government claimed that this would reduce greenhouse gas emissions
by nearly 50 million tonnes CO2e by 2020. Though it is
true that potential energy savings in households resulting from the
package could correspond to emissions reductions in the household
energy sector below business as usual levels, critics have claimed
that this would not result in a net emissions reduction for
Australia as a whole, because it would merely free up additional
emissions permits to be used elsewhere by industry
emitters.[175]
The same argument applies to other voluntary or assisted energy
efficiency or abatement measures, including installation of solar
panels on the roofs of homes, as well as state and community level
initiatives.
The Government has argued that such measures
will reduce the overall cost of the CPRS to the economy, and this
reduction in cost is beneficial to everyone, including
householders, because it would limit the increase in energy prices
under the CPRS. The CPRS bill also allows for the abatement from
voluntary measures to be taken into account when setting the annual
caps.[176]
However, as the caps are set at least five years in advance, there
is an inbuilt lag time in any response to such considerations. The
Senate inquiry into the exposure draft CPRS legislation recommended
that the legislation be amended so that in relation to setting the
emissions caps the Minister shall have regard to voluntary action,
rather than may have regard .[177] This recommendation was not adopted. However,
the Government recently announced that it would hold public
consultation workshops across the country to determine how
voluntary action can be taken into account when setting CPRS
caps.[178]
Under the May 4 changes, the Scheme now
provides for the establishment of an Australian Carbon Trust, which
includes an Energy Efficiency Savings Pledge Fund and an Energy
Efficiency Trust. These would operate as follows:
- the Pledge Fund will be established to enable individuals to
buy carbon pollution permits to reflect the energy savings from
their individual energy efficiency measures. These permits would
then be retired under the CPRS, hence reducing the overall number
of permits available to industry, and
- the Energy Efficiency Trust is to fund energy efficiency
investments in commercial buildings that would be paid back by the
business through its energy cost savings. There are currently no
provisions in the bill for the resulting emissions abatement to
cancel permits under the CPRS.
The changes also included a commitment to
GreenPower purchases after 2009 when setting the annual emissions
caps.[179]
The 4 May changes do not address the essential
criticism of the treatment of voluntary action in the CPRS. The
emissions abatement from individual households that install solar
panels on their roofs, for example, does not impact the annual caps
under the changes any more than was provided for in the draft
legislation through the Minister having regard to such savings. In
fact, the Pledge Fund may be somewhat counter to the efficacy of
such mechanisms, as it suggests that individuals should spend their
money buying permits to be cancelled, instead of recouping the
costs of their investment in energy efficiency measures and
potentially investing in further measures. The resulting reduction
in permits available to industry could also potentially lead to
higher energy costs for the individual by increasing the cost of
permits overall. The impact of the Pledge Fund on the carbon market
may in reality be minimal due to low participation and low overall
emissions abatement in the voluntary sector in comparison to the
annual reductions required under the Scheme. The provision of a
price cap for four years also limits any such influences (the
Pledge Fund will not buy and cancel permits during the first year
of fixed prices).
It is also worth noting that the exposure
draft legislation and the bill as introduced already allow for
purchase and cancellation of permits by individuals. However, the
Pledge Fund is likely to make this process more accessible by
providing a simple purchasing procedure, and will overcome any
limitation on minimum purchase quantities required at auction.
It is widely accepted that energy efficiency
measures should be an essential component of any climate change
mitigation program, and such measures have the potential to produce
substantial emissions reductions at little or no cost.[180] Energy efficiency
measures are expected to account for some of the emissions
reductions that are to be achieved by liable industries under the
CPRS, but there are substantial energy efficiency opportunities
outside these industries that may require additional incentives to
fully realise. At the Council of Australian Governments (COAG)
meeting on 30 April 2009, COAG signed a Memorandum of Understanding
(MOU) on energy efficiency and released a draft National Strategy
for Energy Efficiency. The MOU notes:
A carbon price alone will not realise all the
potential cost-effective opportunities to improve energy efficiency
across the Australian economy. Market barriers, such as split
incentives, information failures, capital constraints, early mover
disadvantage and transaction costs need to be addressed to remove
impediments to investment in energy efficiency by households and
business.[181]
It is generally considered important that
individuals, communities and businesses be able to contribute to
and be involved in a national strategy to mitigate climate change,
in order to facilitate the behavioural transformation that will be
required to allow our societies and economies to adjust to a carbon
constrained world. It is not clear that the CPRS encourages such
involvement, but as noted in COAG s MOU above, there may be more
appropriate or effective means of encouraging voluntary and energy
efficiency measures external to the CPRS, for example through
enhanced regulation of energy efficiency standards, rebates, feed
in tariffs and tax incentives. The Senate inquiry into the exposure
draft legislation also recommended that complementary policies be
developed alongside the CPRS to encourage voluntary action.[182]
The CPRS allows for unlimited import of
certain international Kyoto credits. This provision has been
criticised for its potential to reduce the initiative to abate
domestically if cheaper mitigation measures are available
abroad.[183]
Since climate change is a global problem, however, the inclusion of
international units can be seen as a sensible provision within the
framework of working towards a global solution. Just as the
emission of one tonne of CO2 has the same effect whether
it occurs in Australia or Indonesia, the removal of one tonne of
CO2 has the same effect regardless of where it occurs.
The Government has indicated a desire to explore linking
opportunities with other emissions trading schemes in the future,
by prescribing non Kyoto international emissions units, for use
under the CPRS.
The provision is also consistent with the aim
of achieving a given mitigation target at lowest possible cost,
though it requires the mitigation target to be defined more broadly
as mitigation for which Australia is responsible, rather than
mitigation of Australian emissions per se. A cap on the
import of international credits may negatively affect abatement by
reducing its cost efficiency. This is because mitigation will
happen first where it is cheapest. Similarly, carbon credits will
be bought at the cheapest available price. If the international
credits represent the lowest price, then they will set the domestic
price of carbon. Conversely, if the domestic price lies below the
international price of carbon, there will be no imports. It is
likely however, at least in the first year of the Scheme while a
low fixed price of $10 exists, that no international carbon credits
will enter the market.
The CPRS Bill is lengthy and complex.
Consequently, only the main operative provisions will be covered by
the following section.
Clause 3 sets out the objects of the Bill.
These are divided into three main themes:
- to give effect to Australia s obligations under the Climate
Change Convention and the Kyoto Protocol: subclause
3(2)
- to support the development of a global response to climate
change: subclause 3(3) and
- to set targets for the reduction of emissions in Australia:
subclause 3(4).
Australia is aiming to reduce its GHG
emissions on either of the following bases:
- if Australia is a party to a comprehensive
international agreement that is capable of stabilising atmospheric
concentrations of greenhouse gases at around 450 parts per million
of carbon dioxide equivalence
reducing net greenhouse gas emissions to 25%
below 2000 levels by 2020: paragraph 3(4)(a)
and
- if Australia is not a party to such a
comprehensive international agreement the target is:
reducing net greenhouse gas emissions to 60%
below 2000 levels by 2050: subparagraph
3(4)(b)(i), and
reducing net greenhouse gas emissions to
between five and 15 per cent below 2000 levels by 2020:
subparagraph 3(4)(b)(ii).
