Government Release of the Climate Change White Paper

On 15 December 2008 Prime Minister Kevin Rudd released the Government’s Climate Change White Paper, Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future.

The White Paper confirms that the Government is committed to establishing a carbon trading scheme on 1 July 2010 and to meeting its long-term target of a 60 per cent reduction in greenhouse gas emissions from 2000 levels by 2050.

Medium-term targets

Importantly, the White Paper sets out Australia’s medium-term national target to reduce Australia’s greenhouse gas emissions by between 5 per cent and 15 per cent below 2000 levels by the end 2020.

The top of this range (5 per cent below 2000 levels) represents a minimum unconditional commitment to reduce emissions by 2020, irrespective of the actions by other nations. The bottom of this range (15 per cent below 2000 levels) represents 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.

Figure 1 shows the indicative trajectory and the 2020 target range compared to the emissions projections published in Tracking to the Kyoto target.

Figure 1: Indicative trajectory and 2020 target range

Source: Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future, p. 4-23.

Global action on climate change

The Government argues that Australia’s particular national circumstances — including its strong population growth, large share of energy and emissions-intensive industries, and heavy reliance on fossil fuels for energy — mean that Australia faces a relatively greater structural adjustment task to move towards a low-emission future than many other developed countries.

The Prime Minister today stated that Australia’s projected population growth of around 45 per cent over the 1990–2020 period means that Australia’s target range translates to a 34–41 per cent reduction in the per capita emissions of every Australian over this period.

The Government believes that it is in Australia’s national interest to achieve a comprehensive global agreement to stabilise atmospheric concentrations of greenhouse gases at around 450 parts per million of carbon dioxide equivalent. However, the Government recognises that achieving global commitment to such action in the near term will be challenging.

In the event that a comprehensive global agreement were to emerge involving emissions commitments by both developed and developing countries that are consistent with long term stabilisation of atmospheric concentrations of greenhouse gases at 450 parts per million (ppm) CO2 e or lower, the Government is prepared to establish Australia’s post-2020 targets in line with achieving the agreed goal.

The Carbon Pollution Reduction Scheme –a ‘cap and trade’ arrangement

The CPRS is designed to redress the failure of the market to reflect the cost of carbon pollution in the costs of business or the price of goods and services.  In a ‘cap and trade’ scheme, aggregate emissions are capped at a level that is consistent with environmental objectives. The number of tradable carbon pollution permits will be equal to the Scheme cap—if the cap were to limit emissions to 100 million tonnes of carbon dioxide equivalent (CO2-e) in a particular year, 100 million emissions permits would be issued for that year.

Under the CPRS, emitters of greenhouse gases need to acquire a permit for every tonne of greenhouse gas that they emit.  The quantity of emissions produced by firms will be monitored, reported and audited.  At the end of each year, each liable entity will need to surrender a permit for every tonne of emissions that they produced in that year.  The number of permits issued by the Government in each year will be limited.  Firms will compete to purchase the number of permits that they require. Firms that value the permits most highly will be prepared to pay most for them, either at auction or on a secondary trading market. For some firms, it will be cheaper to reduce emissions than to buy permits. Certain categories of firms will receive an administrative allocation of permits, as a transitional assistance measure. Those firms could use the permits or sell them.

Scheme Coverage

The Scheme will cover around 75 per cent of Australia’s emissions.  All six greenhouse gases included under the Kyoto Protocol will be covered from the Scheme’s commencement.

The Scheme will broadly cover emissions from stationary energy, transport, fugitive, industrial processes, waste and forestry sectors.  Targets will be achieved through a combination of placing Scheme obligations directly on some emitters, and, in other cases, placing obligations further ‘upstream’ in the production chain, as a way of cost-effectively capturing smaller sources of emissions.

Initially, the Scheme will not cover emissions from agriculture, given that the sector is characterised by thousands of small emitters that make the calculation of emissions complex and impractical.  However, the Government has indicated that agriculture’s eventual inclusion in the Scheme is desirable, if it can be achieved cost-effectively. Commencing in 2009 the Government will undertake a work program to enable it to determine in 2013 whether or not to cover agriculture emissions from 2015.

The Government does not propose to include deforestation in the Scheme, as Australian deforestation emissions have reduced markedly since 1990, due largely to increased protections against land clearing.

