Release of Senator Wong’s Green Paper on Carbon Pollution Reduction

Introduction

Senator Penny Wong today released the Australian Government’s Green Paper on Carbon Pollution Reduction (Green Paper).

Like the June 2008 Draft Report of the Garnaut Review released on Friday 4 July 2008 (Draft Garnaut Report), the Green Paper is a strong call to action to remove the link between economic activity and greenhouse gas emissions.

In most areas, the key proposals of the Green Paper do not differ significantly from the recommendations of the Draft Garnaut Report. The major exceptions to this are the Green Paper’s proposals:

1. to offset the additional carbon cost imposed on liquid transport fuels by cuts to fuel taxes
2. to include Kyoto-compliant forestry activities, but permanently to exclude deforestation, and
3. to provide specific assistance to the coal-fired electricity generation sector.

The Green Paper sets out more concluded policy positions and fewer genuine options than may have been expected. For that reason, the Green Paper gives a fairly clear picture of how the government proposes to proceed. It is to be read as a companion piece with the consultation paper Design Options for the Expanded National Renewable Energy Target Scheme released on 2 July 2008 by the COAG Working Group on Climate Change.

The coming months until the release of the foreshadowed White Paper are likely to see intense lobbying by industry and other interested groups in relation to the few genuine options canvassed by the Green Paper.

Key proposals

The key proposals of Green Paper are as follows:

1. The Green Paper proposes a cap-and-trade emissions trading scheme. No other form of emissions reduction schemes is proposed. In particular, carbon tax is not proposed.
2. The proposed emissions trading scheme is to be called the Carbon Pollution Reduction Scheme (CPRS).
3. The CPRS will place a cap on emissions and will require affected businesses to buy a pollution permit—to be called an Australian Emissions Unit (AEU)—for each tonne of CO2e emitted.
4. The CPRS would place obligations on about 1,000 Australian companies.
5. The CPRS will commence ‘in 2010’.
6. The CPRS will be accompanied by the following business and household supports:
   
   
   1. 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 Green Paper does not specify the precise mechanism for implementing this policy. The policy will be reviewed after three years.
   2. Other assistance measures will be introduced to help low- and middle-income households and to improve household energy efficiency.
   3. Permits will be issued free to ‘the most emissions intensive trade exposed industries’.
   4. There will be direct assistance to coal-fired electricity generators.
   5. Two specific industry adjustment funds will be established: the Climate Change Action Fund and the Electricity Sector Adjustment Scheme.
   6. Revenue from the sale of permits under the CPRS will be used for the purposes of these business and household supports.

These matters are discussed in further detail below.

The CPRS

The main features of the CPRS, in overview, are as follows:

Cap

The Green Paper reiterates the government’s commitment to reducing Australia’s greenhouse gas emissions to 60 per cent of 2000 levels by 2050.

However, the Green Paper does not contain an announcement of any specific cap or caps. Rather, it foreshadows that such an announcement will be made by the end of 2008 (after the completion of Treasury modelling).

Also, the Green Paper makes it clear that, under the CPRS, caps will be set for five year periods in advance and will not be altered within those periods even if in respect of any such period Australia undertakes changes in international obligations. In that case, the government will, if necessary, make up any shortfall in internationally agreed targets by purchasing international emissions units.

In addition, under the CPRS there will be a process to establish ‘gateways’ to subsequent periods (namely: ranges within which caps will be set in the next ten years after a relevant period).

In other words, at any particular time the following things will be known under the CPRS: the cap for the current five year period; and the range within which the caps for the periods within the next ten years will be set.

Covered greenhouse gases:

All six internationally recognised greenhouse gases will be covered, namely: carbon dioxide, methane, sulfur hexafluoride, nitrous oxide, hyrdrofluorocarbons and perfluorocarbons.