Proposed paragraph 3(4)(c)
specifies that these targets are to be reached in flexible and cost
effective way.
Clause 9 provides that
Commonwealth, state and territory governments (the Crown ) are
bound by the Bill, However, with some exceptions, there are not
liable to a pecuniary penalty or to be prosected for an offence.
This protection does not extended to government authorities (as
opposed to government departments, or the Executive, for example),
nor does it apply to governments for penalties in relation to, for
example eligible emission unit shortfalls (see clause 133).
Clause 14 introduces two
important terms the national scheme cap
and the national scheme cap number . The
national scheme cap is a quantity of GHG
that has a carbon dioxide equivalence (CO2e) of a
specified number of tonnes. Subclause
14(1) empowers the relevant Minister to declare, by
regulation, the national scheme cap , for
a financial year, except for the financial year commencing 1 July
2011.[184] This
is then referred to as the national scheme cap
number for that financial year.
The national scheme cap
number may be less than Australia s total GHG
emissions for that year. The Minister must take all reasonable
steps to set the national scheme cap
numbers for the financial years commencing 1 July
2012 2014 before 1 July 2010: subclause 14(2).
Subclause 14(3) requires the
Minister to take all reasonable steps to declare the
national scheme cap number in respect of
the financial year beginning on 1 July 2015 at least five years
before the end of the eligible financial
year . The definition of eligible
financial year in clause 5 is either
the financial year beginning on 1 July 2011, or a later
financial year. In the context of subclause 14(3)
it is not clear at what point the Minister must have declared the
national scheme cap number for the
financial year beginning on 1 July 2015. However, paragraph
14(3)(b) does requirement the national scheme cap
number to be declared five years in advance.
Clause 15 introduces the term
national scheme gateway which will only
apply from the eligible financial year beginning on 1 July 2015.
Essentially this means that the national scheme
cap must be no more than the uppermost level of the
national scheme gateway and no less than the lowest level of the
national scheme gateway in an eligible financial year as declared
by regulation: subclause 15(2).
In making the regulation about the
national scheme gateway the Minister
must have regard to Australia s international
obligations under the UNFCCC and the Kyoto Protocol to that
convention: paragraph 15(4)(a).
In addition, the Minister, in making these
regulations, may have regard to:
- if a report has been presented by the expert advisory committee
(see Clause 354), that report to the extent that
it deals with either the national scheme cap number or the above
mentioned gateways: paragraph 15(4)(b)
- the stabilisation of GHG in the atmosphere at 450 part per
million: subparagraph 15(4)(c)(i)
- the development of comprehensive global action to restrain GHG
emissions: subparagraph 15(4)(c)(ii)
- the economic implications of setting either the annual national
scheme cap number and the emissions gateways, including the effect
on the carbon price [185]: subparagraph 15(4)(c)(iii)
- voluntary action which is expected to reduce Australia s GHG
emissions: subparagraph 15(4)(c)(iv)
- estimates of GHG emissions not directly covered by the proposed
CPRS, such as emissions from the rural sector: subparagraph
15(4)(c)(v), and
- any other relevant matter, such as past levels of voluntary
action (including action at the household level) that have not as
yet been taken into account for the setting of the national scheme
cap number: subparagraph 15(4)(c)(vi.)
On or as soon as practicable after any clause 15
regulations have been tabled, the Minister must also table a
written statement setting out the Minister s reasons for making his
or her relevant recommendation to the Governor-General regarding
the regulations: subclause 15(6).[186]
One of the essential components of any ETS is
the precise rules defining which entities are covered by the scheme
and which are not. Part 3 deals with these matters
in respect of the proposed CPRS.
As noted above, liability under the proposed
CPRS is on a facility by facility basis.
Clauses 17 and
18 formally make all facilities[187] (other than landfill
facilities) emitting GHG liable entities
in an eligible financial year under the proposed CPRS whether they
are controlled by either a collective entity (such as a
corporation) or an individual.
Subclauses 17(4) and
18(4) exempt individual facilities from the scheme
if they emit less than 25 000 tonnes CO2e in a financial
year. Special rules apply to landfill sites (see below). There are
also separate provisions covering fuels (see below).
Clause 5 defines the term
landfill facility as a facility for the
disposal of solid waste as landfill, and includes a facility that
is closed for the acceptance of waste. Clauses 20
and 21 impose a liability under the proposed CPRS
on landfill facilities, managed by either collective entities or
individuals, that emit over 25 000 tonnes of CO2e per
year. If the landfill facility is within a certain distance of
another site that accepts a similar type of waste the emissions
threshold is 10 000 tonnes of CO2e per year:
subclauses 20(13 and 21(13).
Subclauses 20(6),
20(8), 21(6) and
21(8) exempt the following landfill facilities
from proposed CPRS obligations:
- land fill facilities that have not accepted waste since 30 June
2008, and
- emissions coming from waste accepted before 1 July 2011.
Clauses 24 and
25 apply the provisions of the National
Greenhouse and Energy Reporting Act 2007 (NGER Act) to the
measurement and reporting of GHG emissions from a facility.
For CPRS Bill purposes a synthetic greenhouse
gas is defined in clause 5 as having the same
meaning as in the NGER Act. This definition is to be inserted as
new section 7B of the NGER Act by item
146 of the proposed Carbon Pollution Reduction Scheme
(Consequential Amendments) Bill 2009. Briefly, this proposed
definition includes each of the following gases as a synthetic
greenhouse gas:
- sulphur hexafluoride
- a hydrofluorocarbon of a kind specified in the table in new
subsection 7B(2) of the NGER Act, and
- a perfluorocarbon of a kind specified in the table in new
subsection 7B(3) of the NGER Act.
Clauses 26 and
27 impose a liability under the CPRS Bill on
importers, manufactures and suppliers of synthetic greenhouse gases
where the amount of imported or manufactured gases is 25 000 tonnes
or more of CO2e per year. This amount is calculated by
subtracting the netted out number from
the amount of gas an importer or manufacturer is responsible for in
an eligible financial year.
For an importer a netted out
number under subclause 26(7) is:
- if the person s imports exceed their exports of these gases the
amount of gas exported, otherwise
- the amount imported.
For a manufacturer the netted out
number under subclause 27(7) is:
- if the amount manufactured exceeds the amount exported the
amount exported, otherwise
- the amount manufactured.
The above definitions of netted
out numbers do not address situations where:
- a person s imports of these synthetic greenhouse gases are less
than their exports, and
- the amount manufactured is less than the amount exported.
These situations may arise where a person is
both a manufacturer and simultaneously an importer and exporter of
these gases. The proposed legislation is silent on the calculation
of a netted out number in these
circumstances.
Clause 5 defines the term
eligible upstream fuel to include liquid
petroleum fuel and gas, black and brown coal, coke, natural gas,
ethane, coal seam methane and other fuels in both their processed
and unprocessed forms. Generally, the fuels covered by this scheme
are those on which either import duty, or excise, is payable.
