Update on Emissions Trading Scheme Negotiations

23rd November 2009

This paper provides an update on the Government’s Carbon Pollution Reduction Scheme.

Background

The legislation to establish an Australian emissions trading scheme (ETS) – the Carbon Pollution Reduction Scheme (CPRS) – was introduced to Parliament on 14 May 2009. The package of bills passed the House of Representatives, and the Senate adjourned consideration until August 2009. In the interim, the Coalition and Senator Xenophon commissioned a report from Frontier Economics to consider the CPRS, its costs, and alternative schemes.

On 13 August 2009, the Coalition, the Greens and Senators Xenophon and Fielding voted down the CPRS Bills.

The same legislation was reintroduced into the House of Representatives on 22 October 2009 and is currently being debated in the Senate.

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.

Developments

The Government has 32 seats in the Senate, meaning they need 8 additional votes to pass the CPRS legislation. The Australian Greens, the National Party and Senator Fielding declared their opposition to the legislation at the outset. The Government and Liberal Party, therefore, have been negotiating amendments to the legislation. Hawker Britton’s Occasional Paper, Understanding Coalition Amendments to the Proposed Carbon Pollution Reduction Scheme, details the Liberal Party’s proposed amendments.

The issue has been divisive for the Liberal Party, with a significant proportion of the parliamentary party voicing their opposition to the scheme publicly, despite the ongoing negotiations with the Government. Other members stated their preference to delay the vote until after the UN Climate Change Conference in Copenhagen in December. Still others expressed their doubts about anthropogenic climate change altogether.

Amendments

Today (23 November), Shadow Minister for Energy and Resources, Ian Macfarlane MP, confirmed that an agreement had been reached with the Government. The Prime Minister and Minister for Climate Change held a joint press conference to detail the final offer delivered to the Opposition.

Key elements as outlined in the Government’s press release include:

  • Emissions-Intensive Trade-Exposed Industries: permanently incorporating the Global Recession Buffer – which provides industries eligible for 60 per cent assistance with a 10 per cent buffer, and industries eligible for 90 per cent assistance with a 5 per cent buffer – into assistance rates. The 1.3 per cent Carbon Productivity Contribution has been retained to ensure all industries reduce their emissions.

  • Coal Sector: A total of $1.5 billion in transitional assistance will be provided to the coal sector over five years. This is an increase from $750 million previously. The Government will commit $270 million to the Coal Mine Abatement Fund through the Climate Change Action Fund to assist gassy coal mines to reduce emissions. In addition, the current COAG Renewable Energy Target (RET) review process will consider whether new waste coal mine gas projects should be eligible.

  • Voluntary Action: The Government will ensure the CPRS takes into account voluntary action by households.  Voluntary action by households will now allow Australia to go beyond our 2020 emissions reduction target. In addition, the CPRS will be amended to ensure that all existing and future purchases of GreenPower will be counted, and allow Australia to go beyond our 2020 national targets.

  • Electricity Sector Adjustment Scheme: An increase of $4 billion in assistance under the ESAS, increasing the total value of permits under the ESAS from $3.3 billion to $7.3 billion. A further three new measures – a Low Emissions Transition Incentive, an Energy Security Assurance Mechanism and deferred payment arrangements - will be introduced to maintain energy security and drive the transition to a low pollution future.

  • Electricity Prices: A Transitional Electricity Cost Assistance Program of $1.1 billion to assist medium and large manufacturing and mining businesses with CPRS-related increases in electricity prices in the early years of the Scheme.

  • Agriculture:  As previously announced by the Government, agricultural emissions will be excluded from the CPRS and offsets for agricultural emissions abatement will be included.”1

Liberal Party position on the Emissions Trading Scheme 

On 24 November 2009, the Coalition Shadow Cabinet and the Joint Party Room met to debate the negotiated amendments. Leader of the Opposition, Malcolm Turnbull, was successful in gaining the support of Shadow Cabinet for the deal, however it was unclear whether he had the support of the Party Room.

On 1 December 2009, the Liberal Party met again, and following a leadership spill, Tony Abbott emerged as the Leader of the Opposition. At that time the party room also voted on their preferred position regarding the proposed emissions trading scheme. A clear majority, of 54 votes to 29, voted to defer the emissions trading scheme legislation in the Senate. This would be achieved by supporting a motion to refer the legislation to a Senate committee for further scrutiny.

If this motion is not successful, the Liberal party room resolved to oppose the emissions trading scheme legislation. This would mean that the bills would not be passed by the Senate for a second time, creating a potential double dissolution trigger for the Government.

However, there is still the possibility that some Liberal Senators will cross the floor, which may enable the legislation to be passed.
Attention will now focus on the Senate, which will likely vote today on a motion to refer the emissions trading legislation bills to committee. If the motion fails, the Senate will continue to consider the legislation and it is unclear when the final vote on the legislation may be. In that event, the Senate has agreed to sit from 10am to 10pm each day until the legislation is resolved. 

