n°19
••••
February 2010
C
LIMATE
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HANGE
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OLICY IN
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USTRALIA
:
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OWARDS A
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ARKET FOR
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REENHOUSE
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Oliver Sartor
1After over a year now of intense political and media debate, Australia is still wrestling with the challenge of putting a price on greenhouse gas emissions (GHGs). A legislative package called the Carbon Pollution Reduction Scheme (CPRS) has now been rejected by the Senate twice, in both August and December 2009. However, this is certainly not the end of the story.
Assuming it does eventually come to life, the CPRS would have some important consequences for efforts to mitigate global carbon emissions. Domestically, it would place a cap on ~73% of Australia’s domestic GHGs, creating a broad economy based price signal to drive energy efficiency, low carbon capital investments, and create a market place for new low carbon technologies. The CPRS Bill would allow national reduction targets to be set between 5 to 25% below 2000 levels by 2020, depending on the outcomes of the ongoing international negotiations.
Internationally, the nature of current diplomatic and economic relationships in the Asia-Pacific Region suggests that Australia has genuine potential to provide positive leadership on climate policy. Since the CPRS would be the largest national mandatory Emissions Trading Scheme (ETS) to commence in the Asia-Pacific Region, its design is being observed with interest by other countries who are developing their own mitigation strategies. At present this includes Japan, Taiwan and South Korea, which have all announced plans for emissions trading schemes to begin in the next five years. Moreover, the way in which Australia’s ETS would deal with international offset credits will be relevant to the shape of the international carbon markets in the years to come. This report therefore offers a comprehensive analysis of the history, carbon market design choices and future prospects for Australia’s CPRS legislation. It explores the way in which Australia has come a long way in recent years and has indeed begun to play a very positive role in international climate policy circles, and recognises the threat to this position that is posed by the uncertain future of the CPRS.
1 Oliver Sartor is a research fellow at CDC Climat Research, where he researches on international carbon markets, carbon pricing, and competitiveness.
A
CKNOWLEDGEMENTS
The author wishes to thank everyone he encountered in the course of preparing this report,
especially Anaïs Delbosc, Benoît Leguet, Raphaël Trotignon, Emilie Alberola and Maria
Mansanet-Bataller for their many helpful thoughts and suggestions.
CONTENTS
INTRODUCTION
4
I.
AUSTRALIA’S (HIGH) EMISSIONS PROFILE
5
II.
T
HER
ELUCTANTC
OUNTRY:
20
YEARS OFA
USTRALIANC
LIMATEP
OLICY7
A. Australia and the Kyoto Protocol 7
B. Climate Action at the State, Territory and Local Levels 9
C. The Public Imagine an Inconvenient Climate 9
D. The Australian Climate Policy Revival 10
III.
THE “CARBON POLLUTION REDUCTION SCHEME” (CPRS)
12
A. Reduction Targets 13
B. Coverage of Sectors 15
C. Allowance Units 15
D. Australian Allowance Prices 16
E. Unlimited CERs & Abatement Uncertainty 17
F. Allocation: A High Share of Auctioning 19
G. Treatment of Trade-Exposed Industries 19
H. Governance 21
I. Negotiated Amendments 23
J. The CPRS, Economic Transition and Long Term Investment: An Open Question 24
IV.
WHAT NEXT FOR THE CPRS?
25
A. Back to the Senate – The Political Saga Continues 25 B. The International Negotiations: What Australia Wants 26
C. Linking to the New Zealand ETS? 26
D. Barriers to Linking 28
C
ONCLUSIONS29
V.
ANNEXES
30
A. Annex 1 – The Age and CCS Potential of Australia’s Coal-fired Power Stations 30
B. Annex 2 – EITEI Free Allocation Rules 31
C. Annex 3 – Composition of Australian Economy vs. EITEIs 32
D. Annex 4 – The Compliance Year Schedule 33
E. Annex 5 – Complementary Policies to the CPRS 33
VI.
REFERENCES
36
I
NTRODUCTIONAustralia occupies an interesting space in terms of the global effort to reduce greenhouse gas (GHGs) emissions. On the one hand, its emissions profile poses complex policy and political challenges for mitigation. On the other hand, Australia has abundant resources of low-emitting fossil fuels2 and renewable energies. Geopolitically, it is also surprisingly well positioned to lead international climate policy in the Asia-Pacific region.
Australia has historically been a relatively important economic international player in this region. For one thing, it is currently the largest global exporter of coal to Asia. So its energy exports have helped fuel the region’s economic development in recent decades. Further, in the 1990s, Australia effectively led the establishment of the Asia-Pacific Forum for Economic Cooperation (APEC) – a peak international body which works to harmonise economic policies, such as trade and investment between member countries3. These economic links provide opportunities for climate policy, such as competitiveness issues arising from carbon pricing, to be addressed from the standpoint of international economic co-operation. Depending on the outcome of the current round of international negotiations, this may prove important. Due to historical and cultural ties to Europe and the United States, Australia can sometimes occupy a unique diplomatic bridge between the “West” and the developing East-Asian countries. In fact Australia has already sought to make use of this in seeking compromises between the USA, Europe and China in the present round of climate negotiations. It is now also seeking to build capacity to reduce emissions for deforestation in Indonesia and Papua New Guinea; and it is supporting the call for developed countries to create a “fast start fund” of $30 billion for climate change financing to developing countries, under the Copenhagen Accord.
It is in this international context that the Australian Parliament finds itself knee-deep in the chaotic politics of implementing a broad-based Emissions Trading Scheme (ETS) for carbon. The Australian ETS, which is part of a legislative package called the Carbon Pollution Reduction Scheme (CPRS), has now been rejected by the Senate twice, in both August and December 2009. It has also helped to end the political careers of no less than three leaders of the Opposition party since 2007. However, this is not the end of the story. The CPRS is due for a third Senate vote in February 2010 and, if it fails then, the Government will have a chance to call an early election – known as a “double dissolution” since it dissolves the entire Senate and the House of Representatives – and let Australian voters determine the issue once and for all. Although the most recent new suggests that the Government is likely to wait until later in the year to call the next scheduled House and half-Senate election.
Assuming it does eventually succeed, the CPRS would put a declining cap and a price on approximately 73% of Australian emissions in the sectors of stationary energy, transport and liquid fuels (including domestic aviation), mining, waste, industrial processes. It would also have an opt-in provision for forestry and agriculture to create domestic offsets. Depending on the extent to which an effective global agreement can be reached in the coming months and years, the cap would be set to achieve reductions somewhere between 5 and 25% below 2000 levels by 2020 (4-24% relative to 1990 levels).