It is important to note that the general 25
000 CO2e emissions threshold does not apply in these
cases. All the embedded emissions in these fuels are covered by the
proposed CPRS. That is, all the potential greenhouse gas emissions
that could be released from the combustion of these fuels are
covered by the CPRS rules.
Clauses 31 and
32 impose a CPRS liability on importers and
producers of liquid petroleum fuel. Clause 5
defines liquid petroleum fuels as being,
amongst other things, excisable goods within the meaning of the
Excise Act 1901 or the Excise Tariff Act
1921.
Clauses 33
39 impose a liability for an eligible financial
year under the proposed CPRS on those who import, refine or supply
eligible upstream fuels . That is, the
importer, refiner or supplier of such fuels is liable under the
scheme in respect of the embedded CO2e in those fuels.
This amount is known as the provisional emissions
number .
However, the provisional emissions number is
reduced by the netted out number of these fuels. This term refers
to the embedded CO2e of the fuels supplied to another
party. This party then assumes the liability of the embedded
CO2e in the fuel in question.
Thus the liability of an importer, producer or
supplier of an eligible upstream fuel would equal:
- the provisional emissions number minus the netted out number,
plus
- any emissions occurring due to that party s own use of the fuel
and, if appropriate, any emissions occurring in the production of
that fuel.
The result of the above calculation cannot be
less than zero.
One of the key administrative tools in
administering the proposed CPRS is the obligation
transfer number (OTN). This number is issued by the
CPRS administering Authority to those who are liable, or who may be
liable, under the proposed CPRS: subclause 44(2).
A person or liable entity may apply for an OTN: clause
42, or it is issued by the Authority to those who it
believes will need it: clause 45.
The OTN is designed to give effect to the CPRS
obligations between the upstream suppliers of fuel and the direct
emitters so as to prevent double counting of emissions and gaps in
coverage. This is achieved by making it possible for CPRS
obligations to be transferred from upstream suppliers of fuel and
GHGs to intermediate suppliers and end users. If an entity quotes a
valid OTN to an upstream supplier, the supplier is relieved of
liability for the relevant supply, and the potential liability is
transferred to the entity that quoted the OTN. For example, when a
fuel is supplied to another party, such as by a refiner to a
distributor, the refiner quotes the distributor s OTN. That number,
together with the details of the fuel supplied, is then given to
the administering Authority. The supplying entity s net emissions
are calculated using this information plus that reported under the
NGER Act.
Clauses 52 55 set out the
circumstances in which the quotation of an OTN by a recipient of an
eligible upstream fuel to a fuel supplier
is mandatory.
- In particular, clauses 53 to
55 require the quoting of an OTN by a recipient to
a supplier where:
- the recipient is a retailer of natural gas
- the recipient either re supplies natural gas or is a liquid
petroleum gas marketer
clause 5 defines a liquid
petroleum gas marketer to be a person or entity who is supplied
liquid petroleum gas from various types of bulk storage for the
purposes of re supply,
- where the liquid petroleum gas is used a feedstock to another
process (such as fertiliser manufacture)
regardless of the amount supplied or the
emissions of the facilities using these eligible upstream
fuels.
Clauses 56 64 allow a
recipient of the supply of various types of eligible upstream fuels
or synthetic greenhouse gases to quote the OTN to the supplier.
However, quoting of this number in these circumstances is not
mandatory. Generally these circumstances do not include the
combustion of the fuel in question. They also include the export of
these fuels or gases.
The circumstances referred to in
clause 58 appear to overlap with the requirements
to quote the OTN in clause 55. In the latter
clause, it is required to quote the OTN where liquid petroleum gas,
propylene, or ethane is used as a feed stock for another product.
In the former clause the quoting of the OTN is voluntary where the
eligible upstream fuel is used in manufacturing other products.
Liquid petroleum gas, propylene, and ethane fuel are all eligible
upstream fuels.
The difference between the use of, for
example, liquid petroleum gas as a feed stock and its potential use
in the manufacturing of other products is not clear from reading
the legislation. Thus there may be an unintended conflict between
the requirement to quote the recipient s OTN in clause
55 and the voluntary quotation of this number in
clause 58.
The CPRS Bill provides exceptions in relation
to liability transfer certificates, which permit transfer of
liability under the CPRS Bill and transfer of reporting obligations
under the NGER Act. Because the CPRS Bill is designed to apply to
both individuals and constitutional corporations, the NGER Act will
be amended to require all relevant entities to meet reporting
obligations.[188]
The CPRS Bill provides two circumstances in which the liability for
a particular facility can be transferred from one entity to another
by means of a liability transfer
certificate :
- within a corporate group: this will allow the transfer of CPRS
liability from the controlling corporation to another member of the
controlling corporation's corporate group. This is of practical
benefit, allowing a change of law or carbon cost to be relayed via
a clause in a contract which the subsidiary is party to, on the
basis that such a clause could not be used if the liability were
placed solely on the controlling corporation:[189] clause
69
- from a person who has operational
control of a facility to an entity with financial
control:[190]
clause 73.
Such circumstances may include where a mine or
pipeline is operated under contract. Normally, the entity which has
operational control would be liable under the proposed CPRS.
However, should that entity lack the financial resources to meet
its CPRS obligations, it would be appropriate for the CPRS
liability to be transferred to another entity.
Under Clauses 70 and
74 such transfers may only occur with the written
consent of the controlling corporation of the corporate group.
According to Clauses 72 and
76 such certificates must only be issued where the
Authority is satisfied that:
- the relevant transfer tests in clauses 69 and 73 are met,
and
- the applicants are likely to continue to have the capacity, the
access to information and the financial resources to meet the
requirements of:
the proposed CPRS scheme and relevant
regulations, and
the NGER Act.
At the time when the CPRS commences there will
be existing contracts between parties which will be affected by the
scheme. Those parties who are directly liable under the CPRS will,
presumably, wish to pass the costs they incur onto their customers.
Other parties in the supply chain who are not directly liable under
the CPRS but who will face cost increases themselves may also wish
to pass on all or part of those costs to their customers.
From a customer's viewpoint, the best
protection is a fixed price contract.
However there are two types of clauses which
are contained in contracts which may allow for the increased prices
to be passed on. They are referred to as a change in law clause
which, essentially, allows for a variation in a contract price when
there has been a change in the law; and a pass through clause
which, depending on how broadly it is drafted, may allow cost
increases to pass through a supply chain.
The liability transfer certificate is designed
to trigger the operation of these clauses in existing
contracts.[191]
However, a change in law provision generally only allows the
passing through of costs that the subsidiary incurs as a result of
a change in law. Because the liability transfer envisaged by the
CPRS Bill will only take place if the subsidiary applies for a
liability transfer certificate from the Authority, it may be that
the subsidiary will not be incurring the liability as a result of a
change in law but as a result of its voluntary decision to apply
for the certificate.
Further, it is unclear why minority
shareholders in a partly owned subsidiary would wish to take on the
liability that would normally be borne by the majority shareholder
s group and so, where they are able to veto such a move, they will
most likely do so, thus stopping the subsidiary from applying for a
liability transfer certificate. This is despite the fact that the
subsidiary may be best placed to manage the facility s emissions
and pass on the associated carbon cost to its customers.