Offset credits could potentially be created by those sectors not covered by the Scheme. Offsets are credited reductions in emissions that are purchased by other parties to allow them to increase their own emissions. Offsets cannot be created in sectors already covered by the Scheme—the very broad coverage of the Scheme implies that there is little scope to pursue offset activities, particularly if agriculture is to be included in the Scheme. The Government will consider the scope for domestic offsets in 2013 at the time it considers the inclusion of agriculture. The Scheme will not include domestic offsets from agriculture emissions in the period prior to coverage of these emissions.

The carbon market

Carbon pollution permits will be created as personal property, and the legislation implementing the Scheme will not provide any power to extinguish these permits without compensation (except in the case of misrepresentation or fraud). Permits will be tradable and will be able to be banked indefinitely–they will have a vintage, the earliest they can be used–but no expiry date. Liable entities will also have a small borrowing allowance–they will be able to meet up to 5 per cent of their liabilities by using the following year’s vintage permits.

To ensure appropriate regulatory oversight is provided, the Australian Securities and Investments Commission (ASIC) will be given the necessary legal power to investigate and prosecute market manipulation in the carbon market. This will be achieved by designating carbon pollution permits and Kyoto units as financial products for the purposes of the Corporations Act 2001. The Government will consult further on these adjustments. The net effect will be that the permit market will be subject to the same effective safeguards as the Commonwealth bond market.

The carbon price

Reflecting that the actual carbon price will be determined by the market, assistance to business and households has been based on an assumed initial carbon price of $25 per tonne of CO2-e, broadly consistent with the Treasury modelling undertaken earlier this year. Each year the Government will review the adequacy of the household assistance package in the context of the Budget.

The Treasury modelling suggests that, in the context of efficient market-based global action to stabilise greenhouse gas concentrations at 550 ppm, the initial emission price in 2010 could be around AU$23 per tonne of CO2-e in nominal terms. Stabilising at lower concentration levels requires faster cuts in global emissions and higher emission prices. The starting price is 40 per cent higher to achieve 510 ppm and 110 per cent higher to achieve 450 ppm. Consistent with the target range chosen, the Government has decided to set a price cap for five years, of $40 per tonne at Scheme commencement, rising at five per cent real per annum.

Scheme caps

The Scheme cap determines the number of permits that will be issued by the Government.

Household Assistance Package

Carbon costs will be incorporated in the prices of goods and services, and will ultimately be borne by consumers. The carbon price will have the greatest impact on emissions-intensive goods, such as electricity, gas and other household fuels.  Electricity prices are estimated to increase by around 18 per cent and gas prices by 12 per cent. Across all households, it has been calculated that this would lead to an average increase in spending of $4 per week on electricity and $2 per week on gas and other household fuels.

The Government has acknowledged this impact and has committed to providing a range of measures to help households adjust to the impacts of the Scheme. The total size of this assistance package is estimated to be $6.0 billion in 2011-12.

  • Pensioners, seniors, carers and people with a disability will receive a 2.5 per cent pensions increase of around $382 for singles and $320 for each member of a couple.
  • Self funded retirees will receive an upfront increase in the Seniors Concessions allowance of around $382 for singles and $320 for each member of a couple.
  • Other welfare recipients including the unemployed will secure a 2.5 per cent increase beyond indexation of around $307 for singles and up to $276 for each member of a couple.
  • Low and middle earners will receive one or a combination of:
      •  An increase of $390 in the Low Income Tax Offset.
      •  An increase in the maximum rate of Family Tax Benefit Part A of 2.5 per cent, an increase of $124.10 per child aged 0-12 years and $156.95 per teenager.
      • An increase of in the base rate of Family Tax Benefit Part A of $115 per child aged 0-17 years and $140 per child aged 18-24 years.
      •  An increase in Family Tax Benefit Part B of 2.5 per cent, an increase of $98.55 per family for children aged under 5 years and $73 per family.
      •  A $500 transitional payment per adult for low income families.

Assistance for Emissions-Intensive Trade-Exposed Industries

The Government will provide assistance to emissions-intensive trade-exposed (EITE) industries to reduce the risk that industries will relocate offshore due to competition from countries without carbon constraints and to provide general transitional assistance towards a carbon constrained economy.