While this report will highlight some ways in which Australia might improve its ETS in the future, it is important to understand it has been a major political challenge for Australia to embrace a national carbon pricing policy. Australia has historically been an economy heavily dependent on cheap but emissions-intensive energy sources and primary industries such as mining and agriculture is another important national industry. The country also has a fast-growing economy and a rapidly rising population. This has led to strong opposition to a price on carbon, amid arguments that Australia should wait to see what big emitters like the United States, China and India, will do before committing4.
2
Australia also has very large untapped potential for natural gas – with 1.4% of the world’s known reserves and around a quarter of known uranium reserves (http://www.wri.org/publication/navigating-the-numbers).
3
Member Economies are: Australia, Brunei, Canada, Indonesia, Japan, South Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, United States, Chinese Taipei, Hong Kong, China, Mexico, Papua New Guinea, Chile, Peru, Russia, Vietnam.
4
As the following report will make clear, much hard work has been done already, but more remains ahead if Australia is to have a first class carbon market which helps it to live up to its international responsibilities, and seize its opportunities.
I. AUSTRALIA’S (HIGH) EMISSIONS PROFILE
Australia is the highest per capita emitter of GHGs in the OECD and one of the highest worldwide. In 2006 its 21 million inhabitants together emitted 576 Mt of CO2e, after land-use, land-use change and forestry
(LULUCF) is taken into account; a figure 4.2% higher than 1990 levels. The average Australian thus emitted 26.7 tCO2e in that same year
5
. In comparison with other OECD countries, this placed it well ahead of the USA (20.6 tCO2e)
6
, for example. Thus, although Australia accounts for only around 1.4% of annual world emissions, it nevertheless manages to spread those emissions over an extremely small number of carbon consumers.
Figure 1 - Australia’s emissions per capita compared
Source: Garnaut Draft Report (2008).
Three factors stand out as explanations for Australia’s high emissions profile. First and foremost, Australia has large mineral and fossil energy deposits. It is home to 5.4% of the world’s known black coal reserves, 24.1% of its brown coal reserves and is currently the world’s largest coal exporter. Not surprisingly, therefore, it has created an international comparative advantage for itself in the areas of mining, primary energy and activities related to mining. In 2006-2007, during the height of the recent global commodities boom, mining alone accounted for approximately 8% of Australian GDP, of which coal exports represented around 3 to 4%7. If one adds to this the related activities of minerals processing, metals production, services to mining and the fossil energy sector, the figure is approximately one fifth of GDP8. Australia has also developed an economic model that is very heavily reliant on (relatively cheap) domestic coal-fired power. In 2006-2007, 84% of Australian electrical energy was generated from coal, while only 8% came from renewable sources of energy9. Australia’s primary energy supply is significantly more emissions intensive than other developed countries. In 2005 its per capita GHG emissions due to energy were approximately 67% higher than the OECD average10. Its total energy consumption per capita was also the fourth highest after the USA, Canada, and Saudi Arabia11.
5 If LULUCF is excluded Australia’s per capita emissions are 20.6 t CO
2e p.a., just behind the USA, with 21.4 tCO2e p.a. 6
http://unfccc.int/ghg_data/items
7
Pearce, G. (2009) Australian Quarterly Essay: “Quarry Vision”, p11.
8
Australian Bureau of Statistics, 2004/5 Input-Output Tables.
9
Australian Bureau of Agricultural and Resource Economics: Energy in Australia (2009), Ch. 3.
10 Garnaut Review Draft Report, (2008), CH.7.1.3. 11
In 2006, 51% of Australian emissions in came from stationary energy, compared to 32.4% in United States and the world average of 37%.12
Figure 2 - Australia’s emissions in 2006 by sector
Source: CPRS Green Paper (2008).
Agricultural activities are also an important source of Australia’s emissions. Per capita emissions from agricultural production in Australia are more than four times the OECD average. Australian agriculture is very cattle intensive, with over 100kg of beef and 29kg of sheep meat produced per person per year, compared to the OECD average of 22kg and 2kg. Thus, the majority of Australian agricultural emissions (66%) are methane emissions from “enteric fermentation” produced by the digestive processes of livestock.
The third stand-out feature of Australia’s emissions profile is the transport sector. In 2006, 14% of total emissions came from transport (79.1 MtCO2e). Of this, approximately 57% were the result of residential
transport, with the remainder representing commercial transportation. Australian per capita emissions from transport in 2006 were 30% higher than the OECD average13. This is all due to a more transportation intensive economy, sparse population across large geographical distances, and is a partial consequence of underinvestment in public transportation infrastructure in major cities.
Figure 3 - International comparisons of emissions from energy use (2005)
Source: Garnaut Draft Report (2008).
Australia also has unusually high population growth among the countries of the developed world. During the period 2000 to 2007, Australia’s population grew by 10%. Due to continuing high rates of immigration, Australia’s population is projected to rise from 20.7 million in 2006 to 26.1 million by 2020 and, if current trends continue, reach 30.5 million by 2030.
12 Ibid, p.41
13
If no changes were made in Australians’ consumption and production patterns, then this high rate of growth will create more energy demand from the highly CO2-intensive grid, more cars on its roads and
more domestic demand for beef and sheep products.
II. THE RELUCTANT COUNTRY: 20 YEARS OF AUSTRALIAN CLIMATE POLICY
Climate policy in Australia began in 1988, when the Federal Government established the National Climate Change Program. The program consisted of a committee of scientific advisers known as the National Greenhouse Advisory Committee, together with a Prime Ministerial Working Group to assess possible targets. However, in 1990, the same Government tempered its enthusiasm for action, stating it “will not proceed with measures which have net adverse economic impacts nationally or on Australia’s trade competitiveness in the absence of similar action by major greenhouse gas producing countries”14.
However, in 1992, the Coalition of Australian Government’s (COAG) – which comprises all eight State and Territory Governments in the Federation15 plus the Federal Government – proposed a series of measures to reduce emissions known as the National Greenhouse Response Strategy (NGRS).
The package was strongly resisted by the electricity sector16. During the same period (1983 – 1993), a significant restructuring of the Australian economy was underway. In keeping with the global trend around the world at that time, Australian State and Federal Governments had begun a wide-ranging deregulation of markets, including energy markets. This fact, as well as the privatisation of a number of electricity assets owned by State Governments, led to the view that for the reforms to be successful, Australia would need to “drive prices down and consumption up”17. All of this subsequently overwhelmed the NGRS plan. The scrapping of the NGRS plan, together with the election of a new conservative government under Prime Minister John Howard in 1996, effectively put Australian climate policy on hold for the first 11 of his next 11 ½ years in power.
A.