This anomaly arises, because the CPRS imposes
primary liability not on the entity that has
operational control over the emitting
facility but on that entity s controlling corporation. This seems
to derive from the approach taken by the national greenhouse and
energy reporting scheme under the NGER Act, where reporting
obligations are best left to the controlling corporation level.
However, the same logic does not necessarily apply to the
imposition of liabilities under the CPRS. Perhaps it would better
serve the object and purpose of the CPRS to require that a
subsidiary with operational control over a facility, be made
responsible for making an application for a liability transfer
certificate unless the controlling corporation otherwise agrees.
This would result in the costs associated with the CPRS liability
being imposed by law on the subsidiary, thereby enabling it to take
advantage of any change in law provision in its sale contracts.
The Carbon Pollution Reduction Scheme
(Consequential Amendments) Bill 2009 proposes amendments to the
NGER Act that clarify which corporation has operational
control in the situation of partnerships, joint
ventures and trusts. In such circumstances the Authority has the
power to issue a declaration. Where the Authority does not issue a
declaration, it falls on the entities to nominate which of them has
operational control . If the entities do
not so nominate, they will be subject to a penalty. This means that
a nominated joint venturer carries all of the credit risk of the
other joint venturers. This proposed arrangement may also impose a
disproportionate share of liability of smaller joint venture
participants. Perhaps a commercially more realistic and fairer
arrangement would be to impose CPRS liability on each of the joint
venturers in proportion to their joint venture interests.
As it stands, the Bill fails to contemplate
that more than one entity may have financial control over a
facility. In that case there will be uncertainty as to which entity
is entitled to assume the CPRS liability for the facility.
Part 4 is about the issue of
Australian Emission Units (AEUs) and the acceptance of emissions
credits generated by the Kyoto Protocol flexible mechanisms for
CPRS purposes.[192] It is these AEUs and Kyoto protocol units that are
traded and accepted for the acquitting of a CPRS liability.
Clause 86 allows the
Authority to issue AEUs for a particular financial year at any time
before 15 December following the end of that year thus for the
financial year covering the period 1 July 2011 to 30 June 2001, the
AEUs must be issued by 15 December 2012. Liable entities must
surrender their AEUs or other emissions credits by 15 December
following the end of the relevant financial year under the proposed
scheme: clause 132. Under Clause
85 the relevant financial year for which an AEU was issued
is the vintage year .
Clause 88 specifies the
circumstances under which an AEU can be issued. These circumstances
are:
- as the result of an auction conducted by the Authority
- issued under clause 89 at a fixed price
- as assistance to EITE or coal fired power stations
- to eligible reforestation projects, or
- as a result of the destruction of synthetic greenhouse
gases.
As noted above the Authority will issue AEUs
at a fixed price under clause 89. The table in
subclause 89(1) sets out the charge per unit for
five separate periods. The effect of this subclause is to cap the
price of an AEU for CPRS purposes until 15 December 2016. The
maximum number of AEUs that can be issued to a person is worked out
using the formula in subclause 89(2).
Subclause 89(7) defines the
indexation factor for a particular
eligible financial year by way of a prescribed formula. The factor
is calculated by taking the index number of the March quarter
immediately preceding the start of an eligible financial year and
dividing it by the index number for the March quarter 12 months
before that, and then adding 1.050 to the result.
Under subclause 89(5) the
units issued under clause 89 procedures are
automatically surrendered once they have been issued. They cannot
be traded or saved for later use. Subclause
129(5A) also has this effect.
Subclause 89(10) specifies
that the index number for these purposes
is the All Groups Consumer Price Index number calculated by the
Australian Bureau of Statistics.
Subclause 89(11) requires the
publication of the fixed price charge for a particular financial
year before the start of that year, from 1 July 2012.
Under clause 93 the total
number of AEUs issued in any one vintage year from auctions and as
a result of the assistance measures must equal the
national scheme cap number of that
year.[193]
However, this provision does not include the number of units issued
as a result of reforestation activities and the destruction of
synthetic greenhouse gases. Thus the total number of AEUs issued in
any one year may be above the national scheme cap number.
Clause 94 specifies that an
AEU is personal property that is able to be transmissible to
another party. Clauses 95 98 set out the
conditions by which an AEU may be transferred.
Under clause 103 the relevant
Authority may, by legislative instrument, decide the policies,
procedures and rules for the auction of AEUs.
In clause 5 a
Kyoto unit is defined to mean:
- an assigned amount unit (AAU)
- a certified emission reduction unit (CER)
- an emission reduction unit, (ERU), or
- a prescribed unit issued in accordance with Kyoto Rules
- a removal unit (RU).[194]
These emission reduction units arise from the
activities conducted under the Kyoto protocol to the UNFCCC.
Australia s ratification of the Kyoto Protocol obliges it to set up
mechanisms to handle these units within Australia.
Clauses 104 116
achieve this aim by allowing these units to be entered in the
register of emissions units kept by the Authority and allowing the
transfer of these units to and from various parties.
As noted above, only some of the above Kyoto
units will be generally accepted for CPRS purposes.
In clause 5 a
non-Kyoto international emissions unit is
defined as:
- a prescribed unit issued in accordance with an international
agreement (other than the Kyoto Protocol), or
- a prescribed unit issued outside Australia under a law of a
foreign country .
The first point refers to emissions units that
are issued under either a successor to the Kyoto Protocol or some
under international agreement such as Australia s proposed Forest
Carbon Market Mechanism .[195] The last point refers to emissions units that
may be issued under another country s emissions trading scheme, for
example New Zealand s emissions trading scheme.
Clauses 117
121 enable the Authority to enter a
non-Kyoto international emissions unit in
its emissions units register.
Clause 122 allows regulations
to make provision for, or in relation to, prohibiting the surrender
of non-Kyoto international emissions units for CPRS purposes. As
already mentioned, initially, these non-Kyoto international
emission units will not be accepted for the proposed scheme s
purposes.
Briefly, a liable entity s emission number is
the number of AEUs and/or eligible international emissions units
(collectively known as eligible emissions units) that they are
obliged to surrender by 15 December each year in respect of the
immediately previous financial year.
Clause 125 defines a person s
emissions number as being made up of:
- the total of a person s provisional emissions numbers
a person s provisional emissions numbers are
defined generally in Part 3 as the amount of
tonnes of CO2e emitted from facility(s) under the person
s control in a particular financial year, and
- the person s make good number (if any)
a person s make good
number is defined in clause 142 to
be shortfall between the number of eligible emissions units
surrendered and the number that is required to be surrendered for a
particular eligible financial year if the person is also a liable
entity for the following financial year.
A person s emissions number for any year can
be reduced by the number of AEUs surrendered to the Authority in
the previous financial year above that required to meet their CPRS
liability: subclause 125(2).
