Understanding Coalition Amendments to the proposed Carbon Pollution Reduction Scheme

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The purpose of this paper is to outline the amendments to the Carbon Pollution Reduction Scheme (CPRS) that the Coalition has put forward for negotiation with the Government. These amendments were outlined in a media release from the Leader of the Opposition ¹.

The Carbon Pollution Reduction Scheme

Under the CPRS, the Government will set an annual limit (or cap) on the total amount of carbon pollution that can be emitted within Australia. The cap will be gradually lowered, reducing the level of carbon pollution produced each year. Companies or other groups within Australia that need to emit carbon to do business will need to purchase permits (or may be issued with permits) that represent the right to emit a specific amount of carbon pollution. The total amount of permits issued overall cannot exceed the government-set cap. Businesses will be able to trade permits among themselves if they find they have more than they need – or if they don’t have enough – ensuring that abatement (reducing emissions) occurs at a minimal cost.

The legislative package to establish the CPRS was voted down by the Senate on 13 August 2009. The Government reintroduced the Bills into the House of Representatives on 22 October 2009. The Senate is expected to vote on the legislation in the week beginning 16th November 2009, ahead of the UN Climate Change Conference in Copenhagen on 7-8 December.

Coalition Amendments

The Coalition has put forward a number of amendments to the CPRS legislation. Following is a brief description of each of the changes proposed.

Emissions-Intensive Trade-Exposed Industries
“The CPRS commits Australia to a minimum 5 per cent reduction in national emissions from 2000 levels by 2020. Adopting such a target ahead of some other countries will mean that Australia’s traded industries face higher costs than some of their international competitors, which may have a significant impact on the most emissions-intensive trade-exposed (EITE) industries.”² The Government is committed to supporting these industries in order to reduce the risk of ‘carbon-leakage’ and providing transitional assistance through the EITE Assistance Program.

The following tables provide a summary of the key features of the EITE Assistance Program under the CPRS.

Table 1: Summary of Key Features of the EITE Assistance Program ³

Table 2: Government’s policy on key elements of the EITE assistance program ⁴

Rates of Assistance

The emissions intensity of activities will be measured in terms of either Carbon Emissions per $million of revenue or Carbon Emissions per $million of value-added. As outlined above (see ‘Initial rates of assistance’), the CPRS proposes two levels of assistance (90% or 60%) for EITE activities with an emissions intensity falling between certain ranges – ‘highly emissions-intensive’ or ‘moderately emissions intensive’.

The Coalition proposes to amend the CPRS to provide a single level of assistance for EITE industries at 94.5 per cent until 2014-15 and 90 per cent from 2015-16 onward. Under the Coalition’s model there would be no distinction between ‘highly emissions-intensive’ and ‘moderately emissions-intensive’ activities and therefore a higher percentage of assistance would be available to a broader range of activities (based on emissions intensity).

Further, the Coalition proposes to set a minimum threshold to qualify for EITE assistance – at 850 tonnes of CO2 per $1 million of revenue (compared to 1000 tonnes which is the minimum under the current CPRS legislation) or 2550 tonnes per $1 million of value-added (compared to 3000 tonnes under the current CPRS legislation). Dropping the threshold for assistance effectively means that more businesses will be eligible for assistance than under the Government’s current model.

Review of Assistance

The Coalition also wants to amend the way the EITE assistance is reviewed.

The current CPRS legislation allows for an independent body to review the EITE Assistance Program every 5 years (so the first review around 2014-15), or at the request of the Minister. As per the table above, the reviews would consider the existence of comparable carbon restraints in other countries when making a decision about whether an industry should continue to receive assistance. However, the Coalition wants to make amendments so that assistance can only be phased out if the independent body (the Productivity Commission) determines that 80 per cent of relevant international competitors are subject to comparable emission constraints. The Coalition argues that this will create a more predictable process for withdrawal of EITE assistance, although the time frame for withdrawal is a minimum of five years, the same as under the current CPRS legislation.

Eligible EITE industries

The Government has already identified a number of EITE industries/activities (see http://www.climatechange.gov.au/government/initiatives/cprs/eite/eligibility-assessment-process/eite-activity-definitions.aspx).

The Coalition proposes to include primary food processing as an EITE industry. This would include dairy, abattoirs, malt, canning, sugar and similar processing. Kate Carnell, the Chief Executive Officer of the Australian Food and Grocery Council has expressed the concerns the industry has of the possibility that “…in the absence of a global agreement on greenhouse emissions, more expensive carbon levied Australian goods will be placed at a competitive disadvantage when forced to compete against imported goods from non-carbon levied nations. ⁵”

The Government has suggested that ‘downstream activities’ should be assessed independently ⁶ :

Definition of EITE Activities

The Coalition has put forward an amendment to require the Department of Climate Change to use the Australian Bureau of Statistics (ABS) definition of ‘value-add’ which includes consumables and other non-capital and non-labour costs of the activity. The Coalition suggests that defining EITE activities in this way will enable those activities that involve a number of sequential or parrallel processes to be assessed as a single integrated activity.