Australia and the Kyoto Protocol
The Kyoto Protocol: A Greenhouse Accounting Coup
Australia under the Howard Government remained deeply skeptical of policies to reduce emissions. Partly this was a result of the fact that Prime Minister Howard came with self-professed “deep connections” with the United States18. This would see Australia align itself increasingly with US policy on many international issues during Mr. Howard’s and US President George W. Bush’s periods in office. It was in this setting that Australia took part in the UNFCCC’s Kyoto Conference in 1997.
At Kyoto, Australia argued that it was a special case due its carbon intensive energy sector. It argued that this would make it difficult to reduce emissions cheaply while sustaining economic growth. It succeeded, and was offered a target for the first compliance period (2008-2012) which would allow emissions to rise to 108% of 1990 levels.
However, Australia achieved something of a greenhouse accounting coup at Kyoto, when it successfully insisted that a new article be inserted into the Protocol text. After midnight on the last day of negotiations, it won support for Article 3.7, after other countries decided it would be foolhardy to let the Protocol fail on a concession to Australia.
14
As cited in Hamilton, C. (2001) Running from the Storm: A History of Australia’s Climate Change Policy.
15
Australia is a federation comprising six separate States and two Territories. Under federal law, the States and Territories are responsible for the provision of major services within their territory, including energy services.
16
See M. Diesendorf (1996), “How can a “competitive” market for electricity be made compatible with the reduction of greenhouse gas emissions?”, Journal of Ecological Economics, Vol. 17:1, pp33-48.
17 Attributed to a former senior energy policy advisor of the Keating Government in Pearce, G. (2009), p.20. 18 Ibid.
Article 3.7 allowed Annex 1 countries which had positive net emissions from land use, land use change and forestry (LULUCF) in 1990 to be allowed to count those net emissions towards their emissions baseline in 1990.
This was extremely advantageous to Australia. In 1990, by chance, unusually large tracts of land had been cleared in Queensland – a practice which had since stopped. In fact, by 1997, Australia’s emissions had been falling from 1990 levels for some time due to this cessation of land-clearing (see Figure 4 below).
Thus, in 2009, despite a 50% increase in emissions from energy and 40% increase from transport between 1990 and 200819, in 2008 Australia still remained more or less on track meet its Kyoto target.
Figure 4 - Changes in Land-clearing before 1997 gives Australia a Kyoto Accounting Coup
Source: Based on Data from Australia’s Greenhouse Gas Inventory Accounts 2007.
Australia Refuses to Ratify the Kyoto Protocol
Soon after the agreement of the Kyoto Protocol in 1997, it started to seem possible that US President Bill Clinton would be unable to ratify it because of strong opposition by the then Republican-controlled US Congress. When asked initially if Australia would ratify the protocol without the USA also ratifying, Prime Minister Howard said, “we have some understanding of, and sympathy for, the American position, but our position is not identical to the Americans and … the commitments we made following the meeting in Kyoto, we intend to honour.”20
But when it became certain that the USA would not ratify, the Australian Government’s position changed: “…for us to sign the Protocol in its present form would, in the Government’s continuing judgement, place unfair fetters on many industries, not least [the minerals processing and energy export industries].”21 Australia thus became the only other developed country apart from the United States which had not ratified the Kyoto Protocol by 200322.
19
The Commonwealth of Australia (2009) Australian National Greenhouse Accounts, 2009.
20
Doorstop Transcript, 11 July 2001 (available at:
http://www.anthonyalbanese.com.au/file.php?file=/news/ZFYZABAMQVQJUKZLYOBILLHQ/index.html) 21
Transcript of an address by Prime Minister John Howard to the Minerals of Australia Annual Dinner, 2 June 2003. 22
In November 2007 Australia finally ratified the Protocol, when the new Prime Minister made it his first official act in office.
Australia’s Kyoto Objective
B.
Climate Action at the State, Territory and Local Levels
In the absence of federal action following Kyoto, the Australian States, Territories, and Local Governments decided to take action of their own. For example, in 2003 the State of New South Wales introduced the Greenhouse Gas Abatement Scheme (GGAS) – the first mandatory tradable permits scheme for GHGs anywhere in the world. GGAS sought to reduce emissions associated with electricity production and consumption within New South Wales by mandating that electricity generators and retailers meet state-wide benchmarks for reducing the CO2-intensity of their production or purchase
credits from firms which did not exceed their benchmarks.
The New South Wales Scheme was a limited success in terms of abatement23, but it inspired others to follow and learn from its experience. In 2005 the Australian Capital Territory also introduced a GGAS scheme based on the New South Wales model. In 2005 the State of Queensland introduced its 13% Gas Scheme24. The State of Victoria then commenced its own Victorian Renewable Energy Target (VRET) in January 2007, which set a target of 10% of Victorian electricity to be sourced from renewable technologies by 201625.
In addition, many municipal governments also tried to do their bit. From 1997 to 2009, 144 Australian local Governments had joined the ICLEI-Local Government’s for Sustainability program. The program uses its international expertise and experience to help local governments in developing, implementing and monitoring concrete climate change mitigation plans and appears to have led to significant measurable mitigation projects in Australian cities and communities26.
C.
The Public Imagine an Inconvenient Climate
Possibly the most significant factor in changing the direction of Australia’s climate policy was a necessary combination of three events.
The first event was that, from 2002 to 2007, the country suffered its worst droughts on record. In 2003, for instance, lack of rainfall led Australia to experience a record 28.5% year-on-year decline in total agricultural production27. These severe droughts fought their way to the forefront of the national consciousness, partly due to the high suicide rates it induced in among lifelong farmers in rural Australia, but also because, by 2006, serious water shortages were developing in Australia’s largest capital cities (see Figure 5 below). The drought was accompanied by two further events. The first was hurricane Katrina, and the images of the destruction it wrought on the city of New Orleans in August 2005.
The second event was the timely release of former US Vice-President Al Gore’s film, An Inconvenient Truth. The film was released in cinemas across Australia on 14 September 2006. By February 2007, 76% of Australians believed that climate change and its effect on Australia was a “major problem”28. It is hard to explain the profound effect this film had on Australian consciousness about climate change. It was as if, having suffered the pain of the droughts and worried about water shortages, the public was given the explanation for it that they craved. This shift helped convince the public that, after 11 years of Prime Minister John Howard, it was time for a change. In November 2007, Australians elected a new Labour Government to power which was promising an emissions trading scheme to start by 2010 and emissions cuts of 60% by 2050.
23
There is research which suggests that NSW GGAS has not made a significant contribution to either greenhouse gas abatement or energy efficiency in the NSW electricity sector. A key reason seems to have been a lack of transparency and regulatory stringency in the accreditation of NGACs resulting in the demand for NGACs being met almost entirely from pre-existing non-additional projects (see MacGill, 2007).