Covered sectors

1. The Green Paper proposes almost as wide a coverage as the Draft Garnaut Report.
   
   
   1. The following sectors are proposed for coverage under the CPRS: stationary energy, transport, fugitive emissions¹, industrial processes, waste and (optionally) Kyoto-compliant forestry.
   2. It also proposes that agriculture will be included at a date no earlier than 2015, a decision to be made on this subject in 2013.
      
2. Deforestation will be permanently excluded from coverage.
3. Emissions of synthetic greenhouse gas will be covered by the CPRS.
4. Emissions from combustion of biofuels and biomass for energy will not be covered by the CPRS.
5. Transport fuel which is exported, used for international transport, sequestered in plastics or supplied to visiting defence forces and consular vehicles will be excluded from coverage.
6. The Green Paper proposes a threshold before obligations under the CPRS are imposed on any entity within a covered sector, namely: the entity must emit at least 25,000 tonnes per year of emissions of CO2e. This threshold is subject to exceptions:
   
   
   1. It does not apply to entities which are up-stream transport fuel suppliers.
   2. It also does not apply to a number of other entities (such as: coal mines; producers of coke and coal by-products; and other specified coal-related industries) in certain circumstances where those entities are supplying fuel to small emitters.
   3. Carbon that is transferred to carbon capture and storage (CCS) facilities will be netted out of the originating entity’s gross emissions.
      
7. In relation to CCS facilities, obligations for fugitive emissions—from transport of the carbon and from the CCS facility—will be imposed under the CPRS on the operator of the CCS facility.
8. Owners of Kyoto-compliant forests² will be able to ‘opt in’ to the CPRS at any time after its commencement. Owners who opt in will be issued AEUs for the increased net quantity of CO2 that is stored in the forest. However, they will also be liable to account for their deemed emissions when any part of the forest is felled (according to the Kyoto Protocol rules).

Compliance period

The compliance period under the CPRS will be annual by reference to financial years. That is, liable parties will be obliged to acquit AEUs in respect of their emissions in each financial year.

Method of allocation of AEUs

1. As a general rule, AEUs will be publicly auctioned on a quarterly basis, the first auction to take place ‘as early as is feasible’ in 2010. At one of the quarterly auctions, AEUs for future years (up to three years in advance) would also be auctioned. The government has invited submissions on the desirability of more or less frequent auctions.
2. Special rules will apply in the case of allocation to emissions-intensive trade-exposed industries (EITE Industries). The Green Paper does not indicate how an industry may qualify to be an EITE Industry except to state that ‘all industries, other than those for which there exists a physical barrier to trade, would be considered’. The Green Paper implies that agriculture, if and when included in the CPRS, will be an EITE Industry. The government proposes to provide a share of free AEUs to the most-emissions-intensive trade-exposed industries. This share will amount to around 20 per cent of all AEUs, rising to 30 per cent if and when agriculture becomes a covered sector in the CPRS.
3. The following allocation method is proposed for EITE Industries.
   
   
   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 would get a free allocation to cover 60 per cent of their emissions.
   2. Activities that have an emissions intensity above 2,000t per million dollars of revenue would 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.
      
4. Assistance would be provided until 2020 unless broadly comparable carbon constraints in other countries, or sectoral agreements, are developed. After 2020, assistance would be phased out over five years, assuming an acceptable global agreement is in place.
5. The auction process will be subject to a price cap applying in the first five years of the CPRS. The Green Paper does not specify the cap but foreshadows that it will be at a level high enough to make it improbable that the cap will be exceeded.

Availability of banking and borrowing

AEUs will be freely bankable. Borrowing of AEUs will also be allowed on a limited basis.

Penalties

1. Compliance and enforcement provisions, including penalties, will be finalised ‘over the remainder of 2008’.
2. The Green Paper discusses, but does reach a conclusion concerning, any ‘make-good’ obligations which might apply despite payment of the penalty.

