Emissions trading in Australia

1  Introduction

On 15 December 2008, the Australian Federal Government released its White Paper on the proposed Australian greenhouse gas emissions trading scheme (ETS) (White Paper)¹.

The White Paper is the clearest indication to date of the likely shape and content of the ETS, which is to be called the Carbon Pollution Reduction Scheme (CPRS). The White Paper sets out finalised proposals for the design of the CPRS. It will be followed in early March 2009 by exposure draft legislation.

The White Paper comes after other significant documents, particularly: the Green Paper on the Carbon Pollution Reduction Scheme, released on 16 July 2008 (July 2008 Green Paper)²; and the Final Report of the Garnaut Review released on 30 September 2008 (Garnaut Final Report)³.

Particularly since the July 2008 Green Paper, there has been much discussion and speculation about the CPRS’s principal elements: the timing of its introduction, its short-, medium- and long-term targets and trajectories, the method of permit allocation (particularly to industries in trade-exposed sectors) and whether the CPRS will contain a statutory ‘costs pass-through mechanism’ for affected contracts.

The White Paper commits Australia to an ETS commencing on 1 July 2010 whose major design elements are described in detail in sections 2 to 10 below. Principally:

1. The ETS which the White Paper proposes is a thoroughgoing cap-and-trade system having no baseline-and-credit features and no carbon tax features.
2. It will cover all six of the greenhouse gases which are widely recognised internationally (GHGs) and most sectors of the economy which are implicated in either the production or the removal of GHGs, accounting for approximately 75 per cent of Australia’s GHG emissions, and directly involving approximately 1,000 firms (excluding forestry operators who may choose to opt-in to the system).
3. The CPRS will not involve a statutory ‘costs pass-through mechanism’.
4. The White Paper restates the Rudd Government’s long-term target of a 60 per cent reduction in national GHG emissions from 2000 levels by 2050. The actual commitment which the White Paper sets for the CPRS is as follows: a reduction in Australia's national GHG emissions by between five per cent and 15 per cent below 2000 levels by the end of 2020. 
5. The CPRS will have a price cap for the first five years of its operation. The price  cap will be A$40 per tonne of carbon dioxide equivalent (CO₂e) at commencement of the CPRS, rising at five per cent per annum.
6. The CPRS will have linkages with international carbon markets. In particular, no quantitative restrictions will apply to the use of eligible international units⁴ for compliance in the CPRS.

The White Paper contains much detail. The following summarises the main elements of the proposals set out in the White Paper.

2  General outline of CPRS

The general shape of the ETS to which the White Paper commits Australia is as follows:

1. The Federal Government will set a limit or cap on emissions of covered GHGs by persons and enterprises (‘firms’) in covered sectors during successive compliance periods (annual, by reference to financial years). The Federal Government will issue emissions permits (for free and by auction). An emissions permit will give its holder the right to emit a certain quantity of GHGs during a compliance period, and the total of the quantities covered by the emissions permits issued during the compliance period will equal the cap. In this way, the quantity of allowable total emissions is limited to the amount of the cap.
2. A firm in a covered sector may emit GHGs only by surrendering a suitable number of emissions permits. Once surrendered, an emissions permit cannot be re-used for any purpose. Firms will be enabled to trade emissions permits among themselves, so that a firm which does not hold sufficient emissions permits to enable it to emit the quantity of GHGs that it needs to emit may buy emissions permits from another firm which holds more emissions permits than it needs (because, for instance, it has managed to reduce its own GHG emissions). In theory, such an arrangement will mean that the market will ensure that the required emissions reductions are achieved at the lowest possible marginal cost.
3. Emissions permits will be created as personal property, and the legislation implementing the CPRS will not provide any power to extinguish the permits without compensation (except in the case of misrepresentation or fraud). Also, emissions permits will be designated as ‘financial products’ for the purposes of the provisions in the Corporations Act 2001 (Cth) regulating such products, particularly the marketing of them. The White Paper states that the Federal Government will consult further on implementation of this aspect of the CPRS. The Trade Practices Act 1974 (Cth) will also apply in respect of emissions permits, particularly the marketing of them.
4. Both the July 2008 Green Paper and the Garnaut Final Report indicated that unlimited banking of permits would be permitted, namely that an emissions permit would be ‘stamped’ to show the first year in which it can be surrendered and could be surrendered in that year and in any subsequent year. They also indicated that there would be a limited facility to borrow, namely: to surrender a permit whose ‘stamped’ year has not yet occurred. These positions are reflected in the White Paper. The White Paper indicates that a firm will be able to bank without limit emissions permits which it does not require during a particular compliance period so that it can surrender them during a subsequent compliance period. It also indicates that a firm will be able to meet up to five per cent of its liabilities in any one compliance period by borrowing the following year's vintage permits.
5. Pecuniary and other penalties will apply for emitting GHGs without surrendering a suitable number of emissions permits.
6. Both the July 2008 Green Paper and the Garnaut Final Report expressed a generally negative view of offsets (which are a feature of a baseline-and-credit system and therefore essentially foreign to a cap-and-trade system). The July 2008 Green Paper expressly ruled out the generation of agriculture-based offsets before the inclusion of agriculture in the scheme. It stated that, in 2013, the government will give further consideration to the scope for offsets generated in sectors that cannot be included in the CPRS. It appeared, therefore, that no domestic offsets will be able to be generated until at least that time. These positions are reflected in the White Paper. No scheme of domestic offsets will form part of the CPRS.
7. However, as mentioned, the CPRS will have linkages with international carbon markets. No quantitative restrictions will apply to the use of eligible international units⁵ for compliance in the CPRS. This is a modification of the position contained in the July 2008 Green Paper—but no exports of CPRS emissions permits will be allowed, and would only be introduced with five years' notice. This latter qualification may not apply if and when Australia enters into a bilateral linking arrangement with another country (such as New Zealand). In that case, exports would be required and such a link may be entered into with less than five years' notice where this was unlikely to lead to a significant change in carbon prices.
8. The White Paper foreshadows that administrative arrangements will be put in place for the performance of functions such as: setting the cap from time to time, allocating permits, recording transfers and surrenders of permits, verifying offsets and enforcing compliance. But these are not described in detail in the White Paper.