However, the Government has previously explained that using the ABS definition would be complex and difficult ⁷.

The Government has explained its position on integrated activities ⁸:

Further detail on the ‘No overlap’ principle is at Attachment A.

Agriculture

Agriculture emissions consist mainly of methane and nitrous oxide from livestock and cropping, and make up 16 per cent of Australia’s emissions (Australia’s second largest source). In the Green Paper, the Government outlined the reasons why it would not be practical to cover agriculture emissions from the commencement of the Scheme. The Government has previously stated it would make a final decision on whether to include agriculture emissions in the Scheme by 2013, for a 2015 commencement.

The Coalition wants to amend the CPRS legislation to explicitly exclude agricultural emissions, to ensure that any future inclusion would require Parliamentary approval rather than simply a regulatory change. The Coalition also wants the Government to commit to a range of agricultural carbon offsets equivalent to those available in comparable jurisdictions such as the United States and European Union. The following diagram illustrates the effect of including domestic offsets in a cap and trade scheme ⁹.

In the Green Paper, the Government indicated that the CPRS would not include domestic offsets from agriculture emissions in the period prior to coverage of these emissions (i.e. 2015), mostly because of the difficulties of measuring the sector’s emissions. The Government has indicated that it would consider the scope for offsets from emissions sources that could not be included in the scheme in 2013, following final decisions on coverage of agriculture emissions.

Biosequestration

The Coalition is asking the Government to provide increased funding for research and trials of agricultural and biological sequestration such as biochar, algae, soil carbon and other technologies. Coal mining fugitive emissions

Fugitive emissions are primarily methane, carbon dioxide and nitrous oxide emitted during the production, processing, transport, storage and distribution of coal, oil and gas. Fugitive emissions account for 6 per cent of Australia’s emissions.

Generators that emit over 25,000 tonnes of CO2-e6 per annum will be liable to acquire and surrender carbon pollution reduction permits (to be known as Australian Emission Units (AEUs)) equivalent to their actual emissions of CO2-e. Each AEU represents one tonne of CO2-e.

As a ‘strongly affected industry’, the coal-fired electricity generation sector will benefit from the Electricity Sector Adjustment Scheme (ESAS), and will receive part of their requirements for AEUs for free.

The Coalition wants to amend the CPRS to exclude coal mine fugitive emissions from the Scheme. However, under the Coalition model, fugitive emissions would be controlled and abated through regulation. The Coalition proposes that from 2013, ‘rich methane gas’ from underground coal mines is used for beneficial uses that are technically and economically feasible, for example, supply to the gas grid and/or generation of electricity. The Coalition also proposes to remove the compensation to the coal industry offered under the proposed CPRS.

Further, fugitive emissions from coal mines would be subject to a reduction target of 30% by 2025 with the target reviewed every 5 years by the Minister.

Electricity Generators

The Climate Change White Paper noted that stationary energy contributes approximately 50% of Australia’s emissions. Emissions from this source are from the ‘combustion of fossil fuels, mainly coal and gas, to produce energy for purposes other than transport. The largest emitters are electricity generators with most remaining emissions coming from on-site power generation within the manufacturing, construction and petroleum refining industries. Home heater, on-site diesel generation, and farm machinery also make a contribution.^’10

The CPRS White Paper states:

“The CPRS will impose a carbon cost on all fossil fuel-fired generators. The most emissions intensive generators may be constrained in their ability to pass on these costs, leading to a decrease in their asset values. In the absence of any assistance, this could negatively impact on the investment climate in the Australian energy industry.

The Government will provide assistance to the coal-fired electricity generation sector through the Electricity Sector Adjustment Scheme (ESAS) to help the transition to a low emissions economy under the CPRS. The ESAS will provide a fixed administrative allocation of permits to generators over five years (delivering around $3.8 billion of assistance in nominal terms, based on estimated carbon prices under a 5 per cent reduction in emissions from 2000 levels by 2020).

Assistance will be available to coal-fired generators that have an emissions intensity above 0.86 tonnes of CO2-e per megawatt hour generated, and that were in operation, or committed to be constructed, on 3 June 2007. Assistance will be allocated to individual generators on the basis of historical energy output and emissions intensity data. This approach targets assistance to those generators that are most likely to be heavily impacted, whilst maintaining their incentive to reduce emissions in response to the carbon price.”¹¹

The Coalition proposes to amend the CPRS to offer greater compensation to electricity generators by extending the provision AEUs to coal-fired generators from 5 years to 15 years. This will increase the total AEUs available to generators from 130 million to 390 million.