24
The scheme has now expanded its target to 15% by 2015. Most recently, in August 2009, the Queensland Government has expressed interest in purchasing CDM credits from nearby Papua New Guinea as offsets for its States high carbon diet. This would be in addition to any national target.
25 Victoria is Australia’s dirtiest State in terms of GHGs from energy production because of it’s percentage of brown coal
(lignite) -fired plants.
26http://www.iclei.org/ 27
http://www.abc.net.au/rural/news/stories/s938242.htm
28
Figure 5 - Stream flow of Rainfall into Perth’s Dams (1910 – 2006)
Source: Australian Climate Policy Green Paper (2008).
D.
The Australian Climate Policy Revival
The Asia-Pacific Partnership on Clean Development and Climate
Mr. Howard made one interesting contribution to international climate diplomacy before he left office. In 2007, in an effort to neutralise the fact that climate change had become a critical election issue, the Howard government used Australia’s position as chair of the 15th Asia Pacific Forum for Economic Co-operation (APEC) to lead the establishment of the Asia-Pacific Partnership on Clean Development and Climate (APP).
This international non-treaty agreement – among Australia, Canada, India, Japan, China, South Korea, and the United States – has recently been eclipsed by the United States’ re-engagement with the UNFCCC process under President Barrack Obama. But after the disillusionment with the UNFCCC process following the disappointing Copenhagen Summit in December 2009, the APP offers a further possibility for international cooperation among a significant subset of the world’s largest emitters outside of the UNFCCC – especially given the fact that this forum is already geared to dealing with economic and trade related issues in the region.
The Shergold Report, the Garnaut Review and the ETS White Paper
Following the election of a new government under Prime Minister Kevin Rudd in November 2007, Australia has moved quickly towards a much more aggressive national climate policy.
In 2006, the Howard Government had commissioned a report into the most appropriate way to reduce emissions. This report was known as the Shergold Report (2007)29, after its lead author Dr Peter Shergold. Dr Shergold’s Final Report concluded that “Australia has a vital interest in the form of any emerging global response…[however]…at the same time, it needs to be recognised that Australia’s natural resource and fossil fuel–energy endowments, and access to cheap energy, have helped underpin our economic growth and prosperity. Australia needs to proceed carefully in taking on emissions constraints ahead of concerted international action.”30 The report went on to recommend that Australia adopt an emissions trading scheme (ETS) for carbon emissions, however this process was soon superseded by a national election 4 months after its release, when the Rudd Government came to office.
29 Commonwealth of Australia (2007) : National Emissions Trading Task-Group 30 Ibid (Executive Summary p.2)
While in opposition, the Australian Labour Party had also commissioned its own expert review of Australia’s appropriate response to global warming. And as it came to power in November 2007, their review – lead by an eminent professor of economics and former Australian diplomat, Prof. Ross Garnaut – saw the staged release of a series of very detailed reports on all aspects of Australian climate policy. In June 2008, the Garnaut Review‘s Interim Report called on the Federal Government to establish a broad-based emissions trading scheme for GHGs, excluding only agriculture. It recommended that all but 20% of allowances be auctioned, with the remainder allocated to so-called trade-exposed industries, but with such assistance declining in proportion to the extent to which Australia’s competitors in international markets adopted comparable carbon prices. In September 2008, in its Final Report, the Review advocated Australia set a binding target to reduce emissions by 10 to 25% on 2000 levels by 2020 – depending on measures taken by other countries – and 85% by 2050.
The Government quickly followed each of the Garnaut reports, first with a Policy Green Paper (July 2008), which proposed the so-called Carbon Pollution Reduction Scheme – an ETS for Greenhouse Gases to begin in July 2010 – and then a CPRS Whitepaper (December 2008). The Whitepaper moved away from the Garnaut Final Report somewhat, committing Australia to 5 to 15% reductions on 2000 levels by 2020 and 60% reductions by 2050. It proposed offering 35 to 45 % of permits for free to trade-exposed industries as well as the nation’s “strongly affected” coal-fired generators.
The Whitepaper was for many observers disappointing. For a significant proportion of the population, the Government was guilty of having “sold out” to industry lobbyists31 by setting targets below the average of 25 to 40% reductions below 1990 levels recommended by the International Panel on Climate Change32. It was also heavily criticised for having allocated billions of dollars of free permits to in coal-fired power generators. For others, struggling to comprehend the mechanism of emissions trading itself, an ETS seemed to mean two things. Firstly, it seemed like it would mean more money for investment banks – seen as the culprits of the 2008 financial crisis – and it also seemed to imply that actions at the local or individual level to reduce emissions would only free up more permits for polluters to go on polluting. For many industry groups, on the other hand, the compensation was still insufficient. They argued that the scheme was certain to “wreck the economy” for the sake of a tiny reduction in global emissions. Others argued that Australia should do nothing until China, India and the USA had announced their policies and targets33. The Australian Government appeared to have miscalculated and struggled to explain the rationale behind its decisions to the general public. It failed to win the support of key environmental NGOs, the press, the major business lobbies. Even Prof. Ross Garnaut gave evidence to an Australian Senate committee hearing saying that he thought the scheme’s targets and allocation decisions were so compromised that he wasn’t sure whether it would better to have the scheme approved by the Senate or replaced by a better scheme at a later time34.
As the daily pressure mounted following the release of the Whitepaper, the Rudd Government decided it would attempt a significant public “back flip” on its policy. In May 2009, it announced key changes to the bill to be presented to the Parliament in June. Having secretly negotiated with key industry and environmental groups to obtain a guarantee of support for the changes, Australia’s reduction target range would now be increased to between 5 and 25% below 2000 levels, subject to very strict (and unlikely) conditions being met at the international level (see Section III).
31 See, for example, Guy Pearse (2009), “Quarry Vision: Coal, Climate Change and the End of the Resources Boom”,
Quarterly Essay, Vol 33.
32
See the Fourth Assessment Report (2007).
33
“The ETS is nothing more than a massive tax. It’s a massive tax that goes on the front of a Labor Party guilt trip and also the proposition that Mr. Rudd, God-like, can change the climate. Now, I believe that [Prime Minister] Rudd can change the climate the day after he makes it rain…And I don’t believe a massive new tax foisted on all Australian working families is going to do anything to the temperature of the globe.” As spoken by Australian National Party Senator Barnaby Joyce on ABC News Breakfast October 6th 2009.
34
On April 16 2009, Mr. Garnaut was asked by the Federal Senate Select Committee on Climate Change whether the scheme as proposed was "better than nothing", Prof. Garnaut said it was a "really hard question…I am still agonising over that, to be honest”.