3  Targets, caps, trajectories and price

3.1 Targets

The July 2008 Green Paper and (in particular) the Garnaut Final Report had much to say relevant to the caps and trajectories which might be set in legislation for the CPRS. More detail of what they said is set out in Schedule 1. These positions are largely reflected in the White Paper.

• The White Paper states that the Rudd Government accepts the findings of the Garnaut Final Report that:

• stabilising concentrations of GHGs around 450 ppm or lower would be in Australia's interests, and
• achieving global commitment to emission reductions of this order appears unlikely in the next commitment period.

The White Paper also states that, if a comprehensive global agreement emerges involving emissions commitments by both developed and developing countries that are consistent with long-term stabilisation of atmospheric concentrations of GHGs at 450 ppm CO₂e or lower, Australia will ‘establish its post-2020 targets so as to ensure it plays its full role in achieving the agreed goal’.

• The White Paper restates the Rudd Government’s long-term target of a 60 per cent reduction in GHG emissions from 2000 levels by 2050. The White Paper states that this long-term target will be mentioned as a goal in the legislation for the CPRS.
• The actual commitment which the White Paper sets for the CPRS is as follows: a reduction in Australia's national GHG emissions by between 5 per cent and 15 per cent below 2000 levels by the end 2020. It describes the 5 per cent commitment as ‘a minimum (unconditional) commitment’ and the 15 per cent commitment as ‘a commitment to reduce emissions in the context of global agreement where all major economies commit to substantially restrain emissions and all developed countries take on comparable reductions to that of Australia’.

These commitments invite comparison with the position of the Rudd Government shortly after its election in November 2007. On 15 December 2007, at the Conference of the Parties to the Kyoto Protocol in Bali, as a party to the United Nations Framework Convention on Climate Change Australia endorsed the so-called ‘Bali roadmap’, a document which recognises the need for unquantified ‘deep cuts’ in emissions⁶. Shortly afterwards, the signatories to the Kyoto Protocol (including Australia but not including the United States) went further: they agreed their future work would be guided by scientific findings indicating that developed countries would jointly need to make 2020 cuts of 25 per cent to 40 per cent.⁷

3.2 Caps and trajectories

The White Paper commits the Rudd Government to the ‘trajectories mechanism’ foreshadowed in the July 2008 Green Paper.

There are two elements to that mechanism: ‘caps’; and ‘gateways’ for future caps. ‘Caps’ will be determined annually for at least five years in advance. ‘Gateways' (or ranges within which future caps will lie up to a further 10 years in advance) will be announced every five years. The caps will be extended by one year every year. The ‘gateways’ will be extended by five years every five years.

The first five years of caps will be announced in 2010, before the CPRS commences and after the Copenhagen meeting of the Parties to the United Nations Framework Convention on Climate Change and the Kyoto Protocol.

The White Paper indicates that the first caps in the first three financial years of the post-2010 trajectory are likely to be as follows:

1. in 2010–2011: 109 per cent of 2000 levels
2. in 2011–2012: 108 per cent of 2000 levels, and
3. in 2012–2013: 107 per cent of 2000 levels.

In 2010, the Federal Government will announce a further two years of caps in the post-2010 trajectory in 2010 (for financial years 2013–14 and 2014–15). Figure E.1 of the White Paper is illustrative:

3.3 Price

On 30 October 2008, the Federal Treasury released its predictions of carbon prices under both 5 per cent and 15 per cent reduction targets mentioned in 3.1 above. The following table presents Treasury’s predicted carbon price under this modelling:

Carbon price A$/tCO2e

3.4 Price limits

Both the July 2008 Green Paper and the Garnaut Final Report indicated that, during the first five years of the CPRS, there will be a cap on the price of emissions permits. The White Paper reflects these indications and states that the CPRS will contain an upper limit on the price of emissions permits in respect of the first five years of operation of the CPRS. The price cap will be A$40 per tonne CO2e at commencement of the CPRS, rising at five per cent per annum.

