Emissions Trading Update

01 Jun 2007Archived News Climate Change Matters

Scheme start | Targets and emissions trajectory | Coverage | Allocation | Early mover credit | Emissions fee/penalty | Offsets | Linkage | Reporting | Summary Definitions | Energetics' Submission to the Federal Government on Emissions Trading | Greenhouse gas emissions (GHG) reporting proposal for inclusion in the NPI NEPM variation

 

Summary and Comments on the 'Report of the Task Group on Emissions Trading'

Scheme start

Trading to commence in 2010 at the earliest, with full-scale implementation by 2011 or, should international policy negotiations warrant, no later than 2012.

Targets and emissions trajectory

A mixture of a long-term aspirational target, medium term gateways and annual firm caps that are determined by an emissions reduction trajectory that commences moderately, progressively stabilises, and then results in deeper emissions reductions over time. The trajectory and associated targets are subject to review and recalibration every 5 years.

Comment
The combination of a long-term target, medium term gateways and annual firm caps is in line with that proposed by the National Emissions Trading Taskforce (NETT) in its Discussion Paper: Possible Design for a National Greenhouse Gas Emissions Trading Scheme. However the scheme proposed by the NETT does include a fixed 60% long-term target for 2050. This is in contrast to the Task Group’s discussion of an aspirational target.

In the Report of the Task Group on Emissions Trading, the ‘upper bound of the gateway’ is interpreted as ‘Emissions reductions that Australia is prepared to make unilaterally’ (p. 105), whilst the ‘lower bound of the gateway’ is interpreted as ‘Emission reductions Australia would be prepared to make in moving towards international agreement and anticipated deployment of known technologies’ (p.105).

Coverage

Maximum possible coverage of all sources, sinks and greenhouse gases is advocated by the Task Group, including:

  • Direct emissions from stationary energy, fugitive sources, industrial processes and transport where facility(1) level emissions exceed 25 kt in CO2-e emissions per year; and
  • Upstream fossil fuel suppliers (likely to include non-industrial coal, gas and petroleum).

Initially, emissions from agricultural and forestry industries are to be excluded, with further detailed assessment to be undertaken during the design phase for the waste sector and for some sub-sectors (for example, open-cut coal mines).

Comment
The coverage proposed by the Task Group is far more extensive than that proposed by the NETT; whereas the NETT proposed inclusion of all 6 Kyoto gases for offset providers, it suggested coverage of only three for emitters. Furthermore, the NETT did not include coverage of upstream fossil fuel suppliers and commenced in phase I with stationary energy generators only.

Allocation

Allocation is to be enabled by means of both auctioning and free allocation. The criteria and methods for free allocation are reasonably complex and are as follows:
i) Free compensation will be provided to firms suffering disproportionate(2) loss of asset value by means of a one-off allocation of permits for different vintages up to and including 2020. Some permits beyond 2020 will also be available, where:

  • Assets(3) existed(4) before the announcement of the scheme;
  • The firm’s loss of value(5) is determined by the combined after-tax costs of direct and indirect energy inputs for the life of an asset;
  • Loss of value is disproportionately greater than that experienced by the wider economy by a sufficient margin(6); and
  • Where costs cannot be passed on to either domestic or international customers.

ii) Free allocation will be provided to firms suffering disproportionate loss of asset value where:

  • The firm continues production in Australia;
  • Allocation for direct energy inputs of existing facilities is determined by means of an emissions intensity(7) that would move over time to benchmarking(8);
  • Allocation for direct energy inputs of new facilities is determined by means of benchmarking; and
  • Allocation for indirect energy inputs is determined by means of economy-wide modelling(9) of the annual cost burden.

iii) Permits not allocated freely would be auctioned. It is anticipated that over time the proportion of permits allocated via auctioning would increase to 100%.

In a move that reflects similar efforts to those of the cap and trade scheme designed under the Regional Greenhouse Gas Initiative of the North-eastern United States, auction revenues are proposed by the Task Group to be directed towards mitigation efforts such as:

  • R&D and pre-commercial demonstration of LETs;
  • Funding co-operative action with developing nations;
  • Correcting market failures that impede mitigation e.g. the take-up of energy efficiency;
  • Assistance to households; and
  • Managing business tax burden.

Early mover credit

Early abatement efforts would be recognised by means of crediting abatement activities undertaken after a policy announcement by:

  • Crediting early abatement from offset activities not included in the scheme (including some Clean Development Mechanism (CDM) and Greenhouse FriendlyTM credits); and
  • Crediting early abatement from activities that would be covered within the scheme.

Comment
The provision of early mover credits in its current form is dependent on the date at which a policy announcement has been made. As discussed above, it is unknown if that date has already passed. If it has not yet passed, any abatement actions undertaken now will not be credited, but rather incorporated into annual firm caps. When Energetics requested further clarification from Malcolm Turnbull on this point, he assured us that early action was one of the key considerations of the proposed design.