Clause 129 specifies that
eligible emissions units may be surrendered electronically to the
Authority, and which units can be surrendered, as follows:
- AEUs surrendered for a particular eligible financial year are
to be surrendered in respect of that particular year, or earlier
eligible financial years
this provision allows a liable entity to save,
or bank, unused AEUs issued in respect of a particular eligible
financial year for use in later years. There is no requirement for
the surrender of a particular vintage year s AEUs in respect of the
corresponding eligible financial year
- a Kyoto unit must not be surrendered if it is in breach of
regulations: subclause 129(6)
- a Kyoto Protocol Removal Unit or an Emissions Reduction Unit
that has been converted from a Removal Unit during the Kyoto
Protocol s first commitment period (2008 2012) must not be
surrendered to the Authority in relation to a financial year
beginning on 1 July 2013 or later years; and
- a non-Kyoto international emissions unit must not be
surrendered if that action would breach regulations made under
clause 122.
Subclause 130(4) allows a
liable entity to borrow up to five per cent of a current financial
year s emission number (effectively the liable entity s emissions)
from the next financial year, for surrender in relation to the
current eligible financial year.
Clause 132 requires a liable
entity to surrender enough eligible emissions units by 15 December
following the end of an eligible financial year so that they do not
have a shortfall of units in respect of that year.
Clause 133 imposes a
financial penalty according the number of required emissions units
not surrendered in respect of a financial year. For the financial
year beginning on 1 July 2011 the penalty per unit will be $11
(compared to the fixed price of $10 per unit). In later years the
penalty per unit not surrendered to the Authority will be fixed by
regulation, or failing that, will be 110% of the benchmark average
auction price for the previous financial year.
Subclause 133(2) limits the
penalty per emission unit to 110 per cent of the average auction
price for such units during the relevant financial year.
The amount payable under clause 133 becomes
payable on 31 January in the next eligible financial year:
clause 134. Under clause 135 if
an amount of penalty calculated under clause 133 remains unpaid
past the due date, then the person becomes liable to pay an
additional amount calculated at the rate of 20 per cent per annum
or some lower rate which may be specified in the regulations.
The National Registry of Emissions Units (the
Registry) currently exists and is operated by the Commonwealth.
Clause 145 gives the Registry a statutory, rather
than just administrative, basis and provides that it will be
operated by the Authority. It will have the duel function of
being:
- the registry for AEUs, and
- the registry for Kyoto units.
Clause 146 allows a registry
account to be opened in the name of a person. This means that a
registry account can be opened in an individual s, as well as a
corporate entity s, name.
Clause 150 identifies a
number of different types of Kyoto units and specifies that these
units cannot be transferred or surrendered for CPRS purposes.
Clause 167 enables the
relevant Minister to implement the proposed Emissions-intensive
trade-exposed (EITE) assistance program by regulation. This clause
requires the Minister to take all reasonable steps for these
regulations to be made before 1 July 2010.
Significantly, a great deal of the detail
relating to the CPRS is to be provided for by way of regulations
which are due to be made available for public comment in June 2009.
For example, detailed scheme cap numbers for each relevant
financial year. It is expected that these will be consistent with
the 2020 and 2050 national emissions targets. The Minister is
required to take all reasonable steps to ensure that regulations
are made to set the scheme caps within the range specified for the
relevant year before the start of that particular year under
clauses 14-15.
The EITE assistance program will also be
created by way of regulations. The regulations will set out the
Government s decisions relating to the eligibility of activities
and the allocative baselines for eligible activities. Regulations
will also set out the rate at which assistance may be reduced.
Regulations will also be the source for details relating to the
administration of the Registry as it relates to Kyoto units.
It is common for Acts of Parliament to
delegate to the executive government, the power to make regulations
which supplement and help give operational effect to the primary
Act. While such regulations are not required to be passed by both
Houses of Parliament, either House may disallow them. A member of
Parliament has 15 sitting days from the date of tabling in which to
give a notice to move a disallowance motion in relation to them. If
the motion is passed, or alternatively has not been withdrawn or
otherwise disposed of within a further 15 sitting days after the
notice was given, the regulations cease to have effect from the
date the motion is passed or the expiry of the second 15 sitting
day period. Actions done under the authority of the regulation or
other disallowed instrument before the actual or deemed date of
disallowance remain legally valid.[196]
Clause 176 authorises the
issue of AEUs free of charge to coal-fired power generators who
hold an eligibility certificate for such assistance for the
financial years commencing on 1 July 2011 to the year commencing 1
July 2015.
This clause also contains a formula to
determine the annual number of AEUs issued to eligible generators
over this period (see clause 186 for additional
formulas for these purposes).
For the first two years of the scheme s
operation (2011 2012 to 2012 2013) the annual number of free AEUs
given to coal fired power generators will be capped at 26 140 000:
subclause 176(2). Otherwise the formulae contained
in this clause will be used to calculate the amount of free permits
issued to each eligible generator. It is likely that the actual
number of emissions permits given to generators in these two years
will be less than this upper limit.
Clause 177 imposes a 180 day
limit[197] after
the commencement of this particular section on persons applying for
an eligibility certificate for coal-fired generation assistance.
Only those owning, controlling or operating coal-fired power
generation facilities may apply for these certificates:
subclause 177(2).
Clause 181 specifies the
criteria for the issue of such certificates. An operating power
generation complex will qualify for a certificate if any one of its
generating units met any one of the following criteria:
- it was in operation at any time during June 2007:
subparagraph 181(2)(a)(i)
- if it was not in operation in June 2007 there was a plan to
re-commence operation before the end of 2007: subparagraph
181(2)(a)(ii)
- if it was not in operation during June 2007 due to restricted
access to cooling water supplies there was a plan to return it to
operation when this problem was overcome: subparagraph
181(2)(a)(iii).
Additional criteria for being granted these
certificates are:
- at least 95 per cent of power generated by the complex during
the financial year commencing 1 July 2006 came from coal
combustion: paragraph 181(2)(b), and
- at any time during the financial year commencing 1 July 2006
the generation complex was connected to an electricity grid with a
capacity of at least 100 megawatts: paragraph
181(2)(c).
Subclause 181(3) provides
that power generation projects that:
- were in existence but not yet completed, and
- were fully committed[198] as at 3 June 2007, where 95 per cent of the power was
to be generated by coal combustion and would be connected to a grid
with a capacity of 100 megawatts also qualify for these assistance
certificates.
Clause 183 allows the
relevant Minister, before 1 August 2014, to declare that a
specified generation asset will not receive further free AEUs, if a
windfall gain declaration is in force.
One of the most telling criticisms of the
operation of the European Union Emissions Trading Scheme during its
first two trading periods (2005-2007 and 2008-2012) is that power
generators received windfall profits from the large scale
allocation of free emissions permits to them. The Australian
government has addressed this issued in the design of the CPRS.
Clause 185 requires a person
who has received free AEUs in respect of a power generation asset
to make a submission to the Authority in respect of windfall
profits before 30 September 2013.
Clause 186 empowers the
Authority to make a windfall gain declaration in respect of a power
generation asset, if that asset passes the windfall gain test.
Clause 187 specifies that a
power generation asset passes the windfall gain
test if:
- it is likely that the total value of assistance to the
particular asset will be greater than the likely projected long
term net revenue loss, or
- it is likely that there will be a projected long term net
revenue gain from the particular generation asset.
For the purposes of the above clause the total
value of assistance is the market value of free AEUs with vintage
years beginning between 1 July 2011 and 1 July 2013 plus the
projected market value of free AEUs issued with vintage years
beginning on 1 July 2014 and 1 July 2015: subclause
187(3).