The price limitation mechanism will be as follows: in each period between 31 October (the emissions reporting deadline) and 15 December (the permit surrender deadline) in respect of the first five years of operation of the CPRS, an unlimited number of ‘special’ permits will be available (at A$40 per tonne CO₂e in the first year rising at 5 per cent per annum) to parties having obligations under the CPRS. Unlike ‘ordinary’ permits, ‘special’ permits will be incapable of being banked or traded.

As mentioned, no quantitative restrictions will apply to the use of eligible international units⁸ for compliance in the CPRS. The market for these credits is developed and large compared to Australia’s total emissions and will operate as a further ceiling on the carbon price in Australia if the price of Australian permits rises above the price of CERs.

4  Covered sectors

4.1  General

Sectors that will be covered from the scheme’s commencement are the following:

1. stationary energy
2. transport
3. industrial processes
4. fugitive emissions of methane, carbon dioxide and nitrous oxide during the production, processing, transport, storage and distribution of coal, oil and gas
5. emissions of synthetic GHGs
6. waste, and
7. post-1989 reforestation of previously cleared land (that is, Kyoto-compliant forestry activities), on an ‘opt-in’ basis.

Detailed definitions of these sectors will need to occur and be included in the Act or regulations for the CPRS.

Emissions from landfill waste sites that closed prior to 30 June 2008 will not be included in the CPRS. Emissions from waste deposited prior to 1 January 2009 will be excluded from the CPRS until 2018.

One further sector is expected to be brought into the scheme, but no earlier than 2015, with a firm decision expected to be made in 2013: agriculture.

4.2 CCS

Both the July 2008 Green Paper and the Garnaut Final Report indicated that the role for Carbon capture and storage (CCS) will be as follows: any GHGs which has been captured and stored from the emissions of the originating source will be subtracted from the calculation of emissions from that source. For example, a coal-fired power station which is connected to a CCS system will be deemed never to have emitted the GHGs which are captured and stored by that system. However, the CCS operator itself will be liable for any fugitive emissions from its operation.

The White Paper reflects these positions.

CCS regimes have now been enacted at both federal and state levels in Australia⁹. The Offshore Petroleum Amendment (Greenhouse Gas Storage) Act 2008 (Cth) commenced in November 2008, and the Rudd Government is currently consulting with stakeholders regarding the regulations which will be made under that Act. Onshore CCS legislation has also been passed in Victoria and a bill has been introduced in the Queensland Parliament.

4.3 CCS and forestry

In relation to forestry, both the July 2008 Green Paper and the Garnaut Final Report indicated that owners of Kyoto-compliant forests (that is, in short, forests established from 1990 onwards on previously cleared land) who opt into the scheme will be able to receive free permits for those forests’ net removals of carbon dioxide from the atmosphere. They will also have to account for any actual or deemed emissions, for example when those forests are destroyed or cut down. According to current Kyoto principles, all of the carbon dioxide sequestered by a forest is deemed to have been returned to the atmosphere when that forest is destroyed (even if, in fact, the carbon dioxide continues to be sequestered in wood products).

The White Paper reflects these positions.

5  Point of liability

5.1 Position prior to White Paper

1. Both the July 2008 Green Paper and the Garnaut Final Report indicated, in relation to the covered sectors, that (subject to the matters in (b)):
   1. the point of liability for surrendering emissions permits will generally be the point at which the emissions actually occur, and
   2. there would generally be an annual threshold of 25,000 tonnes of CO₂e of emissions before any liability is imposed.
2. Both the July 2008 Green Paper and the Garnaut Final Report indicated that, in sectors where there are many small emitters, such that it would be inefficient and uneconomical to assign direct liability to those emitters, a ‘proxy’ would be chosen and that proxy will be directly liable for surrendering emissions permits, the costs of which are expected to be passed downstream, ultimately to consumers. This will be the situation (for example) in relation to suppliers of liquid transport fuels and suppliers of black coal and certain brown coal products to facilities that emit less than 25,000 tonnes of CO2e annually of emissions. In these cases, the point of liability lies with the upstream fuel suppliers and there is no threshold for liability.
3. Principles modelled on those in the National Greenhouse and Energy Reporting Act 2007 (Cth) will guide the determination of the ‘liable entity’ for any particular ‘point of liability’:
   1. In general, entities with operational control over covered facilities or activities will be ‘liable’ under the CPRS. 
   2. For corporations, obligations will be placed on the ‘controlling corporation’ of a company group where either the controlling corporation or a member of the group has operational control over a covered facility or activity.
   3. A joint venture is a member of the corporate group of a ‘controlling corporation’ if any subsidiary of that corporation participates in the joint venture.
4. One of the issues that remains to be settled in relation to the coverage of agriculture (if an when included in the CPRS) is the appropriate point of liability.