Admissible offsets

1. The Green Paper foreshadows a very limited role for domestic offsets.
   
   1. As noted above (at Covered sectors (h)), Kyoto-compliant forestry will be eligible to participate in the CPRS as a covered sector, and owners who opt in will be issued AEUs for the increased net quantity of CO2 that is stored in the forest.
   2. As noted above (at Covered sectors (f)(3)), CCS will also be covered directly by the CPRS.
   3. The Green Paper contemplates that agriculture will not be able to generate offsets in the period prior to its inclusion in the CPRS.
      
2. The Green Paper states that, in 2013, the government will give further consideration to the scope for offsets generated in sectors that cannot be included in the CPRS.

International linkages

Like the Draft Garnaut Report, the Green Paper contemplates a judicious and calibrated approach to international linkage.

1. Initially (and with minor exceptions), the only practicable possible international linkage will be to credits generated under the Kyoto Protocol’s Joint Implementation (JI) mechanism and its Clean Development Mechanism (CDM).
2. Certified emissions reductions (CERs) generated under the CDM will not be accepted in any event if they are from forestry-based projects.
3. There will be a limit on the extent to which liable entities can use CERs and credits generated under JI to meet their obligations under the CPRS. This limit will apply for the first two years of the CPRS. The limit will be specified in the White Paper to be issued at the end of 2008.
4. At least in the early years of the CPRS:
   
   
   1. AEUs will not be capable of conversion for sale in international markets, and
   2. ‘assigned amount units’ (the allocations made to nations under the Kyoto Protocol) from other countries will be incapable of use in the CPRS.

Other measures

The Green Paper states the government’s commitment that ‘every cent’ raised by the CPRS will be used to assist Australian households and businesses to ‘adjust to the scheme and to invest in clean energy options’.

The Green Paper foreshadows that assistance to households will be given largely through the taxation and social benefits systems, together with the introduction of energy efficiency measures and consumer information. Further details, including what proportion of auction revenues will be returned to households, are not included in the Green Paper.

There will be special assistance for ‘strongly affected industries’, a category of industries separate from EITE Industries and which the Green Paper identifies as having certain characteristics. Among ‘strongly affected industries’ is the coal-fired electricity generation sector.

In relation to that sector, the Green Paper contemplates the establishment of an Electricity Sector Adjustment Scheme (ESAS) which, in conjunction with existing programs such as the National Clean Coal Initiative (NCCI) will be available to do the following (among other) things:

1. provide direct assistance to coal-fired generators
2. address particular impacts of the scheme on workers, communities and regions, and
3. support the development and deployment of CCS technologies.

Direct assistance to coal-fired generators may consist of direct payments or free carbon pollution permit allocations to relevant entities in the sector. However, the Green 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.

The Green Paper foreshadows a range of measures to assist workers, regions and communities on which a ‘clear and sizable burden’ has been, or is highly likely to be, imposed by the introduction of the CPRS. The Green Paper, however, contains few further details of what form that assistance will take or how it will be allocated.

The Green Paper states that the government recognises that ongoing support will be needed to continue to help drive the development and deployment of CCS technology. The Green Paper is not specific about how this support will be provided. It simply states that any further support should recognise the technical and institutional hurdles to the development and deployment of CCS technologies, and reflect Australia’s significant domestic and international interests in the development of this technology.

The Green Paper also foreshadows the establishment of a Climate Change Action Fund which will focus on industries 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.

Transitional arrangements

Importantly, the Green Paper calls for the phase-out of the existing market-based carbon abatement schemes in force in the States and Territories, in line with the Council of Australian Governments’ complementary measures and streamlining agenda. This would apply particularly to the New South Wales Greenhouse Gas Reduction Scheme (GGAS) and its ACT counterpart.

Endnotes

¹ Namely: methane, carbon dioxide and nitrous oxide emitted during the production, processing, transport, storage and distribution of coal, oil and gas.
² Namely: forests established since 1990.

For more information please contact

Name : John Taberner
Title : Consultant
Office : Sydney
Phone : +61 2 9225 5427
Fax : +61 2 9322 4000
Email : john.taberner@freehills.com