Clause 188 specifies that no
free AEUs will be given in respect of a generation complex (and not
a particular power generation asset within that complex) that does
not pass the power system reliability test.
Clause 189 specifies the
power system reliability test that
generation complexes have to pass in order to receive free AEUs
is:
- as at 1 September in the eligible financial year the person who
either owns, controls or operates the generation complex is
registered under either a Commonwealth or State law regulating
energy markets
- as at 1 September of an eligible financial year the nameplate
rating in megawatts of that complex was not less than the same
rating as at 3 June 2007, or
- if there is a reduction in the nameplate rating of the
generation complex the appropriate energy market operator certifies
that this reduction is unlikely to breach power system reliability
standards, or
- if before 1 September in any eligible financial year the person
s registration under the appropriate Commonwealth or State law
ceased to be in force the appropriate energy market operator
certifies that it is unlikely that the relevant power system
reliability standard will be breached in the following two
years.
Clause 5 defines the term
nameplate rating to generally mean the
maximum continuous electrical generation capacity in megawatts of
the generation complex, or the proposed generation complex.
In respect of privately held land the
provisions of this part apply to eligible reforestation projects
established on property held under the Torrens land title
system.[199]
Clause 191 requires the
Authority to issue free AEUs to the holder(s) of a certificate of
reforestation as soon as practicable after the day that certificate
was issued.
Subclause 191(2A) requires
that certificates issued during the 2011 2012 financial year are to
have a vintage year beginning on 1 July 2012. This means that such
units cannot be surrendered during the first year of the scheme s
operation (2011 2012). They may, however, be traded.
Under sections 40-1000 to 40-1025 of the
Income Tax Assessment Act 1997 a limited tax deduction is
available to land holders who establish a forest for the purposes
of carbon sequestration. The issue of free AEUs may not be the only
benefit available to persons undertaking a reforestation project
influenced by this part.
Clause 192 requires the
applicant for a certificate of reforestation to provide a
reforestation report in respect of an eligible reforestation
project for a particular reforestation reporting period. Such
certificates are not transferable: clause 197.
Clause 195 specifies the
conditions under which a certificate of reforestation may be
issued. Amongst these conditions are:
- the recipient is a recognised reforestation entity:
paragraph 195(2)(a)
- the recipient holds a carbon sequestration right in relation to
the relevant reforestation project[200]: paragraph
195(2)(b)
- the recipient is not required to hand back AEUs arising from
another reforestation project and is not required to pay amounts in
relation to this requirement: paragraph 195(2)(c),
and
- the number of tonnes of GHGs removed by the project is greater
than the amounts of AEUs issued in respect of that project:
paragraph 195(2)(e) and subclause 195(3).
Clause 201 generally requires
that, amongst other matters, a reforestation entity be a fit and
proper person before the Authority will grant recognition as a
reforestation entity. This requires that they not have been
convicted of an offence involving dishonesty the conduct of
business under Commonwealth, State or Territory law, and not have
contravened certain other laws such as the restrictive trade
practices provisions of Trade Practices Act 1974.
Subclause 209(4) allows the
Authority to declare a project an eligible
reforestation project if:
- if the Torrens land title system applies the area is held under
a single title: paragraph 209(4)(b)
- the applicant is a recognised reforestation entity:
paragraph 209(4)(c)
- the applicant holds a carbon sequestration right in relation to
the project: paragraph 209(4)(d)
- each of the following has consented, in writing to the making
of the application in relation to the project area(s): the holder
of an estate in fee simple; the holder of the forestry right; any
mortgagee registered in accordance with a law of a State or
Territory: paragraph 209(4)(e)
- if the project area(s) is not Crown land in a State or
Territory and the applicant is not a State or Territory, then the
principal Minister of the State or Territory, must certify in
writing that the application holds the carbon sequestration right
in relation to the project and that the State or Territory will not
deal with the projects area(s), and will not allow any other person
to deal with the said area(s), in a manner that is inconsistent
with the carbon sequestration right: paragraph
209(4)(f), and
- the project meets any relevant requirements made under the
regulations: paragraph 209(4)(g).
Other criteria for the recognition of an eligible
reforestation project will be specified in regulations. The
Authority or the applicant may vary, or revoke, the recognition of
an eligible reforestation project on the same grounds as mentioned
in clause 201.
An eligible reforestation project can also
occur on Crown Land that is not under the Torrens system of
title.
Each eligible reforestation project is to be
given a reforestation unit limit . This
number is one of the upper limits on the number of AEUs that can be
issued in relation to a particular eligible reforestation project
under clause 196. The other upper limit is the net
total number of tonnes of greenhouse gases removed minus one. That
is, the AEUs issued in respect of a particular project must be at
least one tonne less that the amount of GHG removed by that
project.
Clause 220 defines the
reforestation unit limit to be the
projected net greenhouse gases removal number for the project less
the sum of:
- the number that, under the regulations is the non-CPRS
greenhouse gases removal sales number for the project, and
- the number that, under the regulations, that is the 2008 carbon
stock baseline number for the project.
These latter two terms are not elsewhere
defined in the Bill. However the Explanatory Memorandum notes
that
The calculation of the unit limit will also
take into account the 2008 carbon stock baseline for the project
and any sale of abatement from the reforestation project to schemes
or projects outside of the Carbon Pollution Reduction
Scheme.[201]
Clause 225 requires a person
holding a carbon sequestration right in relation to an eligible
reforestation project immediately before the end of a reforestation
reporting period under clause 223 to provide a
reforestation report. The information required in this report and
the manner and form in which it must be provided will be set out in
regulations.
Clause 226 requires person s
holding a forestry right to maintain that forest stand to the
extent that it is reasonable to expect that, when the trees reach
maturity, the net number of tonnes of GHG removed will equal or
exceed the net total number of AEUs issued in relation to that
project.
Clause 240 defines a
carbon sequestration right to be estate
or interest in the eligible reforestation project that is the
exclusive legal right to obtain the benefits of the sequestration
of carbon dioxide by that project.
For private land this estate or interest has
to arise under the Torrens system of land title. The same
requirement does not arise in relation to Crown land that is not
Torrens system land.
The precise definition of a carbon
sequestration right is very important as only holders
of these rights may obtain free AEUs arising from eligible
reforestation projects.
Clause 241 defines a forestry
right to be the estate or interest in the reforestation project
that gives a person the exclusive legal right to establish, manage
and maintain a forest on the project area or areas.
Again, for private land this right must arise
under the Torrens system of land title: subclauses 241(1)
and (2). This requirement does not apply to Crown land
that is not Torrens system land: subclauses 241(3) and
(4).
In the context of the UNFCCC Clean Development
Mechanism (CDM) the destruction of one of the synthetic greenhouse
gases, hydrofluorocarbon (HFC), has been accomplished at a very low
cost.[202] While
Australia cannot host CDM projects under the current Kyoto Protocol
rules, this outcome indicates that these GHGs may be disposed of at
little marginal cost in Australia.
