Release of Federal Government Green Paper on Emissions Trading Scheme

The Minister for Climate Change, Senator the Hon Penny Wong, today released the Rudd Government’s Carbon Pollution Reduction Scheme Green Paper.  The Green Paper details:

• The structure of the Government’s Carbon Pollution Reduction Trading Scheme
• Compensation for households and trade exposed emissions-intensive industries
• How to address the upfront costs that the Scheme will impose on electricity generators.

The Green Paper follows from a commitment given by Federal Labor prior to the 2007 Federal Election to introduce Australia’s first national emissions trading scheme in the context of its response to climate change more generally. The broad approach on climate change being taken by the Government rests on three pillars:

• Reducing Australia’s greenhouse gas emissions, marked by the target of reducing emissions by 60 per cent of 2000 levels by 2050.  The Government is also committed to setting a medium term target.
• Adapting to climate change that cannot be avoided, acknowledging that there will be far-reaching impacts on the economy, human amenity and the environment.
• Helping to shape a global solution to a global problem.

Key points to note:

• The scheme will be ‘cap and trade’.
• Transport will be included in coverage but the cost of fuel will be offset with matching reduction in the fuel excise.
• Agriculture will not be included until at least 2015.
• Compensation will be provided to businesses and consumers identified as being most vulnerable.

Reducing Australia’s greenhouse gas emissions and emissions trading

The Rudd Government recognizes that the most effective way to drive reductions is to use market based mechanisms.  The Government has previously indicated it will place a cap on the emissions allowed to be produced, with permits issued up to the level of the cap each year. This was confirmed as the preferred model in the Green Paper. Under a cap plan, businesses would surrender to the Government a number of permits equal to their emissions, creating a market for permits.  This would produce a market for permits, to be actively traded, at a price.

Design principles:

1. Australia’s federal emissions trading scheme will be ‘cap and trade’.  It will set an overall environmental cap by issuing a set number of permits, and allow entities to trade permits, thus putting a price on carbon.
2. The caps will be designed to place Australia on a low emission path in a way that best manages the economic impacts of transition.   The Government has also committed to ensuring that the design parameters balance the desirability of international linking to form an emerging global market with the need to meet Australian objectives, particularly in the early stages of implementation.
   1. The Government has indicated that it will announce a medium-term national target range for 2020 by the end of 2008.
   2. The Government proposes to announce a methodology for setting scheme caps for the period 2010-2011 to 2014-15 consistent with the Government’s national emissions targets.  The Government will announce finalized scheme caps for the first five years of the scheme in early 2010.  This will also enable the Government to take into account international climate change developments, including negotiations and commitments made by major developed and developing countries.
   3. In order to provide certainty to business, the Government also proposes that beyond the five year period of scheme caps, it will identify a range (a ‘gateway’) within which future scheme caps must be set.  ‘Gateways’ will extend for 10 years and will be reviewed and extended at five year intervals. This will mean that market participants will know what the caps will be for the forthcoming five years, followed by an indicative range within which future caps will be set. Further information can be found here.
3. The scheme will have maximal practical coverage of greenhouse gases and sectors.  The broader the scheme’s coverage the more cost-effectively it will reduce greenhouse gas emissions, and the more likely the burden of reductions be spread more fairly.
   1. The Government proposes that all greenhouse gases included under the Kyoto Protocol be covered from the Scheme’s commencement.  These include: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydroflurorocarbons, and perfluorocarbons.
   2. The Government proposes that transport (which contributes approximately 15 per cent of the country’s carbon pollution) will be included in the coverage of the ETS, but that the anticipated impact on petrol prices will be offset with a matching cut in the fuel excise, with a periodic review of the adjustment mechanism over a three year period (until 2013). Whatever fuel excise has been removed from the price of fuel after 2013 will stay off permanently.
   3. The Government proposes that in general, scheme obligations would apply directly to large emitters (to facilities that direct emissions of 25,000 tonnes of carbon dioxide equivalent a year or more).  As such, the Government has proposed that emissions from stationery energy, industrial processes, waste and fugitive emissions from oil and gas production be covered from the Scheme’s commencement.  Where there are large numbers of small emitters, the Government considers it more practical to cover emissions by applying scheme obligations at another point along the supply chain.  The Government does not anticipate that a majority of Australia’s 7.6 million registered businesses will face additional regulatory burdens under the Scheme.
   4. The forestry sector will be included on a voluntary basis.
   5. Agriculture is not proposed to be included in the trading scheme at commencement in 2010, and the Government has indicated that it is not disposed to include the sector until 2015 at the earliest. A final decision on whether to include agriculture at this stage is expected to be made in 2013 following the identification of practical methods for the sector’s inclusion, including the development of cost-effective methods of emissions estimation and reporting.
4. The Government has indicated that the design will address the competitive challenges facing emission-intensive trade-exposed industries in Australia.  The Government has flagged its concern that the introduction of a carbon price ahead of effective international action can lead to perverse incentives for such industries to relocate or source production offshore.  The Government will assess the impact of the scheme on industries for which this might pose a risk, while ensuring that incentives remain for these industries to adjust their emissions profiles consistent with an emerging global carbon constraint.