In return for the possibility of tougher targets, trade exposed industries would receive an increase in their free allocations of allowances for the first 5 years of the Scheme35 for between 5 and 10 % more free allocation than before. In addition, the Scheme would commence a year later and the first year of the Scheme would give firms an option to purchase as many emissions allowances as they wished from the Government at a fixed price of AU$10 tCO2e (≈ 6€). The first year would therefore be a carbon tax.
The CPRS Bill Is Voted Down Twice in 2009
The Government has now attempted to pass the CPRS Bill twice. On both August 13th and December 2nd in 2009, the CPRS Bill failed to pass the Australian Senate. Prime Minister Kevin Rudd’s centre-left Labour Government, which controlled the House of Representatives, could pass the CPRS Bill in the House of Representatives. However, Labour did not have the simple majority required to pass bills in the Senate. Labour held only 32 of 76 seats, while 32 were held by the Government’s direct opposition, the Liberal Party, 5 by the Greens, 4 by the National Party, and 2 by Independents. To pass the CPRS, the Government needed to either form a coalition of the Greens plus the two Independents, or, turn to the alternative Government, the Coalition, for support.
So far, this support has been difficult to acquire. The Greens, for example, initially demanded a reduction target of a minimum of 40% below 1990 levels by 2020 to support the Bill; one of the Independents does not support emissions trading as a policy mechanism; and the other believes that climate change is not driven by GHG emissions36.
Meanwhile, the Coalition had been deeply internally divided over the issue. In fact, after a previous leader, Malcolm Turnbull, spent 2 months negotiating amendments to the CPRS Bill in order to make it more acceptable to his party in the Senate, he was finally replaced just one day before the December 2nd senate vote. His replacement, Tony Abbott, who won the leadership by a party vote of 42-41, opposes all forms of carbon pricing37, and by removing Mr. Turnbull from the leadership effectively ensured that the party would all vote against the CPRS, which it did. The closeness of the vote reflected the degree of division within the party on the issue of passing the CPRS.
But It Will Be Back…
The Government now has decided to resubmit the CPRS Bill to the Senate for a third vote this February. This is also expected to fail, since the Coalition parties still effectively control the Senate. The Green Party has recently proposed a compromise of a 2-year carbon tax of AU$20 (~12€) per tonne of CO2e starting
in 2011, while the future of the ETS is resolved. However, the Government has so far shown little interest in the offer and, in any case, with the Coalition unlikely to support it, its prospects in the Senate would be uncertain. The Coalition has meanwhile proposed the creation of an AU$2.5 billion annual fund to give grants to polluters to reduce emissions, as an alternative to carbon pricing. The Government has now set to attacking the plan. Paragraph A in chapter IV provides more details about the possible future outcomes.
III. THE “CARBON POLLUTION REDUCTION SCHEME” (CPRS)
Assuming the CPRS does pass the Senate in 2010, then, on 1st July 2011, Australia’s first national market for greenhouse gases would begin. In its current form, the CPRS Bill would lead to a broad-based cap and trade market putting a cap and a price on around 73% of Australian sources carbon emissions. This section summarises the major design features of the Australian ETS contained in the CPRS Bill and analyses what carbon market actors and policy makers could expect from it.
35
There are two tiers of free allocation, which start at 60% and 90% depending on emissions intensity. The change involved an increase from 60% to 66% and 90% to 95% respectively of total allowances for direct emissions.
36 See for example, http://www.abc.net.au/news/stories/2009/06/16/2599244.htm 37
A.
Reduction Targets
The current CPRS legislation proposes that the Australian Government may set GHG emissions reduction targets of between 5 and 15% below 2000 levels by 2020, 60% by 2050, and, assuming an international agreement meeting strong conditions were met internationally , it would contemplate a -25% reduction by 2020. In the short term, this equates to 4 to 24% below 1990 levels by 2020. These targets are obviously below the 25 to 40% average reductions called for from developed countries by the IPCC’s Fourth Assessment Report of 2007.
International Criteria for the 25% Targets
Prior to the Copenhagen Conference, Australia’s stated policy was that, for the -25% by 2020 target to be enacted, a new international framework would need to include all of the following elements38:
• Comprehensive coverage of gases, sources and sectors, with inclusion of forests (e.g. Reducing Emissions from Deforestation and forest Degradation - REDD) and the land sector (including soil carbon initiatives (e.g. bio char) if scientifically demonstrated) in the agreement;
• A clear global trajectory, where the sum of all economies’ commitments is consistent with 450 ppm CO2-e or lower, and with a nominated early deadline year for peak global emissions no later than 2020;
• Advanced economy reductions, in aggregate, of at least 25 per cent below 1990 levels by 2020;
• Major developing economy commitments to slow growth and then reduce their absolute level of emissions over time, with a collective reduction of at least 20 per cent below business-as-usual by 2020 and a nominated peak year for individual major developing economies;
• Global action which mobilises greater financial resources, including from major developing economies, and results in fully functional global carbon markets.
This still appears to remain the policy intent. However, short of the -25% target, in its submission to the Copenhagen Accord Australia said that it would rise above the unilateral 5% reduction pledge, “by up to 15% by 2020 if there is a global agreement which falls short of securing atmospheric stabilisation at 450 ppm CO2-eq and under which major developing economies commit to substantially restrain emissions and
advanced economies take on commitments comparable to Australia's”39.
Understanding Australia’s Targets
At this stage, it appears very unlikely that the Copenhagen Accord (or subsequent Conferences of the Parties in the short term) will meet the criteria for the 25% target to be enacted. Thus, when Australia has announced its caps for the period from 2011-2015 to the market in March 2010, they will likely be in the range of 5-15% below 2000 levels.
With respect to stringency, the Australian Government has argued that, although 4 to 14% below 1990 levels looks small compared to the IPCC Fourth Assessment Report’s recommended 25 to 40% average reductions for developed countries, Australia’s has special circumstances. Firstly, given high immigration levels, the Australian Bureau of Statistics forecasts that Australia’s population is projected to grow by around 25% from 2008 to 202040. Combined with Australia’s projected economic growth of 3 to 4% per annum, this increasing demand on its carbon-intensive energy sector would lead to “business as usual” emissions growth of around 20% above 2000 levels.
38
See: www.climatechange.gov.au “Australia’s 2020 Emissions Targets”
39 See: Wong, P., Letter to Mr Yvo de Boer on the Copenhagen Accord (available at: www.unfccc.int) 40 See www.abs.gov.au – Population Forecasts
Therefore, the Australian Government argues, Australia’s 5 to 15% targets would amount to relatively ambitious reductions of 25 to 35% from business as usual41 and 25 to 33% reductions per capita by 2020 (See Table below).