The Coalition also suggests that this assistance should be allocated to all generators in proportion to their asset losses rather than their asset size, as this would ensure that private and state government owners of relatively efficient black-coal plants receive a fairer share of assistance.

In the Climate Change White Paper, the Government indicated that it is not in favour of fully compensating electricity generators for a lost asset value.

The Coalition also put forward an amendment to set national emissions caps and gateways ten years (rather than five years) in advance in order to create greater certainty for electricity generators.

Electricity Prices

The introduction of the CPRS will impact electricity prices. In the Green Paper, the Government proposed the establishment of ‘a baseline level of electricity use per unit of production for the activity (the electricity intensity baseline) and determine an electricity allocation factor which would specify the number of permits to be allocated for each unit (megawatt-hour) of electricity consumed’¹².

“The intent of the electricity allocation factor was that it would reflect the likely average electricity price impact of the Scheme converted into permits. That is, the difference between the electricity price impact of the Scheme and the electricity price that would have occurred had the Scheme not been introduced, divided by the expected permit price. The expected price increase needs to be converted into permits since it is proposed that permits would be allocated to assist with electricity related cost increases.

This approach was suggested since the existence of competitive electricity markets implies what is relevant from an assistance perspective is not the emissions associated with electricity generation, but the increased price of electricity that is passed through the electricity supply chain to the entity conducting the EITE activity” ¹³.

After much consideration, the Government decided to adopt a single, nation-wide electricity allocation factor to use in assessing the eligibility of EITE activities and determining allocative baselines. A single national electricity allocation factor set at one permit per megawatt-hour is likely to provide an appropriate level of assistance to EITE entities in relation to their electricity use” ¹⁴.

The Coalition, however, is in favour of amending the CPRS to an ‘intensity-based cap-and-trade model’ for generators. It would function in the same way as the EITE industry assistance program based on output, but would include the introduction of an intensity target for permit allocations to the electricity sector.

The Coalition’s model is supported by a report they commissioned by Frontier Economics. This report is available at http://www.frontier-economics.com/europe/de/news/783/. The table below is from the Frontier Economics Report. It shows average change in wholesale electricity price under the intensity model relative to the CPRS ¹⁵.

Average change in wholesale electricity price under the intensity model relative to the CPRS

The Coalition argues that under the CPRS, retail electricity prices will rise by close to 20 per cent in the first two years. Under an intensity approach, the Coalition believes retail electricity prices would rise by less than 5 per cent in the first two years.

The Coalition suggests that the ‘intensity’ model will deliver the same emissions cuts as the CPRS but with a much smaller increase in electricity prices. They argue that this would greatly reduce the burden on small and mid-sized businesses.

The Coalition has also proposed that if the Government does not consider the intensity model, the Coalition will negotiate for an alternative approach to cushion near-term electricity price increases for small businesses.

Energy Efficiency and Voluntary Action

The Coalition proposes to amend the CPRS provide greater incentive for households and businesses to invest in energy efficiency measures. They propose that this could be done by establishing a national ‘white certificate’ scheme – a voluntary carbon market whereby voluntary abatement measures are rewarded with the issue of a certificate which is then able to be sold into either the official market or a voluntary market operating in advance of the official market. This, they argue, would lead to a lower national level of emissions as businesses and households can earn credits for efficiency measures.

Thus the Coalition also supports the creation of a voluntary offset market in advance of the CPRS and amending the CPRS to ensure that voluntary abatement is included in the national emissions.

Other Amendments

The Coalition also makes a number of other amendments including:

Low emissions technology assistance: an amendment to provide free permits at Ministerial discretion for up to 5 years for new low emissions technology projects in order to mitigate their initial startup disadvantages.
Fuel tax credit scheme and forestry: an amendment to the CPRS (CPRS Fuel Credits) Bill 2009 to ensure that forestry and carbon sequestration are eligible to participate in the fuel tax credit scheme.
Hydrofluorocarbons (HFCs): an amendment to exclude HFCs from the CPRS as abatement if HFCs is already covered by the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989.
Limited Auctioning in 2011-2012: an amendment to enable limited auctioneering for the first year of the scheme to help in the development of secondary markets and systems to provide better opportunity to adapt to permit trading.
Exported fossil fuels: an amendment to ensure that Australian coal exporters are not held liable for the carbon embodied in the coal they export.

Current Developments

The CPRS legislation was re-introduced to the House of Representatives on Thursday 22 October.

“We’ll be introducing this legislation into the House on Thursday of this week. We propose to have it debated in the week thereafter and voted on in the week beginning November 16th and we’ll be debating it in the Senate thereafter.”