5.2 White Paper

1. The White Paper foreshadows departure from the principles mentioned in 5.1(a) above as regards landfill facilities:
   1. In general, the point of liability for surrendering emissions permits will be landfill facilities that emit 25,000 tonnes of CO₂e annually of emissions.
   2. A lower threshold (10,000 tonnes of CO2e annually of emissions) will apply to any landfill facility that operates near another operating facility (within a distance to be determined).
   3. Also, until 2018, ‘legacy’ emissions (emissions from waste sent to landfill before 1 July 2010) will be taken into account in determining whether a facility meets the relevant threshold, but will not need to be made the subject of a surrender emissions permit.
2. The White Paper also foreshadows an important departure from the principles mentioned in 5.1(c) above. An administrative mechanism—the Obligation Transfer Number (OTN)—will be established under the CPRS. The OTN mechanism will, in some cases, enable and, in other cases, require the obligation to surrender emissions permits under the CPRS to be transferred from one ‘liable entity’ to another.
   1. The following entities must use an OTN and assume CPRS liability:
      • ‘large users’ of fossil fuels (other than petroleum liquids), namely: entities with operational control of any facility that emits 25,000 tonnes of CO₂e per annum (or more) from combustion of a single fuel)
      • retailers of natural gas and other pipeline gases, and
      • LPG marketers.
   2. The following entities may use an OTN and assume CPRS liability:
      • entities that use fossil fuel as feedstock in a chemical transformation or consume fossil fuels other than by combustion
      • entities undertaking solid fuel transformation (making coal char, coke, briquettes and by-products) 
      • upstream suppliers of natural gas, LNG, CNG, ethane, coal seam gas, underground coal gas and town gas that acquire gaseous fossil fuels from another entity to manufacture those gases
      • intermediate suppliers of fossil fuels
      • entities using fuel for international voyages or for other purposes that do not result in domestic emissions, and
      • large users of petroleum liquids.
        
        Whether these entities choose to assume direct responsibility for the CPRS liability of the fuels they use will depend on their particular circumstances.
        
3. Also, by way of further departure from the principles mentioned in 5.1(c) above:
   1. With the approval of the CPRS regulator, entities with financial control over a covered facility will have some flexibility to take on CPRS liabilities where specified criteria are met.
   2. With the approval of the CPRS regulator, controlling corporations will have some flexibility to shift CPRS obligations to another legal entity within their group where certain criteria are met, and with the caveat that CPRS obligations would revert to the controlling corporation if that other legal entity fails to meet its obligations under the CPRS.
   3. In cases where the CPRS regulator approves a transfer of liability for a covered facility to another entity within a controlling corporation’s group, the entity taking on liabilities under the Scheme will also be required to take on reporting obligations for that facility under National Greenhouse and Energy Reporting Act 2007 (Cth).

6  Method of permit allocation

6.1  Background

Both the July 2008 Green Paper and the Garnaut Final Report indicated the following concerning emissions permits under the CPRS.

1. Emissions permits will be ‘stamped’ with the first year in which they are capable of being surrendered (in fact, there will be no physical permits or certificates at all, but rather entries in an electronic register).
2. In general, emissions permits will be sold by quarterly public auction. One of the four auctions per year will include the sale of emissions permits for future years (up to three years in advance).
3. During the first five years of the CPRS, there will be a cap on the price of emissions permits.
4. However, special transitional assistance will be given to industries identified as emissions-intensive trade-exposed (EITE) industries.
5. Initially, approximately 20 per cent of emissions permits will be allocated free of charge to certain EITE industries, in the following manner:
   
   1. Activities that have an emissions intensity between 1,500 tonnes of CO₂e per million dollars of revenue and 2,000 tonnes per million dollars of revenue will get a free allocation to cover 60 per cent of their emissions.
   2. Activities that have an emissions intensity above 2,000 tCO₂e per million dollars of revenue will receive a free allocation to cover 90 per cent of their emissions.
   3. In calculating the emissions intensity of an EITE industry, both direct and indirect emissions will be taken into account.
6. Assistance will be provided until 2020 unless broadly comparable carbon constraints in other countries, or sectoral agreements, are developed. After 2020, assistance will be phased out over five years, assuming an acceptable global agreement is in place.
7. Finally, the White Paper implied that agriculture will be considered an EITE industry. Accordingly, when agriculture is brought into the scheme, it will receive comparable assistance and the proportion of emissions permits allocated free of charge will rise to approximately 30 per cent of the total.