The carbon-intensity and relative youth of Australia’s stationary energy sector also poses a challenge in terms of mitigation targets. As Annex 1 shows, much of Australia’s existing stationary energy infrastructure is due for renewal between 2020 and 2035. Thus, Australia’s view is that a big reduction target (combined with a limit on international offset credits) would push the domestic carbon price close to AU$80-100 (≈48-60€) at which point it is considered likely that significant investments in combined cycle gas turbine generation technologies would start to occur in the Australian electricity sector. With the current carbon price in the European Union Emissions Trade Scheme fluctuating between 10 and 15€, Australia sees this as an undesirable outcome. It would mean that not only would it be paying a higher price for carbon than many other countries in Europe or on the international offset market, but it would also lead to stranded assets in these plants, as they are decommissioned, to make way for the lower carbon technologies of the future. Thus, Australia prefers smaller targets and, importantly, the CPRS Bill has allowed unlimited international offsets into its scheme to ensure Australia does not pay more for its carbon than other countries.
Table 1 - How Australia’s Targets Might Compare to Europe and the UK
5-25 per cent below 2000 levels 24-40 per cent below 2000 levels
60 per cent below 2000 levels (4-24 per cent below 1990
levels)
(25-41 per cent below 1990 levels)
(60 per cent below 1990 levels)
European Union
20-30 per cent below 1990 levels
24-34 per cent below 1990 levels
60-80 per cent below 1990 levels
United Kingdom
26-32 per cent below 1990 levels
33-39 per cent below 1990 levels
80 per cent below 1990 levels
Forecast 2020 per capita reduction
Country 2020 targets 2050 targets
Australia
Source: estimates based on data reported at www.climatechange.gov.au and the Australian Bureau of Statistics.
As a relatively small economy (which is likely to suffer the effects of climate change as badly as any other), Australia fears it has more to lose than other developed nations if the world did not act in concert to reduce atmospheric GHG concentrations to below 550 parts per million. Thus, Australia sees an argument for hedging its bets until after 2020, when it knows what climate mitigation trajectory the world is on. This also helps explain the rationale behind why Australia has set this large gap of between 5 and 25% below 2000 levels in its reduction targets.
Common but Differentiated Responsibility
While providing a comprehensive evaluation of Australia’s just contribution to global emissions reductions is beyond the scope of this report, it needs to be mentioned that any rigorous evaluation of Australia’s emissions targets should take into account other factors that those mentioned above. For instance, it should be noted that, unlike the EU ETS or the proposed US cap and trade bill, Australia’s CPRS will allow unlimited use of international offsets to be used for compliance. This has significant consequences for measuring Australia’s relative effort to reduce global emissions. Obviously in an ETS which would allow unlimited offsets into its system, arguments about the short term constraints on achieving higher targets imposed by high emissions baselines, population growth, or the short term carbon intensity of the electricity grid, become to a large extent irrelevant.
41
During a recent television question and answer program the Minister for Climate Change, Senator Penny Wong said, “Australia, on business as usual, would get to about 120% of 2000 levels by the year 2020. So we're proposing to go from 120% to minus 25 if the world is prepared to do the same. That's a very, very substantial reduction” (the Hon. Senator Penny Wong on ABC Television’s Q&A program, 21st May 2009).
After all, the Kyoto flexibility mechanisms effectively allow countries to defer present day emissions reductions by purchasing offsets from overseas to “repay” at a later date – through domestic reduction efforts – when the transition to a low carbon economy is cheaper to achieve (e.g. when the life of current electricity installations expire).
Furthermore, it needs to be remembered that the carbon price paid is only one metric for comparing relative effort. The Kyoto Protocol sought to acknowledge this fact through the so-called supplementarity principle, which effectively stated that parties to the Protocol should bear a significant burden of achieving their reduction targets through domestic measures. Supplementarity effectively acts as a corollary to the above-mentioned flexibility mechanisms. It seeks to reflect the fact that very large real reductions in emissions will need to be made in developed countries in short time if global efforts to achieve the scientifically suggested reduction goals are to be successful. This is part of the reason why the EU ETS has limited the amount of non-Annex 1 international offsets eligible to be used for compliance in its ETS at 13.5% on average, and the Waxman-Markey Bill passed in the US Congress applies a similar limit of around 16% and, after 2018, an exchange rate between domestic credits and international offsets credits that punishes the use of the latter. Other studies have also suggested that Australia’s targets are not consistent with ambitious global efforts42.
B.
Coverage of Sectors
The CPRS will cover approximately 73% of emissions of all six Kyoto GHGs, and cover stationary energy, transportation and liquid fuels (including domestic aviation), waste, industrial processes, and fugitive emissions from mining. At this stage, it seems that agricultural emissions will not be included, but will be eligible to earn domestic offsets (see “Negotiated Amendments” below). Forestry may choose to opt into the scheme to earn credits from emissions removals. These credits would accrue to only 80% of the estimated reductions in emissions from these forests in order to protect the Government against international carbon liabilities which may arise from fires.
Facilities which emit more than 25,000 tCO2e of scope 1 emissions 43
will be covered by the scheme. All in all, the CPRS would cover around 1,000 installations in its first year. Entities with obligations will in some cases be ‘upstream’ (i.e. for the embedded carbon in fuels to be released at another source) and others ‘downstream’ (i.e. at the emissions source).
C.
Allowance Units
AEUsThe Australian domestic emissions allowance currency will be the “Australian Emissions Unit” (AEUs). A new innovation of AEUs from the EUAs of the EU ETS will be that they will be assigned so-called “vintages”. The significance of vintages is that for each year of the scheme the allowances issued for that year’s compliance period will be effectively stamped with a date. This date will indicate the date after which that vintage of permits becomes valid.
42
In January 2009 the European Commission published a discussion paper called Towards a Comprehensive Climate
Change Agreement in Copenhagen. It compared effort using four metrics: GDP per capita, emissions per GDP, early action,
and population growth. For an aggregate 30% emissions reduction by 2020 for developed nations, Australia’s “appropriate targets” using these indicators was estimated at -34%, -37%, -48% and -6%; the last being the population growth adjusted reduction, and the second last taking account of Australia’s delay in taking domestic action via Kyoto. Taking a simple average of these four indicators, Australia (and NZ) comes out as -31.25%.
43
Scope 1 emissions are GHG emissions that are the direct result of an activity that constitutes a facility. Scope 2 is emissions released into the atmosphere from heating, cooling, electricity or steam used by a facility that does not form part of the facility. Scope 3 emissions are those that occur outside of a facility as a result of activities by a facility but which are not Scope 2 emissions. Coverage will also extend to upstream fuel suppliers and some other entities which do not meet the general Scheme threshold or have no direct emissions, for example natural gas retailers. Different thresholds will apply to waste landfill facilities.