Analysis of the final package

The additional expenditure measures cost $1.28 billion over the forward estimates, and $7.01 billion over the period to 2019-20. The Government and the Opposition have agreed to adjust the household package to recognise the lower projected carbon price which is estimated to reduce expenditure by $5.76 billion to 2019-20.

Taken together, this implies a net cost to the Budget of $204 million over the forward estimates and $769 million over the period to 2019-20 compared with the Mid-Year Economic and Fiscal Outlook (MYEFO).

Households

The CPRS will change the prices of the goods and services that all households use. Goods that are emissions intensive to produce will generally become more expensive. This is consistent with the intent of the scheme to reduce greenhouse gas emissions.

The Government is committed to assisting all households, and particularly low income households, to adjust to these changes. The Government will provide a package of direct cash assistance and tax offsets to assist low and middle income households to adjust to the impacts of the CPRS from 2011–12.

Today (24 November) the Government announced that it will modify the level of household assistance to reflect the lower carbon price estimate of $26 per tonne in 2012-13 (included in the 2009-10 MYEFO). The estimated 2012-13 carbon price forecast at MYEFO ($26) is lower than forecast at Budget ($29) due to the appreciation of the Australian dollar. This is expected to reduce expected price increases for goods and services and lead to a smaller rise in the overall cost of living impact of the CPRS.

The overall Budget impact of the modifications to the household assistance package is to reduce spending by approximately $900 million billion over the forward estimates and $5.76 billion to 2019-20.

Voluntary Action

The Government also announced changes that will ensure the CPRS takes into account voluntary action by households, with potential for targets to be adjusted beyond 15 or 25 per cent. The Government will devise a mechanism whereby the collective voluntary action by households – beyond that projected as a result of the CPRS – will be taken into account in setting future caps. This means that voluntary action by households will now allow Australia to go beyond the 2020 emissions reduction target.

In addition, the CPRS will be amended to recognise all emissions savings from the use of GreenPower in determining the cap.

Also, the Government will establish a new Prime Minister’s Task Group on Energy Efficiency, to report by mid 2010 on options for introducing a new Energy Efficiency Mechanism to complement the CPRS and RET.

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 Program3

Table 2: Government’s policy on key elements of the EITE assistance program4

The Government announced today that the CPRS would permanently incorporate the Global Recession Buffer into assistance rates. The table below outlines the effective rates of assistance. The announcement today means the “60% category + Global Recession Buffer” and “90% category + Global Recession Buffer” columns will be the permanent rates of assistance, and will not be removed after 2015-2016 as is indicated in the table below).

The Government also announced that the 1.3% per annum Carbon Productivity Contribution would be retained. This means that initial rates of assistance to EITE industries will be reduced by a Carbon Productivity Contribution of 1.3% per annum to ensure all industries reduce their emissions.

To further enhance the environmental outcomes from the CPRS, the Government will also:

Coal Sector

Some entities within the coal mining sector are considered to be EITE entities under the CPRS. Further information on this is outlined in box 12.8 below5.

The Government had previously announced that the industry would receive $750 million in transitional assistance under the scheme. The amendments now deliver $1.5 billion in transitional assistance to the coal sector over five years.

Coal Sector Adjustment Scheme

A Coal Sector Adjustment Scheme will be established to provide this transitional assistance to the most emissions-intensive coal mines in the form of permits ($1.23 billion). The pool of permits that will be set aside will be equal to 9.72 million permits per year for five years. This pool is equal to around 60% of the fugitive emissions from gassy mines during 2008-09.

Coal Mining Abatement Fund

The Government has also indicated today that it will commit $270 million to the Coal Mine Abatement Fund through the Climate Change Action Fund to assist gassy coal mines to reduce emissions. This represents an additional $20 million. This will be delivered through grant funding for coal sector abatement projects and capital grants with a priority for electricity generation from waste coal mine gas. Funding will be provided on a three for one basis, with coal mine operators required to beet three quarters of the cost of the project. Any permits not allocated under the Coal Sector Adjustment Scheme will be auctioned, and those auction revenues will be added to the $270 million Coal Mining Abatement Fund in CCAF.

Furthermore, the current COAG Renewable Energy Target (RET) review process will consider whether new waste coal mine gas projects should be eligible under the RET; and whether annual targets under the RET should be increased to offset the number of additional Renewable Energy Certificates not backed by generation as part of the ‘Solar Credits’ mechanism.

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.’6 Under the CPRS, electricity 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.

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.”7  

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.

Today the Government announced that it will increase the quantum of assistance available under the ESAS from 130.7 million permits to 228.7 million permits (a 75% increase). This will cost $4 billion, taking the total value of the ESAS to $7.3 billion ($6.3 billion to 2019-20). Furthermore, the Government will extend the period from five to ten years. Previously the value was 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.