6.2  White Paper

In several respects, these positions are substantially amended in the White Paper:

1. Section 9 of the White Paper considers the proposed auction mechanisms at length. Allocations will progressively move towards 100 per cent auctioning as the scheme matures. Emissions permits will be auctioned 12 times a year.
2. Table E.2 of the White Paper summarises the current proposals as regards EITEs as follows: 
   
   

   Feature	Policy
   Form of assistance	Allocation of permits at the start of each compliance period Based on individual entity’s previous year’s level of production Upon closure, must relinquish permits for production that did not occur in that year
   Basis of assistance	Provided to new and existing entities undertaking eligible EITE activity prescribed in regulations
   Scope of assistance	Direct emissions covered by the scheme Scheme related cost increase for electricity and steam use Scheme related cost increase for upstream emissions from natural gas and its components (for example, methane and ethane) used as feedback
   Eligibility for assistance	Eligibility of activity based on an assessment of all entities conducting an activity Trade exposure assessed through quantitative and qualitative tests Emissions per million dollars of value added Time period for assessment: emissions data: 2006–0 to 2007–08 revenue/value added data: 2004–05 to the first half of 2008–09
   Initial rates of assistance	90 per cent for activities with emissions intensity of at least 200ot CO2-3/$m revenue or 6000t CO2-3/$m value added
   Carbon productivity contribution	Initial rates of assistance will be reduced by a carbon productivity contribution of 1.3 per cent per annum
   Allocative baselines	Allocative baseline for activity based on historic industry average level of emissions per unit of production for all entities conducting activity Electricity allocation factor set at 1t CO2-3 per MWh nationwide, may be adjusted in respect of existing large electricity supply contracts Natural gas feedstock allocation factor set state by state
   New entrants	New entities conducting an existing EITE activity will receive the same assistance as existing entities conducting the activity Activities new to Australia will be able to apply for EITE eligibility – assessment and baselines made on the basis of international best practice Allocations to existing entities conducting EITE activities will not be adjusted for allocations to new entrants
   Quantum of assistance	Government expects allocations to EITE sector to be around 25 per cent initially (35 per cent including agriculture), increasing to around 45 per cent by 2020
   Review of assistance	EITE Assistance Program to be reviewed by independent body at each five year review point, or at request of minister Review would consider: inclusion of additional activities in light of commodity price changes and expansions in scheme coverage consistency of EITE program with overall rationale and principles existence of broadly comparable carbon constraints applying internationally Five years’ notice of any changes to EITE Assistance Program to be provided, unless required for compliance with Australia’s international trade obligations

3. The White Paper indicates that the trade exposure of activities will be assessed on one or the other of the following bases:
   
   1. a trade share (defined as the ratio of the value of imports and exports to the value of domestic production) greater than 10 per cent in any one of the years 2004–05, 2005–06, 2006–07 or 2007–08, or
   2. a demonstrated lack of capacity to pass through costs due to the potential for international competition.
4. The assessment of emissions intensity for the purposes of determining eligibility of an activity will be based on either:
   
   1. weighted average emissions per million dollars of revenue generated by entities conducting the activity or
   2. entities may request to Federal Government that the eligibility assessment for an activity is made on the basis of the weighted average emissions per million dollars of value added generated by entities conducting the activity, in which case, the entity and Government will need to agree on which input costs will be adjusted to calculate the proxy for value-added for the activity.

7  Penalties

Neither the July 2008 Green Paper nor the Garnaut Final Report reached a conclusion as to the amount of the penalty for non-surrender of sufficient emissions permits to cover a firm’s emissions. Likewise, they reached no conclusion as to whether payment of the penalty will discharge the obligation to surrender emissions permits or whether a ‘make-good’ provision will apply.

The White Paper states that the CPRS cap ‘will achieve the desired environmental objectives only if it is enforced. This means that entities responsible for emissions covered by the [CPRS] must monitor and report their emissions and report … [and that non-]compliance will attract a penalty’. Details of the enforcement regime will need to be included in the Act or regulations for the CPRS.

The White Paper indicates that the amount of the penalty will be set high enough for it always to be in a firm’s interest to buy additional emissions permits at market value (or reduce its emissions) rather than pay the penalty.

The White Paper also indicates that the CPRS regulator will have a range of compliance, investigative and enforcement powers and a range of mechanisms, including civil penalty and criminal provisions, to respond to non-compliance with the CPRS. In addition to the administrative penalty, the obligation to surrender permits to meet any shortfall will continue under a ‘make-good’ requirement, with permits to be surrendered in the next compliance year.

Also, the White Paper indicates that the legislation for the CPRS will contain ‘assurance’ provisions modelled on those in the National Greenhouse and Energy Reporting Act 2007 (Cth). These include compulsory external auditing provisions. As well, ‘large emitters’ (with obligations under the CPRS 125,000t CO₂e or more) will be required to have their annual emissions reports assured by an independent third-party prior to their submission.

The CPRS regulator will also have the power to review an annual emissions report for up to four years after its submission, except in the case of fraud, in which case the period will be unlimited.

8  Compensation arrangements

The July 2008 Green Paper stated that ‘every cent’ generated from the sale of permits will be used to assist Australian business and households to ‘adjust to the scheme and to invest in clean energy options’. It proposed the following specific forms of compensatory arrangements.

The White Paper does not depart from these positions.