By allowing complying entities to acquire a collection of complementary future allowance vintages at a known price today, it is intended that, firstly, the strength of the future carbon price signal is improved and, secondly, short term spikes in carbon prices should be smoothed out. The Government would therefore auction some vintages ahead of time.
The CPRS would allow borrowing of next year’s permits; however such borrowing will be limited. The borrowing provisions state that covered installations will only be allowed to use up to 5% of the next year’s vintage for compliance this year. Market participants will be allowed to bank as many AEUs as they want, and for as long as they want, for use in later compliance periods.
Entities which fail to surrender sufficient allowances for their annual emissions will be subject to a financial penalty and be required to purchase and surrender missing allowances in future years under a make good provision.
International Credits
The CPRS bill allows for the unlimited importing of certain kinds of Kyoto credits to use for compliance in lieu of AEUs. Non-forestry Clean Development Mechanism units (CERs), Joint Implementation units (ERUs), and afforestation removal units (RMUs), can be surrendered for compliance in the Australian ETS in unlimited amounts. The CPRS Bill currently does not allow any importing of Kyoto Assigned Amount Units (AAUs) for the time being due to concerns about so-called ‘hot air’ AAUs coming into its scheme from Russia and Eastern Europe44. There is also a prohibition on exporting AEU credits
D.
Australian Allowance Prices
The CPRS Bill sets a fixed price of AU$10 (≈ 6€) per AEU for the first year of operation, from 1st July, 2011 to 30th June, 2012. It will therefore operate exactly like a carbon tax for the first year. Covered installations would be able to purchase unlimited allowances from the Government at the fixed price, which are immediately surrendered for compliance. From then on, the price would be determined by regular AEU auctions, and secondary market trading activities, as in the EU ETS for example. The fixed price “permits” would not be allowed to be banked into future years so as to preserve the cap on emissions.
The Floating Price Cap
To begin with, unlike the EU ETS or the Waxman-Markey Bill in the USA, the CPRS Bill places no restrictions on the importation of international offset credits such as Certified Emissions Reductions (CERs) to meet their compliance needs. The post-2012 rules surrounding the Clean Development Mechanism are still uncertain; however it is certain that the CDM will likely continue in some form.
Since Australian entities will be able to substitute purchases of AEUs by CERs in unlimited amounts, Australian compliance buyers should substitute between the two permit types depending on which is cheapest. This should ensure that AEU prices will not rise greatly above the global CER price (currently ≈13€ or ≈AU$22) – except to account for an asset risk premium, as in the EU ETS.
The CER price has historically been determined mainly by the demand from the much larger market of the EU ETS, the international Kyoto compliance market between governments, the supply of credits being generated from offset projects in developing countries, risk perceptions of carbon asset traders, and future demand expectations regarding the future US carbon market45.
44
‘Hot air’ refers to excess supply of AAUs on the international Kyoto market which has been created by the economic collapse of Russia and other Eastern European states during the 1990s. Since, the supply of these AAUs is extremely large, at around 8,200 MtCO2e, and does not reflect ‘real’ long term measures to reduce emissions undertaken by these countries,
the importation of AAUs is considered by many to represent false abatement.
45
Mission Climat of Caisse des Dépôts (October 2009): Tendances Carbone (available at
To date, CER prices have been closely correlated with EU ETS prices, typically trading at a 5-40% discount due to their higher risk properties as commodity assets, given the uncertainties surrounding their future fundamentals (see Figure 7). Assuming this continues, Australian AEU prices would be likely to be either below, or at a similar level, to European allowance (EUA) prices in the EU ETS market because of the floating price cap feature of Australian CER provisions.
Figure 7 - The CER and EUAs Price Spread in the EU ETS (2008-09)
Source: ECX online historical price data www.ecx.eu.
The Fixed (AEU) Price Cap
In addition to the floating price cap imposed by the CER import rules, the CPRS Bill includes a domestic price ceiling for AEUs during the first five years. The price ceiling from 2012-13 will be set at AU$40 (≈24€) and rising at 5% per year (in real terms) until it vanishes in the 2016-17 compliance year. Thus, in the unlikely event that the price of AEUs were to rise considerably above the price of CERs, or that CERs were to rise above AU$40 before June 2016, the Government would step in and start issuing extra AEUs into the market to impose a price ceiling at that level. These extra permits would be offset by purchasing international offset credits.
No Price Floor
The CPRS includes no provisions for putting a floor on allowance prices to ensure a minimum carbon price in the market. The ability to bank allowances into future periods when the scheme cap is expected to be tighter will ensure the price does not drop to zero as it did in Phase 1 of the EU ETS (when no banking was allowed into Phase 2, since it was a 3 year “trial phase”).
E.
Unlimited CERs & Abatement Uncertainty
In the preceding sub-section, it was noted that Australian AEU prices would be likely to be either below, or at a similar level, to carbon prices in the EU ETS market because of the floating price cap feature likely to be placed on AEUs by the CPRS’s CER provisions. It has also been observed in the proceeding sub-section on targets that Australia has an interest in maintaining such a price control on its domestic carbon price in order to protect it from the upside risk of paying higher carbon prices than other countries. However, while this might seem like a positive outcome for Australia, there may in fact be certain policy risks which the use of unlimited international offsets would import into Australia’s carbon market. These are discussed below.
CER Price Uncertainty
Much of this risk comes from the high degree of uncertainty underlying the fundamentals of the largest international offset market, the CER market. CER prices depend on many factors that are difficult to quantify and foresee. They depend on fundamentals such as the outcome of the international negotiations on the post-2012 climate policy framework; the extent to which offsets will be used by the US and other carbon markets if and when they commence; the Australian exchange rate; the growth of supply of CERs coming from developing countries and passed through the UN’s auditing and issuing procedures; and uncertainty about when and whether the European market will reach its CER limit (which would choke off a large chunk of global demand).
This uncertainty surrounding future CER prices is reflected in the price at which they sell in the EU ETS carbon market. CER Futures contracts in the EU ETS are – at the time of publication – significantly backwardated (see Figure 8). This is not the case for the European allowances (EUAs).
Figure 8 - Longer-Term CER Contracts Trade at a Discount to Shorter Term CERs and CERs Trade at a Discount to EUAs
10,00 11,00 12,00 13,00 14,00 15,00 16,00 17,00 18,00 22/0 4/20 09 22/0 5/20 09 22/0 6/20 09 22/0 7/20 09 22/0 8/20 09 22/0 9/20 09 22/1 0/20 09 22/1 1/20 09 C O 2 P ri c e i n € Dec-2009 CER Dec-2011 CER Dec-2009 EUA Dec-2011
Note: Typically, the prices of futures contacts for financial assets or commodities exchanges in markets are higher than their present day (or “spot”) prices. This reflects the fact that there is a cost in holding the asset until maturity since one could have instead bought risk free interest rate securities and seen an increase in wealth over the period before buying the good in the future. ‘Backwardation’ is the name for when the opposite occurs: futures prices are below spot prices. This typically implies that there is a perceived risk in committing today to buy the good at the future date and that this risk outweighs the cost of the lost interest when purchasing the good today and holding it until the future. In the EU ETS, this is the case for CERs but not for EUAs. This reflects their different risks.
