This is the first part of a two-part explainer by Martin Jones on the Clean Energy Future package.
The legislation is lengthy and boring, but it’s important: these 18 bills (and a few more to come in the first half of next year) lay the framework for what will be the primary driver of Australia’s attempt to mitigate dangerous anthropogenic climate change — assuming they pass, of course. Ben Eltham has already taken an excellent look at the Clean Energy Future package (CEF) for New Matilda. What follows in this article and its sequel is a summary of some of the CEF’s nitty-gritty details.
Much of my summary is based on the CEF package as it was released in July. As far as I’ve been able to tell, not much has changed in the current legislation, but if you spot any discrepancies, please comment.
The Emissions Trading Scheme
The best known, and arguably most important piece of the CEF package is an emissions trading scheme (ETS) which will begin on 1 July, 2012. Under an ETS, parties (generally companies) that emit those greenhouse gases covered by the scheme will be required to surrender permits to the government equal to their emissions.
The ETS will cover four of the six greenhouse gases counted under the Kyoto Protocol: carbon dioxide, methane, nitrous oxide and per fluorocarbon emissions from the aluminium sector. The remaining two (hydrofluorocarbons and sulphur hexafluoride) will face an equivalent carbon price through existing synthetic greenhouse gas legislation. To simplify things, the climate change potential of each greenhouse gas is measured in terms of how much carbon dioxide (CO2) it is equivalent to; hence the references to "CO2-e" (technical) or simply "carbon" (colloquial).
Emitters can purchase permits — officially called "carbon units" — for a tonne of CO2-e from the government, or other participants in the ETS. During the first three years of the scheme, the price of permits will be fixed, and permits are immediately surrendered to the government when purchased. This means that in the first phase the ETS will function very similarly to a tax, without actually being one: there is still the ability to trade, albeit at a fixed price. Non-governmental sellers of permits might be companies that have more permits than they need, or farmers who have generated permits through the Carbon Farming Initiative.
For more on the fundamental differences between an emissions trading scheme and a tax, see Carbon Pricing 101.
Permits will cost $23 per tonne of CO2-e when the ETS begins in 2012, and will rise at 5 per cent per year (nominally); $24.15/t in 2013-14 and $25.40/t in 2014-15. From July 1 2015, the price will be variable, and set by the market. The idea is that, by 2016, the international price of CO2-e will be around $29/t.
No foreign permits or credits will be accepted during the fixed-price period, and a maximum of 50 per cent of a party’s obligation during the flexible-price period may be sourced internationally. Kyoto Protocol-compliant credits created under the Carbon Farming Initiative can be used for up to 5 per cent of compliance during the fixed price period. (This limit is far higher than then the number of credits the Carbon Farming Initiative is likely to produce.)
From 2015, some international permits will be allowed. These include Certified Emissions Reductions, Emissions Reductions Units, Removal Units, and other units the Government may allow. The Government’s view is that linking to other credible trading schemes, including the EU Emissions Trading Scheme and the NZ Emissions Trading Scheme, is in Australia’s national interest.
From 2015 to 2018 there will be a price ceiling of $20/t above the international price, and a price floor of $15/t. This is to reduce wild fluctuations and provide some measure of certainty for those who have to factor the price of carbon into their decision-making. These stabilisers will rise by 5 per cent and 4 per cent in real terms, that is, plus inflation, per year, and will be reviewed in 2017 by the Climate Change Authority (CCA). It is unclear which instrument will form the basis of this international price — will it be EU units or New Zealand Units — and to which foreign schemes the Australian ETS will be linked.
During the fixed-price period, permits allocated for free can be traded domestically or returned to the government, but not banked for use in later years. Parties that fail to surrender enough permits in a year will incur fines of 1.3 times the permit price for that year.
In the flexible-price period, an unlimited number of permits can be banked and up to 5 per cent of the current year’s liability can be met by "borrowing" from the next year’s permit vintage. Each year’s vintage of permits will be auctioned in advance by the government, and shortfalls will incur fines which are double the average permit price for that year.
ETS — Targets
Emissions caps — the maximum number of permits, and therefore emissions, permitted within the ETS each year — for the flexible-price period have not yet been decided. The lack of political agreement here is one of the reasons the ETS begins with a fixed price, but the targets will be announced in 2014 and then set five years in advance. Should no emissions cap be set by arliament, the cap for 2015-16 will default to 38 MtCO2-e less than total emissions in 2012-13. From 2016 the default cap will be 12 MtCO2-e less than the previous year.
To put that into perspective: Treasury’s carbon price modelling estimated Australia’s emissions at 578 MtCO2-e in 2010, growing steadily, and our bipartisan target at around 527 MtCO2-e by 2020. (Non-Treasury estimates have different figures, but similar magnitudes.) The Government’s goal is to reduce Australia’s emissions by 5 per cent on 2000 levels by 2020 (up to 25 per cent depending on global action), and by 80 per cent by 2050 (previously 50 per cent) — but it’s not quite clear from the CEF package precisely how many tonnes of CO2-e that is.
Voluntary action will be taken into account when setting caps — the CCA will determine the methodology — and will be treated as additional, as will renewable electricity purchases through GreenPower. People will be able to make a tax-deductible contribution to a Pledge Fund to retire Australian carbon permits, Kyoto compliant and non-Kyoto compliant Australian Carbon Credit Units, and eligible international units.
ETS — Coverage
The ETS will fully cover emissions from stationary energy, industrial processes, fugitive emissions — which are those from coal mines or from extracting gas — and emissions from some waste. The transport sector will be partially covered: domestic aviation, shipping, rail transport, and non-transport fuels will face lower fuel tax credits or higher fuel excises (unless the companies voluntarily participate in the ETS), while household transport fuels, light vehicle business transport, and off-road fuel use by the agriculture, forestry and fishing industries will be excluded from the ETS. The Government wants to include heavy transport from 2014. (This last was rejected by the regional independent MPs. The Greens would like to include all transport.)
Roughly 60 per cent of Australia’s emissions are thus covered directly by the ETS, and two-thirds are covered indirectly (e.g. through fuel excise changes). Those companies (around 500) with facilities that have direct greenhouse gas emissions of 25,000 tonnes of CO2-e a year or more (excluding emissions from transport fuels and some synthetic greenhouse gases) must join the ETS, while others can join voluntarily. Companies may do this to profit through trading, hedge against risks, or because they would otherwise face costs such as higher fuel excises but see the opportunity to achieve their abatement more cheaply in the open market — which is the point of an ETS.
Agricultural emissions, which form roughly 15 per cent of Australia’s total emissions, will be exempt, as will emissions from forestry and land-use change (e.g. conversion of bush into agricultural land).
This article draws on material prepared for an upcoming annual report by the International Emissions Trading Association.
This is the first part of a two-part explainer by Martin Jones on the Clean Energy Future package. The next part, on regulatory bodies and complementary measures, will be published on Monday.
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