1. As discussed at paragraph 6.1(c) above, there will be free allocation of emissions permits to eligible EITE industries for so long as their foreign competitors do not face a comparable carbon price signal.
2. Fuel taxes will be cut ‘on a cent by cent basis to offset the initial price impact of fuel associated with the introduction of’ the CPRS. The White Paper does not specify the precise mechanism for implementing this policy. The policy will be reviewed after three years.
3. Households, particularly low-income households, will be compensated through the taxation and benefits systems and through assistance with energy efficiency measures and information. The White Paper does not indicate what proportion of auction revenues will be allocated for this purpose.
4. There will be specific direct assistance, possibly in the form of free permits, for the coal-fuelled electricity generation sector. However, the White Paper states that only a limited amount of direct assistance will be provided, the quantum of that direct assistance to be determined only after the medium-term national emissions target range is established later this year. That direct assistance would be given on an ‘up front’ and ‘once-and-for-all’ basis before the CPRS begins.
5. Two special assistance funds will be set up: the Electricity Sector Adjustment Scheme (ESAS) and the Climate Change Action Fund (CCAF).
   1. The ESAS, in conjunction with the existing National Low Emissions Coal Initiative (NLECI) and Global Carbon Capture and Storage Initiative (GCCSI), will be involved in the direct assistance to the electricity generation sector just mentioned, structural adjustment to address the impacts of the scheme on workers, regions and communities, and support for the development and commercial deployment of CCS technologies. Under the GCCSI up to A$100 million per year will be contributed to a new Global CCS Institute. The Australian Government is providing A$500 million over eight years to support the NLECI. Structural adjustment assistance for regions will be provided if required under the CCAF. The Federal Government has committed to provide a fixed administrative allocation of permits, delivering assistance of around A$3.9 billion to the most emissions-intensive coal-fired generators over the first five years of the CPRS (based on an initial carbon price of $A25 per tonne). These permits will be distributed to each eligible generator over the first five years of the CPRS.
   2. The CCAF will be a A$2.15 billion fund available over five years to smooth the transition for businesses, community sector organisations, workers, regions, and communities to an operating environment that includes a price on carbon. It will focus on groups that will not receive free permits but which nevertheless will need assistance to adjust to the carbon price that will be imposed by the CPRS. An additional A$300 billion will be provided as part of the coal adjustment stream.

9 Administrative arrangements

9.1  Background

The July 2008 Green Paper and the Garnaut Final Report contained few specifics as to the administrative arrangements that would underpin the CPRS apart from indicating the likelihood of a scheme regulator (who may be the same person or entity as the scheme regulator under the National Greenhouse and Energy Reporting System). The division of labour between the government and the scheme regulator was not been spelt out in detail.

9.2  White Paper

The White Paper indicates that the functions of three regulators (the Greenhouse and Energy Data Officer, the Renewable Energy Regulator and the Carbon Pollution Reduction Scheme Regulator) will be amalgamated into a single regulator whose combined responsibilities will include monitoring, facilitating and enforcing compliance, running auctions for permits, allocating free permits, publishing information relating to the scheme and maintaining the national registry. The combined regulator will continue to perform existing functions under the National Greenhouse and Energy Reporting Act 2007 (Cth), and functions under the expanded renewable energy target.

10  Transitional arrangements

10.1  Introduction

The July 2008 Green Paper proposed a number of transitional arrangements to accompany the introduction of the CPRS. The White Paper further considered these matters.

These matters have important adverse consequences for the continuation of the so-called ‘voluntary’ offsets market in Australia and for transactions conducted in that market prior to the contemplation or coming into effect of the CPRS. The White Paper notes that the Australian Government is committed to develop a national standard for carbon offsets to provide national consistency and give consumers confidence in the voluntary carbon offset market. A discussion paper is said to be released in December 2008 to address the scope of the voluntary carbon market.

10.2  Other carbon-reduction schemes

The July 2008 Green Paper foreshadowed that state- and territory-based GHG mitigation schemes which are currently operating in the electricity generation market would be phased out. These are the Greenhouse Gas Reduction Scheme (GGAS) which operates in New South Wales and the Australian Capital Territory, and the Queensland Gas Scheme.

The July 2008 Green Paper committed the Federal Government to work co-operatively with the relevant jurisdictions to develop appropriate transitional arrangements.

The White Paper reaffirmed these intentions, and provided that the Commonwealth Government will continue to work with:

1. the Queensland Government to encourage the development of appropriate termination arrangements for the Queensland Gas Scheme, and
2. the New South Wales and ACT governments on GGAS termination. However, should some agreement not be reached on this approach, the Commonwealth Government will consider providing some limited assistance for the benefit of GGAS participants, with priority given to adversely affected cogeneration, landfill gas and waste coal mine methane generators, and, as a lesser priority, to holders of unused NGACs. GGAS forestry projects will be allowed to opt into the CPRS, provided they meet the CPRS eligibility requirements.