Clause 245 requires the
Authority to issue free AEUs to the holder of a certificate of
eligible synthetic greenhouse gas destruction as soon as
practicable after that certificate has been issued. These
certificates are not transferable: clause 252.
Under the provisions of clause
246 a person may, within four months of the end of an
eligible financial year, apply for the issue of a certificate of
eligible greenhouse gas destruction if:
- they are a recognised synthetic greenhouse gas destruction
customer, or
- the operator of an approved synthetic greenhouse gas
destruction facility.
Clause 251 provides a formula
for working out the number of AEUs to be issued. This formula makes
reference to the destruction efficiency
factor for the destruction of these gases to be
specified in regulations.
The criteria for the issue of a certificate of
eligible greenhouse gas destruction are set out in clause
250. Briefly, these criteria are:
- the destruction event occurred during the relevant eligible
financial year: subparagraph 250(2)(a)(i)
- the applicant was a recognised synthetic greenhouse gas
destruction customer: subparagraph
250(2)(a)(ii)
- the destruction occurred at an approved facility authorised
under the Ozone Protection and Synthetic Greenhouse Gas Management
Regulations 1995, and complied with those regulations:
subparagraph 250(2)(a)(v) (vi)
- the applicant incurred expenditure in respect of this
destruction: subparagraph 250(2)(a)(iv), and
Operators of approved synthetic greenhouse gas
destruction facilities may also apply for certificates:
subclause 250(3).
The Bill is silent on the amount of
expenditure required to qualify for the issue of AEUs under the
above clause.
Clause 256 requires that a
synthetic greenhouse gas destruction customer be a fit and proper
person having regard to, amongst other things, whether they have
been convicted of a dishonesty offence under Commonwealth, State,
or Territory laws.
All markets work on the basis of information.
The better the quality and scope of the information available, the
better the market works. An ETS is no exception to this rule. It is
arguable that the lack of timely and comprehensive information was
a major contributor to the problems experienced by the European ETS
during its first operating period (2005 2007).[203]
Clause 261 requires the
Authority to establish and maintain a Liable Entities Public
Information Database . This database is to be kept electronically
and will be available for inspection on the Authority s website.
This database will include the following information:
- liable entities under the scheme: clause
262
- liable entity s emission number: clause
263
an entity s emissions number is defined in
clause 125 and is the total quantity of emissions
in tonnes for which the entity is responsible
- a liable entities unit short fall (clause
130), is the difference between their emissions number for
a particular year and the number of AEUs surrendered in respect of
that particular year
- the number of eligible emissions units surrendered by a liable
entity for a particular year: clause 266
an eligible emission unit, in clause
5, includes both AEUs and eligible international emissions
units
- the number of eligible emissions units that have been voluntary
cancelled: clause 267.
In addition, the Authority is required to
publish additional information, including:
- the prices paid for units and the number of units sold at these
prices within 7 business days of conducting an AEU auction:
clause 270
- information about the auctions results of the previous 6
months: clause 271 within 7 business days after
the end of May 2012 through to 2014 and November 2012 and 2013
- information on AEUs issued at a fixed charge under
clause 89 as soon as practicable after the 15
December for the years 2012 to 2016: clause
272
- information on the distribution of free AEUs to EITE
industries, coal fired power stations and as a result of
reforestation projects and the destruction of synthetic greenhouse
gases as soon as practicable after their issue: clause
273
- reports about the issue of free AEUs in the previous quarter as
soon as practicable after the end of each quarter: clause
274
- information on the surrender of borrowed and banked AEUs as
soon as practicable after 15 December: clause
275
- the total number of Kyoto Protocol derived Certified Emissions
Reductions Units (CERs) and Emissions Reduction Units (ERUs) for
which there are entries in its Registry accounts, and this
information must be kept up to date: clause
276
- the total of all liable entities emissions numbers for the
eligible financial year and the total number of liable entities
unit shortfalls in relation to that year as soon as practicable
after 15 January: clause 277, and
- a concise description of the characteristics of AEUs and each
other type of eligible emissions unit 24 hours before the authority
conducts the first AEU auction: clause 278.
-
In addition, clauses 278A 278F require the
publication of information about the number of AEUs and Kyoto Units
voluntarily cancelled or relinquished as soon as practicable after
these events occur.
Clause 280 allows a court to
order the relinquishment of AEUs issued as a result of a conviction
for fraudulent conduct under specified sections of the Criminal
Code Act 1995. The conviction may for an offence occurring
before the coming into force of the CPRS legislation, as long as it
took place after 15 December 2008.
Under the proposed CPRS, individuals are able
to purchase AEUs and other emissions units. They may choose to
cancel these units for environmental purposes. It is interesting to
note that in the United States the Acid Rain Retirement Fund
purchases emissions units issued under that country s Acid Rain
Emissions Trading Scheme. This fund simply banks these emissions
trading units, thereby taking them out of circulation.[204]
Clauses 282 to
284 allow a person holding either AEUs, Kyoto
units or non-Kyoto international emissions units to request that
they be cancelled. Generally, providing that these requests would
not breach any Kyoto Protocol rules or regulatory provisions, they
must be acted upon.
This part contains administrative provisions
for the relinquishment of AEUs.
The possibility that an emissions trading
market may be manipulated is a significant general weakness of cap
and trade schemes. One way in which this manipulation may possibly
occur is through the hording of emissions permits. This Part
contains provisions that require scheme participants to notify the
Authority when they hold a significant number of units.
Clauses 293 and
294 require either a controlling corporation or a
non-group entity to notify the Authority within five business days
after they become aware of holding a significant number of AEUs.
The Authority must publish such notifications on its website.
Subclauses 293(7) and
294(7) define a significant
holding of AEUs as being 5 per cent or more of the
national scheme cap number for a particular vintage year.
The national scheme cap number for a
particular vintage year is defined in clause 14 as
being the quantity of CO2e in tonnes declared in
regulations for an eligible financial year. Under clause
93 the number of AEUs issued in any one vintage year must
not exceed this number. Thus a significant holding for a particular
vintage year is 5 per cent or more of the AEUs issued for a
particular vintage year.
Contravention of the significant
holding notification requirements may subject the
entity to a Part 21 civil penalty. Such penalties are discussed
later in the main provisions section of this Digest.
Should a scheme participant hold a significant
amount of AEUs as defined above it is not clear what, if any,
action (apart from notifying the market) the Authority will take in
response.
Clause 296 gives the
Authority power to gather information and documents that are
relevant to the operation of the enabling legislation for the
proposed scheme. The Authority can gather this information from
anyone it wishes, not just scheme participants. It must have
reasonable grounds for the exercise of this power. A person is
required to comply with any information request made by the
Authority.
Clause 300 specifies that a
person cannot refuse to provide this information or document on the
grounds of self incrimination. However, in case of an individual,
any information or document is not, with limited exceptions,
admissible as evidence in a civil proceeding against them in
respect for the recovery of a penalty. Similarly, except for
prosecutions for providing false or misleading information, any
information or document is not admissible as evidence in a criminal
proceeding against the relevant individual.
It is proposed that the current record-keeping
obligations under the NGER Act will be expanded by amendments set
out in the draft Carbon Pollution Reduction Scheme (Consequential
Amendments) Bill 2009.