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 (e.g. methane and ethane) used as feedstock
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 intensity assessment based on average emissions per million dollars of revenue or emissions per million dollars of valued added
Time period for assessment:
emissions data: 2006–07 to 2007–08
revenue/value added data: 2004-05 to the first half of 2008-09
Initial rates of assistance 90% for activities with emissions intensity of at least 2000t CO2-e/$m revenue or 6000t CO2-e/$m value-added
60% for activities with emissions intensity between 1000t CO2–e/$m and 1999t CO2-e/$m revenue or between 3000t and 5999t CO2-e/$m value-added
Carbon productivity contribution Initial rates of assistance will be reduced by a carbon productivity contribution of 1.3 % 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–e 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% initially (35% including agriculture), increasing to around 45% 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

Fuel tax adjustment arrangements

The Government has committed to cutting fuel taxes on a cent-for-cent basis to offset the initial price impact on fuel associated with the introduction of the Scheme and to assist certain businesses.

Fuel taxes will be cut based on the effect of pricing diesel emissions, and the adequacy of the cut will be reviewed every six months for three years. At the end of the three years the adjustment mechanism will be reviewed. Reductions in fuel tax made during this transition period will become permanent after three years.

The Government will also introduce a new ‘CPRS fuel credit’ payment equal to the fuel tax cut to agriculture and fishing businesses for three years and to heavy on-road transport businesses for one year.

A credit will also be provided to compressed natural gas (CNG) and liquefied natural gas (LNG) that are predominantly used in Australia by heavy transport–the credit for these fuels will be provided for one year (as for other heavy transport). A credit will also be provided to liquefied petroleum gas (LPG) for three years. The credits for LPG, CNG, and LNG will be provided at rates that reflect the lower emissions of these three fuels. These measures will be reviewed at the time that each of these measures is due to cease.

The total estimated cost of the fuel tax measures is $2.4 billion in 2010–11.

Climate Change Action Fund

The Government will establish a $2.15 billion Climate Change Action Fund over five years to assist the transition for businesses, community sector organisations, workers, regions and communities to the CPRS. An additional $300 million will be provided as part of the coal adjustment stream. stakeholder Consultative Committee comprising business, environmental and community stakeholders will be established to provide their advice to Ministers about the detailed design and implementation of activities under the Climate Change Action Fund.

Timeline of the Introduction of the Carbon Pollution Reduction Scheme:

Key dates Steps towards the introduction of the Carbon Pollution Reduction Scheme
December 2008
  • National framework agreed
  • Exposure draft of ETS released
  • Medium-term emissions trajectory released
  • Australia’s emission ‘projections’ released
  • Final response to ‘2020 Summit’ proposals released
January to March 2009 (1st quarter)
  • Release of a guidance paper on data requirements on the emissions-intensive trade-exposed assistance program.
  • Workshops to follow up on guidance paper.
  • Entities engaged in emissions-intensive trade-exposed activities submit data requested in guidance paper.
  • Late February: release of exposure draft legislation.
April to June 2009
(2nd quarter)
  • Early April: End of consultation period on exposure draft legislation.
  • May: Bills (including consequential amendments) introduced into Parliament
  • June: Public release of key draft regulations; Government aims to achieve passage of Bills through Parliament.
July to September 2009
(3rd quarter)
  • Act establishing the Scheme in force 28 days after Royal Assent.
  • Regulator formally established.
  • Private entities able to open national registry accounts for Kyoto units.
October to December
(4th quarter)
  • October: Receipt of National Greenhouse & Energy Reporting System Data for 2008-09 (this will inform the scheme cap and national emissions targets).
  • Stage I regulations and legislative instruments made following passage of Bills.
  • United Nations Climate Change Conference in Copenhagen.
January to March 2010 (1st quarter)
  • Release of Tracking towards the Kyoto Target 2009.
  • Government to announce:
    • the extension of indicative national emissions trajectory up to 2014-15;
    • scheme caps for first five years of scheme (2010-11 to 2014-15); and
    • approach for expanding cap to accommodate increase in coverage.
  • National registry operation with Carbon Pollution Reduction Scheme functions.
  • Stage II regulations and legislative instruments made and tabled in Parliament.
January to June 2010
(1st to 2nd quarter)
  • First auction of permits.
July 2010
(3rd quarter)
  • 1st July 2010: start of first compliance year under the Carbon Pollution Reduction Scheme.
  • Extension announcements –scheme caps extended to 2015-16.
  • Indicative National Emissions trajectory extended to 2015-16.

Further information

Hawker Britton will provide a follow up paper to this summary report in the near future. In the meantime, for further information please contact your Hawker Britton consultant.