The Government’s approach to the Scheme’s design

Several sources of information are informing the Government’s approach:

• The Government has committed to ongoing consultation with State and Territory Governments, including through the COAG Working Group on Climate Change and Water.
• The independent review being undertaken by Professor Ross Garnaut (see Hawker Britton’s Occasional Paper on Professor Garnaut’s draft report here).
• The Australian Treasury is modeling the effects of different emission reduction trajectories on growth, employment, income and prices across the economy. This modeling is now due to be released in September 2008.
• The work undertaken by State and Territory Governments, through the National Emissions Trading Taskforce and the report of the Task Group on Emissions Trading will also be included as part of the Government’s deliberations.  The views already expressed by industry to the NETT will be taken into account when formulating final policy positions.
• The Government will continue to consult widely throughout the design process. The Government is seeking submissions in response to the Green Paper.  Deadline for submissions is 10 September. Further details can be found here.

Assistance and Compensation

One of the central objectives of the Government’s focus on climate change has been how to facilitate significant and permanent changes in the behavior of business and households.

The Rudd Labor Government has recognized that the introduction of a comprehensive Emissions Trading Scheme will have a significant impact not just across resource-intensive industries, but will also affect households and family budgets.  The Government has indicated that preliminary modeling of a carbon price of $20 per tone suggests an average increase in the cost of living of approximately 0.9 per cent in 2010-11.

The Government has indicated that it will develop and introduce a range of measures to assist both trade exposed emissions-intensive industries and households to adjust to the impact of carbon prices.

Assistance for business

While recognizing that many businesses will be able to pass through most of the cost of carbon in the price of their products, trade exposed industries may not be able to do this because of factors beyond their control (eg they are price takers on world markets). To ensure the Scheme’s integrity, the Government proposes to provide some free permits to emissions-intensive trade exposed businesses.  At this stage, the Government’s preferred position is to allocate up to around 30 per cent of permits to businesses conducting emissions intensive, trade exposed activities.  The Government has identified a threshold of 1500 tonnes CO2-e per million dollars of revenue for eligibility under the proposed approach.  The rate of assistance is proposed as:

Proposed eligibility threshold (tonnes of emissions per million dollars revenue)	Proposed assistance rate (initial assistance as proportion of baseline emissions)
Activities above 2000	90
Activities between 1500 and 2000	60

It is proposed that this rate of assistance per unit of output would be reduced over time at a pre-announced rate, with assistance provided until 2020 unless broadly comparable constraints are introduced in other countries, or sectoral agreements are developed.  Federal Government assistance would be phased out over five years after 2020 and once an acceptable global agreement that places obligations on key competitor economies takes effect.

Other industries not subject to trade effects may nonetheless face large changes in their profitability as a result of the ETS.  These are likely to be highly emissions intensive, unable to fully pass on carbon costs, and be owners of significant long-lived assets (eg electricity power generators) with little prospect of alternative use.  The Government has indicated it is disposed toward delivering support to such industries and businesses through the establishment of the Electricity Sector Adjustment Scheme.

More general assistance for business is also proposed through the establishment of the Climate Change Action Fund, the purpose of which is to facilitate Australia’s transition to a low carbon economy.  It is proposed that the Fund will provide partnering funds for a range of activities, including:

• Capital investment in new low emissions processes
• Industrial energy efficiency projects with long payback periods
• Information-sharing of best and innovative practice among small and medium sized enterprises.

Assistance for households

The Government has previously indicated that the substantial revenue generated from the operation of the Emissions Trading Scheme will be used to assist households identified as being most vulnerable to the introduction of a carbon price.  Minister Wong again confirmed this position today.  The Green Paper indicates the Government is committed to:

• Increase payments, above automatic indexation, to people in receipt of pensioner, carer, senior and allowance benefits and provide other assistance to meet the overall increase in the cost of living flowing from the scheme.
• Increase assistance to other low-income households through the tax and payment system to meet the overall increase in the cost of living flowing from the scheme.
• Provide assistance to middle-income households to help them meet any overall increase in the cost of living flowing from the scheme.
• Review annually in the Budget context the adequacy of payments to beneficiaries and recipients of family assistance to assist households with the overall impacts of the scheme, noting that these payments are automatically indexed to reflect changes in the cost of living.
• Provide additional support through the introduction of energy efficiency measures and consumer information to help households take practical action to reduce energy use and save on energy bills so that all can make a contribution.
• The Government has also indicated in the terms of reference for Australia’s Future Tax System Review that it is to consider the interrelationships between the tax and transfer payment systems and the scheme.

Timeframe

August 2008	Professor Ross Garnaut scheduled to release a supplementary draft report on Climate Change
September 2008	Release of economic modeling by Treasury
September 2008	Release of the final Climate Change Review
End 2008	The Government to develop an exposure draft on emissions trading legislation
2009	Passage of emissions trading legislation through Parliament
2010	Commencement of Emissions Trading Scheme

Further resources

The Government’s Green Paper can be accessed here.

Hawker Britton’s Occasional Paper on Professor Garnaut’s draft report on climate change is here.