Clause 302 provides for
detailed record keeping obligations to be made by way of
regulations. Basically, the regulations mandate the similar
requirements in keeping records as those under the Australian
taxation regime, including the requirement that relevant
information be kept for a period of five years.[205] This level of rigor is
required to enable the Authority and auditors to review the
accuracy and completeness of information.
Clauses 303 and
304 require fuel suppliers and recipients to keep
records for five years of relevant information on the use of
Obligation Transfer Numbers (OTN) (see clauses 52
to 64 for OTN provisions).
Clause 308 provides for an
inspector to enter premises with either the consent of the
occupier, or under a monitoring warrant, for compliance purposes or
to substantiate information provided for CPRS purposes.
Clause 309 gives the
inspector a wide variety of powers to carry out these tasks.
Clause 311 gives the inspectors powers to ask
questions and require the production of relevant documents. Under
clause 312 self-incrimination is not an excuse for
failing to answer a question or produce a document. A failure to
comply with clause 311 carries a maximum penalty of 6 months
imprisonment, or 30 penalty units ($3 300), or both.
If a premises is inspected under a monitoring
warrant the occupier has the right to observe this inspection under
clause 319, but, under the provisions of
clause 320, they must provide the inspector with
all reasonable facilities and assistance. These warrants must be
issued by a magistrate under clause 321.
Subclauses 324(2)-324(3)
define the degree of negligence and recklessness that an executive
officer must manifest in relation to a contravention of the CPRS by
a body corporate so as to attract personal liability for Part 21
civil penalty. The meanings of negligence and recklessness are
taken directly from Division 5 of the Criminal Code Act
1995. The NGER Act will also be amended so as to expose all
the corporation's executive officers to such liability on the same
terms as under the CPRS Bill. Provisions establishing personal
liability for corporate executive officers are not uncommon in
Commonwealth environment-related legislation.
Civil penalties
are imposed by courts, but are not criminal offences, and hence
only require the court to be satisfied on the balance of
probabilities (rather than the criminal standard of beyond
reasonable doubt ) that the relevant contravention occurred. From
this perspective, it may make an alleged contravention easier to
prosecute.
Clause 327 sets out how the
relevant court determines the amount of a pecuniary penalty under
the civil penalty provisions of the Bill. These relate to the
particular circumstances of the case. Subclause
327(4) sets an upper limit for corporations of 10,000
penalty units ($1.1 million), except in certain situations where
the court can estimate the corporation has benefited from the
contravention. In that case a penalty of three times the value of
the benefit can be imposed. Subclause 327(6)
provides that for an individual, the upper limit is 2,000 penalty
units. Clause 338 deals with penalties for
continuing contraventions and caps the daily penalties that apply
for most continuing contraventions of the CPRS Bill at five per
cent of the maximum penalty for the contravention. This is a change
from the proposal under the exposure draft legislation, where the
daily penalty could be the same as the maximum penalty for the
contravention.
Clause 346 lists which of the
decisions under the Act are reviewable
decisions . Where a decision is listed, and the
decision was made by delegate of the Authority, a person
affected by the relevant decision can ask the Authority to
reconsider the decision. If after that, the person is still not
satisfied, they may apply to the Administrative Appeals Tribunal
for a review: subclause 350(1). If the original
decision was made by Authority (rather than a delegate), the
application for review is to be made direct to the Administrative
Appeals Tribunal: subclause 350(2).
Clause 353 requires that
periodic reviews of the proposed CPRS are conducted by an expert
advisory committee covering various matters, including:
- the effectiveness and efficiency of the scheme
- whether national emissions targets should be changed
- regulations to be made for the purposes of clause
14 (national scheme cap) and national scheme gateway
(clause 15)
- the policies and procedures for AEU auctions
- the surrender of AEUs and other eligible emissions units
- governance, functions and posers of the Authority, and
- other such matters that are specified by the relevant
Minister.
The relevant expert advisory committee must
include public consultation as part of the review process:
subclause 353(5).
The first review must be completed by 30 June
2014 and each subsequent review must be completed within five years
after the Commonwealth s response to the previous review was tabled
in Parliament: subclause 353(4). Under
clause 354 the report of these reviews must be
tabled in Parliament, as must the Commonwealth s response to any
recommendations arising from these reviews. The Commonwealth must
table a response to the report within six months of receiving
it.
Clause 355 provides for
special reviews to be undertaken by the expert advisory committee
on matters specified by the relevant Minister. The report of these
special reviews must also be tabled in Parliament within 15 sitting
days of the Minister receiving these reports. As soon as
practicable after receiving these reports the relevant Minister
must respond to any recommendations and table that response within
6 months of receiving the report in question.
Under clause 357 the Minister
may establish expert advisory committees. Clause
360 requires that the members of such committees have
substantial knowledge of and significant standing in at least one
of a number of relevant fields, including:
- law and/or economics
- Australian industry, financial markets and/or trading
environmental instruments
- climate science, energy and/or greenhouse gas measurement and
reporting
- greenhouse gas abatement.
Under clause 361 an expert
advisory member s term must not exceed five years.
The proposed CPRS has been subject to critical
comment from a number of sources. The positions of significant
interest groups, as well as those of the non-government political
parties and independents, are summarised to the extent possible on
pages 25-37 of this Digest. Additional information is available
from the reports of the various Parliamentary Committees mentioned
on page 25.
Whatever scheme is eventually adopted will be
somewhat of a compromise between various factors and thus likely to
continue to attract some amount of criticism. However, perhaps what
is most important is that the relevant legislation, and
accompanying policy settings, contains an appropriate balance
between:
- flexibility (so as to accommodate matters such as developments
in international cooperation and agreements on emissions targets,
and future economic cycles, technology developments etc, and
progressive revisions in climate change projections and associated
environmental impacts that may demand tougher or more immediate
action), and
- certainty (in particular to allow economic and social
investment to be planned and carried out with reasonable
confidence).
Achieving this balance will be extremely
difficult. However, the extensive policy development process,
combined with the evidence garnered through the activities of the
Parliamentary Committees, as well as the wide range of Australian
and international climate change activities, does provide
Parliament with extensive information on which to base its
deliberations on this important and complex issue.
Members, Senators and Parliamentary staff can
obtain further information from the Parliamentary Library on (02)
6277 2495.
[63]. Australian Coal Association,
Submission to the Senate Economics Committee, Inquiry into the
exposure drafts of the legislation to implement the Carbon
Pollution Reduction Scheme, Canberra, 25 March 2009, viewed 16
April 2009,
http://www.aph.gov.au/Senate/committee/economics_ctte/cprs_09/submissions/sub106.pdf
.
[72]. Australian Aluminium Council,
Submission to the Senate Standing Committee on Economics,
Inquiry into the exposure drafts of the legislation to
implement the Carbon Pollution Reduction Scheme, Canberra, 26
March 2009, viewed 16 April 2009http://www.aph.gov.au/Senate/committee/economics_ctte/cprs_09/submissions/sub59.pdf.
Leslie Nielson
Julie Styles
Anita Talberg
Juli Tomaras
15 June 2009
Bills Digest Service
Parliamentary Library
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