Source: ECX online historical price data www.ecx.eu.
In the EU ETS, the average limit on the percentage of international credits which firms can use is 13.5% for Phase 2 (2008-2012), ensuring that, although CER prices and EUA prices are linked, the EUA price is not capped by CER prices like it would be in the CPRS.
However, for Australia’s carbon market, the CPRS Bill would link the upper limit of the AEU price to the (uncertain) CER price. Australia’s domestic abatement path will thus be exposed to potentially significant risk in medium to long term CER prices.
This has the consequence that Australia’s abatement path could easily be determined by developments in the international offset market. In such a scenario, the long term price signal driving Australia’s domestic abatement pathway would be determined by factors which could prove quite volatile, or worse, which deliver a price too low to drive long term changes in investment behaviour.
In fact, this kind of risk has already been witnessed in the fall-out from the financial crisis: in the Australian Federal Budget of 2009, the budget forward estimates showed that rising exchange rates had led to forecasts that the CER purchases would be cheaper than expected for Australian firms. The upshot was that this is expected to lower the value of AEU auction revenues obtained by the Government46. Now, CPRS revenue spent on additional carbon reduction measures are predicted to result in a net increase in the budget deficit of AU$1.4 billion per year between 2011 and 2020.
F.
Allocation: A High Share of Auctioning
A strong part of the present version of the CPRS Bill is the quantity of auctioning of allowances that is expected to take place. 50-70% of allowances are expected to be auctioned from the start of Australia’s ETS. This is a terrific improvement on the EU ETS experience.
Auctioning permits establishes better and more effective market prices for carbon as it focuses management attention on possible cheaper in-house abatement alternatives to paying for allowances. This helps to better establish a valid and economically efficient carbon price signal.
Auctioning also avoids the windfall profit scenario – where firms are given allowances for free but then, because of the opportunity cost they incur by not reselling these assets on the market, they decide to include as much as they can of the allowance prices in the goods they sell to customers. This delivers them windfall profits and therefore has the opposite effect on the profitability of emitting carbon to what is intended by policy makers. Windfall profits encourage wasteful spending on lobbying rather than abatement. Australia has clearly learned the lessons of Phase I of the EU ETS, where such profits occurred after more than 95% of allowances were allocated for free.
The CPRS Bill foresees that the majority of emissions allowance units will be auctioned during the period 2012/13 – 2020. In 2011-12 the Government has forecast that free allocation of allowances to Emissions Intensive Trade Exposed Industries (EITEIs) will account for approximately 27% of all allowances and that this would rise to 35% by 2020 (45% if agriculture is included) if the EITEI sector grows at the same rate as the rest of the economy.
In addition, a small percentage (≈ 6.1%) of permits will be allocated over the first 5 years on a one time only basis to the most emissions intensive coal-fired electricity generators as compensation for loss of asset value expected to arise from the scheme. Although this may be increased in order to secure passage of the legislation through the Australian Senate (see “Negotiated Amendments” below)
G.
Treatment of Trade-Exposed Industries
The CPRS offers generous assistance to energy-intensive trade-exposed industries (EITEIs) in order to protect them from international competitors who do not face a price on their carbon emissions.
Australia plans to avoid border taxes, opting instead for a so-called “emissions intensity approach”. During the first year of the scheme energy intensive trade-exposed activities would be compensated with free emissions allowances according the following criteria47:
• 94.5% of the allocative baseline for activities that have an emissions intensity above 2000 tCO2 -e/$million revenue or 6000 t CO2-e/$million value added in the specified assessment period; • 66.6% of the allocative baseline for activities that have an emissions intensity between 1000 t
CO2-e/$million revenue and 1999 t CO2-e/$million revenue or between 3000 tCO2-e/$million value added and 5999 t CO2-e/$million value added in the specified assessment period.
48
46
See Treasury of the Commonwealth of Australia (2009): Mid Year Economic and Fiscal Outlook
47
Australian Parliament, House of Representatives (2009), CPRS Main Bill p.121-123
48
The allocative baseline is calculated by the government as the forecast level of emissions from the respective activity during the year in which assistance is offered.
The allocative baselines are intended to be set in line with industry best practice. That is, the best 10% of firms in an industry shall be used to establish the industry intensity benchmark. This benchmark with then be used to calculate the assistance rate for direct emissions49 according to the following formula:
Direct assistance = Assistance rate
x emissions intensity benchmark of given activity x output
The rates of assistance (94.5% or 66.6%) accorded each emissions-intensive trade-exposed activity are to be reduced by 1.3% a year to reflect expected carbon productivity developments over time. However, some proposed changes by the Government in its negotiations in the Senate may affect the speed at which assistance can be phased out (see “Negotiated Amendments” below). In addition, EITEIs will receive AEU allocations above their expected industry average cost increases50 for indirect emissions, such as increases in electricity costs from the scheme. Some firms will also receive allocations for usage of natural gas as a feedstock in production51.
An Intensity-Based Approach: Appealing in Theory
This is an appealing approach in theory, since firms will then have an incentive to improve their emissions intensity to gain an advantage on the competition. In practice, it is a matter of expert judgement and having reliable data in setting the industry benchmarks (which were not available at the time this report was being prepared). Setting the benchmarks too high could fail to sufficiently protect from international competition, while setting them too low could grant windfall profits that give domestic firms an unfair advantage on international competitors. The “best 10%” benchmark approach attempts to strike that balance.
There is more to the trade-exposed industry allocation than the emissions intensity for direct emissions. In addition, the Government has determined an allocation factor for indirect electricity emissions, i.e. the price rise of electricity which for EITEIs coming from the scheme.
Figure 9 - Emissions Intensity of Australian Industries (Direct & Indirect Emissions)
Source: CPRS Green paper (2008).
49
Direct emissions are those emitted by the installation. Indirect emissions are those emitted by the electricity generated to supply to the installation – the price of which rises for the installation with a price on carbon. See Annex 2 for more details.
50
Ch 12 of the White Paper implies that the assumed pass through rate for allocating allowances to EITEIs for electricity cost increases (EAFi in the allocation formula in appendix E) will be assumed to be “1” even though actual cost past through to
EITEIs has been estimated by the government’s economic consultants to be closer to “.6-.8”. This raises the risk of windfall profits accruing to EITEIs from the Scheme.