Emissions fee/penalty

It is proposed that penalties should start at low levels and then move further away from the expected permit price. In the early years of the program and whilst this fee is low, there would be a limit on the number of permits firms could bank, to prevent the ‘warehousing’ of permits. Make-good provisions are not proposed at the start of the scheme, but may be reconsidered. Firms that are required to pay an emissions fee or penalty during the initial years of the scheme in any given year would be prohibited from banking or selling permits from that year (p.111).

Offsets

Inclusion of credible domestic abatement activities not covered under the scheme, such as those from forestry and agricultural sectors and of credible international offset regimes, is proposed.

Comment
Credits from carbon sink forests (because of well established standards) could be ‘banked’ ahead of scheme commencement – building on changes in tax treatment announced in the 2007-8 budget p.111).

Linkage

Direct linking is preferred, but such direct links are likely to evolve over time. In lieu of such linking, unilateral recognition of official and unofficial credits (including voluntary) credits is likely to occur. Bilateral trade may occur where understandings are developed between schemes.

Reporting

It is expected that reporting will be in line with the National Greenhouse and Energy Reporting Scheme, currently being established by the Council of the Australian Federation.

The Council agreed at its 12 April 2007 meeting that national greenhouse emissions reporting would commence by 1 July 2008, either through purpose-built legislation or through the National Pollutant Inventory (NPI). The Council agreed that, as emissions reporting is a fundamental pre-requisite of any emissions trading scheme, if the Commonwealth Government has not introduced legislation in time for the National Greenhouse and Energy Reporting System to be activated by 1 July 2008, the States and Territories will require reporting from this date through the NPI as an interim measure.

The Council also:

  • Agreed that a national emissions trading scheme should place Australia on a path towards achieving a 60% cut in national emissions by 2050, compared with 2000 levels;
  • Endorsed the National Emissions Trading Taskforces timeline for the implementation of a national emissions trading scheme by the end of 2010. Achieving that timeline includes:
    • Entering into an intergovernmental agreement by the end of 2007; and
    • Passing legislation through all Parliaments by the end of 2008 or as soon as possible thereafter to achieve implementation of the National Emissions Trading Scheme (NETS) by the end of 2010.

 

Summary Definitions

(1) ‘Facilities’ are: 
a. A geographically defined site or building, including all structures and all mobile equipment operating within site boundaries; or
b. A fleet of vehicles operating on public roads, or a fleet of aircraft, locomotives or vessels, whether or not based at a single site (p.186).

(2) ‘Disproportionate’ is defined as where the loss of value is disproportionately greater than that experienced by the wider economy by a ‘sufficient margin’. Expected losses are anticipated to be around 3%. However where there are practical constraints on the ability of Government to calculate individual firm- or facility- level losses in some industries, the Task Group proposes sector or industry level losses could be distributed across the sector using an agreed approach. Where firms do not believe that this provides adequate compensation for their expected loss, provision could be made for this to be demonstrated (p. 192).

(3) ‘Assets’ are defined as the discounted present value of the stream of profits it is expected to generate (p. 123).

(4) ‘Existing’ firms or assets are defined as those operating prior to the announcement of the scheme (p. 115). If 3rd June 2007 is taken to be the announcement of the scheme, then any assets that commence operations after this date will not receive free allocation of permits.

(5) ‘Loss in asset value’ is determined by the combined after-tax costs of direct and indirect energy inputs for the life of an asset (p.113).

(6) ‘Sufficient margin’ has not been defined.

(7) ‘Emissions intensities’ will be determined in the three years prior to the announcement of the scheme (p.195). These will be assessed using the National Greenhouse Gas Inventory data sets. If 3rd June was taken as the announcement of the scheme, the baseline period will therefore be the three year period leading up to that date. For the present the threshold is anticipated to be 3.5%, as proposed in the NETS and incorporates both direct and indirect energy usage (p.197).

(8) ‘Benchmarking’ will be on world’s best practice low emission technologies (p.194). This is in contrast to the benchmarking proposed by the NETS, which would be based on Australian best-practice.

(9) Where 'economy-wide modelling' is less appropriate, energy-intensive firms or industries may use detailed energy sector models to determine expected increase in costs against individual firm’s energy bills (p.196).

Energetics' Submission to the Federal Government on Emissions Trading

Energetics submitted a paper in response to the Task Group's Issues Paper. 

Greenhouse gas emissions (GHG) reporting proposal for inclusion in the NPI NEPM variation

On 8th May 2007, the National Environment Protection Council (NEPC), with the Commonwealth dissenting, has directed that greenhouse gas emissions reporting be included in the proposed National Pollutant Inventory National Environment Protection Measures (NPI NEPM) variation as an option for consideration by NEPC at its June 2007 meeting. 

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