A further three new measures will be introduced to maintain energy security and drive the transition to a low pollution future:

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’

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 use8.

Today the Government announced that A Transitional Electricity Cost Assistance Program of $1.1 billion would be established to assist medium and large manufacturing and mining businesses with CPRS-related increases in electricity prices in the early years of the Scheme. The transitional fund will apply after the fixed-praice transitional year (2011-12) and will be capped at $1.1 billion, distributed over two years as follows;

Targeted recipients of assistance will be corporations in the manufacturing and mining sectors. Assistance will be provided to existing and new corporations with facilities consuming electricity above a minimum threshold of 300 megawatt hours per years. Assistance will not be provided to facilities that are eligible for permits under EITE, Coal or ESAS assistance.

Agriculture

Last week the Government announced that agricultural emissions would be excluded from the CPRS. This will mean that any future inclusion of agriculture under the CPRS would require Parliamentary approval rather than simply a regulatory change. The Government has indicated that it will work with industry to monitor world’s best practice in reducing agricultural emissions and consider a range of ways in which the agriculture sector can contribute to the transition to a low-pollution economy. The Government will also introduce voluntary emissions reporting trials in 2011 to allow the sector to better understand and manage its emissions. Lastly, the Government will conduct a Productivity Commission review in 2015 of whether the sector is achieving world’s best practice mitigation.

Offsets

The Government also announced today that offsets for agricultural emissions (and other sectors not covered by the scheme) abatement will be included in the CPRS and count towards Australia’s international climate change obligations.

The following diagram illustrates the effect of including domestic offsets in a cap and trade scheme9.

The Government t has identified that the this will have the following features:

CPRS permits will be provided for abatement from the sources that are counted towards Australia’s international commitments, subject to the development of robust methodologies:

  • livestock
  • manure management
  • fertilizer use
  • burning of savannas
  • burning of agricultural residies
  • rice cultivation
  • avoided deforestation
  • legacy waste
  • emission from closed landfill activities

The Government again confirmed it will continue to advocate in the international climate change negotiations to ensure the post- 2012 accounting rules only require countries to account for emissions and removals of greenhouse gases resulting from human activity.

National Carbon Offset Standard

In the meantime, the Government will establish the National Carbon Offset Standard to provide clarity to consumers and businesses on what constitutes a credible voluntary carbon claim or offset. Individuals and organisations will be able to be certified as ‘carbon neutral’ under the National Carbon Offset Standard. The National Carbon Offset Standard will be released today and come into effect from 1 July 2010.

It will provide scope for a market for abatement from the following sources that are not counted towards Australia’s international commitments:

Abatement from these sources will transition into the CPRS once abatement is internationally recognised and provided that other CPRS requirements are met.

To further enhance the environmental outcomes from the CPRS, the Government will also:

The Government will provide additional research and development investment of $50 million into the development and on-farm testing of emissions reduction options, including Biosequestration and livestock, supported by the voluntary reporting trial. This funding would include support for the development of a global alliance on agricultural mitigation research proposed by New Zealand.

Green Carbon Fund

The Government will establish a $40 million Green Carbon Fund to build the resilience of natural ecosystems that are under threat from climate change. The first stream of the fund will provide support to monitor and plan for the impact of climate change on biodiversity and land and water resources. The second stream will support initiatives to encourage environmental stewardship and biodiversity where there are carbon co-benefits.

Food Processing

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).

Today the Government announced that primary food processing would be included as an EITE industry. This will include dairy, abattoirs, malt, canning, sugar and similar processing. The Government argues that this will ensure that carbon levied Australian goods will not be at a disadvantage in the absence of a global agreement on greenhouse emissions.

Further, a five-year, $150 million stream of assistance for the food processing sector will be established within the Climate Change Action Fund (CCAF). This stream will be dedicated to funding emissions reduction measures within the primary food processing industry, with initial priority given to dairy processing, meat processing and malt production facilities. This stream will enable:

A reallocation of funding within the CCAF will accommodate this stream.

Liquified Natural Gas

Liquified Natural Gas (LNG) is expected to be a moderately emissions-intensive EITE activity and general allocations of free permits will be made according to the ordinary EITE rules, that is, each eligible producer will receive free permits at a fixed rate of permits per tonne of LNG produced. An additional supplementary allocation of permits will be provided for LNG projects to ensure that all projects receive an effective assistance rate at or above 50% in relation to their LNG production.

Other Issues

The Liberal Party has also made a number of other amendments including:

 

1 Joint Media Release – Prime Minister, Treasurer, Minister for Climate Change, Minister Assisting the Minister for Climate Change, 24 November 2009, A Carbon Pollution Reduction Scheme in the National Interest, available online at .

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.

3 ibid, p. 2.

4Australian 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 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. 46.

6 Australian 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.

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

8 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, p. 61.

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

 

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