10.3  ‘Early action’

The previous Coalition Federal Government had committed to give credit for ‘early action’ on GHG abatement which occurred after 3 June 2007 but before the commencement of an Australian ETS and which met certain further requirements, in particular, a requirement for ‘additionality’ (essentially, that the ‘action’ went beyond ‘business as usual’ and would not have occurred without the prospect of generating credits).

The July 2008 Green Paper proposed not to proceed with that commitment, largely on the grounds of administrative complexity in the context of the short timeframe for the introduction of the CPRS.

The July 2008 Green Paper stated that the imminent introduction of the CPRS will in any event provide an incentive for firms to reduce emissions before the commencement of the scheme.

This position is unchanged in the White Paper.

10.4  Renewable energy targets

As a separate matter, the Federal Government, states and territories, acting through the Council of Australian Governments, have already committed to folding their various ‘renewable energy targets’ (which promote the development and commercialisation of renewable energy by obliging parties who buy wholesale electricity to source an increasing proportion of their electricity purchases from renewable sources) into an expanded, national, Renewable Energy Target (RET). The RET is expected to replace the existing Federal Mandatory Renewable Energy Target (MRET), the existing Victorian Renewable Energy Target (VRET) and the proposed New South Wales Renewable Energy Target (NRET). The progress of the RET is discussed in the next section.

11  Next steps

According to the Rudd Government’s announced timetable¹¹, the aim is to pass legislation for the Australian ETS by June 2009.

The first step is the introduction of legislation to the Federal Parliament. The Federal Government originally stated its intention to do this in March 2009 and has now restated its intention to do so in May 2009. The Federal Government does not control the Senate and will need the support there of either the Opposition Liberal and National Parties, the Green Party, or two independents from Victoria and South Australia. The initial reaction of the Green Party has been negative, and the Opposition, consistent with its policy to delay introduction of a carbon trading scheme until global economic conditions improve, announced on 15 December 2008 that it has commissioned an economic analysis of the proposed CPRS. A Senate inquiry is possible, even likely. Parliament is scheduled to rise for the winter recess on 25 June 2009.

With respect to the expanded Renewable Energy Target, the White Paper states ‘draft legislation is planned to be released for public comment in December 2008. Legislative and regulatory amendments to implement the design of the Renewable Energy Target are expected to be in place by mid- 2009, with the revised targets commencing from 2010.’ The White Paper also confirms that the Renewable Energy Target requires 20 per cent of Australia's electricity to be sourced from renewable generators by 2020.

A Renewable Energy Fund of A$500 million Renewable Energy Fund will support such targeted measures. Further, the White Paper states that ‘administration of the [CPRS], the National Greenhouse and Energy Reporting System, and the Renewable Energy Target will be combined under a single independent regulator.’

The release of the expanded Renewable Energy Target draft legislation foreshadowed in the White Paper occurred on 18 December 2008.

Schedule 1  Caps and trajectories

1  July 2008 Green Paper

In the July 2008 Green Paper, the Rudd Government did not directly address the question of caps and trajectories for the CPRS¹².

Rather, the July 2008 Green Paper said that, subject to foreshadowed special transitional arrangements for the period 2010–2020, whatever initial cap, or set of caps, is decided will be firm for five years. In addition, at any given time a ‘trajectory’ (or indicative range of caps) will be set for the 10 years following the expiration of those five years. In this way, at any given time firms will know the cap for the following five years and the range of likely caps for a period 15 years into the future.

2  Garnaut Final Report

The Garnaut Final Report had much to say relevant to the caps and trajectories which might be set in legislation for the CPRS:

1. The Garnaut Final Report stated that:
   1. the scientific judgments of the Intergovernmental Panel on Climate Change (IPCC) should be accepted on a balance of probabilities, but
   2. the IPCC’s economic analyses, based as they are on work done during the 1990s, ‘have been overtaken by events’ (particularly in China) and as a result they ‘systematically underestimate the current and projected growth of emissions’.
      
      For example, the central range for temperature increases in the 21st century under ‘business as usual’ should be revised upwards from between 1.8°C and 4°C to 5°C. Consequences would include a threat of extinction to 88 per cent of species, destruction of the Great Barrier Reef by mid-century, and inundation by seawater of the Kakadu wetland system by the end of the century.
      
2. The Garnaut Final Report provided detailed modelling and analysis of three principal climate-change scenarios:
   1. the No-Mitigation Scenario: In this scenario, the world does not attempt to reduce its greenhouse-gas emissions. Modelled consequences include a best-estimate increase in global temperature relative to 1990 levels of 5.1°C by 2100 and 8.3°C by 2200, with impacts on human civilisation and most ecosystems that are ‘likely to be catastrophic’,
   2. the 550 Scenario: Emissions are stabilised at approximately 550 parts per million of carbon-dioxide equivalent (550 ppm CO2e) by approximately 2060. Modelled consequences include a best-estimate increase in global temperature relative to 1990 levels of 2.0°C by 2100 and 2.2°C by 2200, and
   3. the 450 Scenario: Emissions are stabilised at approximately 450 ppm CO2e early in the 22nd century. Modelled consequences include a best-estimate increase in global temperature relative to 1990 levels of 1.5°C by 2100 and 1.1°C by 2000.
      