Senator the Hon. Penny Wong, AM Radio, 19 October 2009

The Minister for Climate Change, Senator the Hon. Penny Wong, has had three meetings with the Shadow Minister for Energy and Resources, the Hon. Ian Macfarlane MP, since 19 October 2009 to discuss the legislative timetable and negotiate on the Coalition amendments.

Minister Wong indicated that the Government would hold negotiations ‘in good faith’, but that it will only be prepared to negotiate amendments that ‘maintained the revenue neutrality of the scheme as well as its greenhouse reduction targets’ ¹⁶.

On 28 October 2009 The Australian newspaper reported that the Government will consider accepting the Coalition’s amendment to include agriculture from the CPRS, using regulations to ensure abatement instead (as outlined above).

“I’m pleased to hear from (Senator) Wong that negotiations have commenced and are proceeding in good faith, and I would like to personally thank (Ian Macfarlane) for his genuine efforts to engage with the government.”

Prime Minister Kevin Rudd, 28 October 2009

If the Coalition is successful in negotiating a deal with the Government, the Leader of the Opposition, the Hon. Malcolm Turnbull MP, must also gain the support of the partyroom for a vote in favour of the amended legislation in the Senate. For its part, the Opposition has promised there will be no filibuster when the legislation comes before the Senate in November.

The final session of Parliament is from Monday 23 to Thursday 26 November, ten days before the Copenhagen Climate Change Conference from 7-8 December.

Attachment A

¹⁷

¹Liberal Party of Australia, 18 October 2009, Coalition Plan to Save Jobs and Reduce Costs, available at http://www.liberal.org.au/news.php?Id=3975).

²Australian Government Department of Climate Change, December 2008, CPRS White Paper, Chapter 12, “Assistance to emissions-intensive trade-exposed industries”, p. 1, available at http://www.climatechange.gov.au/government/initiatives/cprs/~/media/publications/white-paper/V2012Chapter-pdf.ashx.

³ibid, p. 2.

⁴ Australian Government Department of Climate Change, June 2009, Establishing the eligibility of activities under the emissions-intensive trade-exposed assistance program, p. 6, available at http://www.climatechange.gov.au/~/media/publications/eite/activity-eligibility.ashx.

⁵ Australian Food and Grocery Council, 15 December 2008, Manufacturers Respond to CPRS White Paper, available at http://www.afgc.org.au/index.cfm?id=776.

⁶ Australian Government Department of Climate Change, June 2009, Establishing the eligibility of activities under the emissions-intensive trade-exposed assistance program, available at http://www.climatechange.gov.au/~/media/publications/eite/activity-eligibility.ashx, p. 18.

⁷ Australian Government Department of Climate Change, December 2008, CPRS White Paper, Chapter 12, “Assistance to emissions-intensive trade-exposed industries”, available at http://www.climatechange.gov.au/government/initiatives/cprs/~/media/publications/white-paper/V2012Chapter-pdf.ashx, pp. 33-34.

⁸Australian Government Department of Climate Change, June 2009, Establishing the eligibility of activities under the emissions-intensive trade-exposed assistance programavailable at http://www.climatechange.gov.au/~/media/publications/eite/activity-eligibility.ashx, p. 20.

⁹Australian Government Department of Climate Change, December 2008, CPRS White Paper, Chapter 6, “Coverage”, available at http://www.climatechange.gov.au/government/initiatives/cprs/~/media/publications/white-paper/V2012Chapter-pdf.ashx. p.63

¹⁰Australian Government Department of Climate Change, December 2008, CPRS White Paper, Chapter 6, ‘Coverage’, available at http://www.climatechange.gov.au/government/initiatives/cprs/~/media/publications/white-paper/V2012Chapter-pdf.ashx. , p. 8.

¹¹ Department of Climate Change website, Electricity Adjustment Scheme, available at http://www.climatechange.gov.au/government/initiatives/cprs/esas.aspx.

¹²Australian Government Department of Climate Change, December 2008, CPRS White Paper, Chapter 12, “Assistance to emissions-intensive trade-exposed industries”, available at http://www.climatechange.gov.au/government/initiatives/cprs/~/media/publications/white-paper/V2012Chapter-pdf.ashx, p. 61.

¹³ibid.

¹⁴ibid., p. 65.

¹⁵ibid., p. 44.

¹⁶Coorey, P., 21 October 2009, Labor raises stakes for emissions horse trading’, Sydney Morning Herald, available online at http://www.smh.com.au/environment/labor-raises-stakes-for-emissions-horse-trading-20091020-h6z0.html.

¹⁷Australian Government Department of Climate Change, June 2009, Establishing the eligibility of activities under the emissions-intensive trade-exposed assistance program, p. 19, available at http://www.climatechange.gov.au/~/media/publications/eite/activity-eligibility.ashx,.