3. Against this modelling, Garnaut Final Report emphasised that ‘Australia’s mitigation effort is our contribution to keeping alive the possibility of an effective global agreement on mitigation’.
4. Accordingly, the Garnaut Final Report recommended that Australia make a public commitment to a range of emissions reductions targets which are keyed to the achievement of an ‘effective global agreement’ which would see ‘all developed and high-income countries, and China’ subject to ‘binding emissions limits from the beginning of the new commitment period in 2013’. That is, Australia should commit itself to ‘conditional targets’ which are dependent on the achievement of such an agreement.
5. Those public commitments should be as follows:
   1. if such an ‘effective global agreement’ is in place and aims to achieve the 450 Scenario—a reduction of 25 per cent of 2000 levels by 2020, and 90 per cent of 2000 levels by 2050
   2. if such an ‘effective global agreement’ is in place and aims to achieve the 550 Scenario—reductions of 10 per cent of 2000 levels by 2020, and 80 per cent of 2000 levels by 2050, and
   3. if no such ‘effective global agreement’ is in place but there is a binding agreement between developed nations only (as is effectively the case with the Kyoto Protocol) – a reduction of five per cent of 2000 levels by 2020.
6. The Garnaut Final Report saw the 450 Scenario as the most desirable, but believed that international agreement to implement it is unlikely to be achieved within the next few years given current political realities. Accordingly, the principal emphasis should be on achieving an ‘effective global agreement’ for the ‘feasible’ 550 Scenario.
7. As did previous reports of the Garnaut Review, the Garnaut Final Report recommended that the period from 2010 to the end of 2012 should be seen as essentially a transitional one during which the key task internationally and for Australia will be the forging of an agreement for the post-2012 period. During this transitional period:
   1. Australia’s target should be to achieve its Kyoto Protocol commitment to restrict emissions to 108 per cent of 1990 levels on average over the period from 2008 to 2012, and
   2. emissions permits under the proposed Australian ETS should be sold at a fixed price of A$20 per tonne of CO₂e in 2010 rising by four per cent + CPI annually.
8. In the absence of any relevant international agreement post-2012 (not even one which binds only the developed countries), the Garnaut Final Report recommended extending the arrangements for the transitional period (that is, selling permits at a rising fixed price) until the earlier of the achievement of an international agreement or 2020.

Schedule 2

Revised timetable (announced 15 December 2008)

Endnotes

1. Executive Summary of the White Paper, White Paper
2. Green paper
3. Garnaut report
4. There are three types of eligible international units, each under the Kyoto Protocol: ‘certified emissions reductions’ created under the Protocol’s Clean Development Mechanism; ‘emission reduction units’ created under the Protocol’s Joint Implementation Mechanism; and ‘removal units’ created by a country on the basis of land use change activities.  
5. See footnote 4.
6. Bali Action Plan
7. Conclusions adopted by the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol at its resumed fourth session held in Bali, 3–11 December 2007
8. See footnote 4.
9. Offshore Petroleum Amendment (Greenhouse Gas Storage) Act 2008 (Cth) article 
10. On 18 February 2009, the Federal Department of Climate Change released a Guidance Paper spelling out data requirements and deadlines for companies seeking permit allocations for their emissions-intensive, trade-exposed (EITE) activities. The assessment process will shape Government decisions about which activities are entitled to free permits and the amount of free permits companies engaged in EITE activities are entitled to receive. The paper sets out a preliminary assessment process to identify industries that will potentially meet the criteria for assistance and should therefore undergo formal assessment. However, the paper nominates 33 production processes that the department has already identified as having the potential for assistance and which will therefore be able to skip the preliminary assessment. These industries include alumina refining, aluminium smelting, cardboard manufacturing, carton-board manufacturing, clinker production, float glass production, lime production, LNG production, newsprint manufacturing, pig iron production, printing paper manufacturing, glass container production, iron and steel manufacturing, lead and zinc refining and smelting and tissue paper manufacturing. 
11. An original timetable was announced by Senator Wong on 17 March 2008. A revised timetable was announced at the time of release of the White Paper. Details of the timetables are set out in Schedule 2.
12. The July 2008 Green Paper gave indications about the Rudd Government’s preferred position on national targets. Its preferred position is to include non-binding medium- (2020) and long-term (2050) national targets in the objects clause of the legislation establishing the CPRS. It is possible that the factors which the Federal Government may consider when making decisions about the targets could also be included in an objects provision. Also, the CPRS annual caps will not be included in the establishing Act because it would require frequent amendment to update the caps. These will be set out in the delegated legislation.

This article was written by John Taberner, Consultant, Michael Voros, Solicitor and Renee Garner, Solicitor, Projects.

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