This is the second part of a two-part explainer on the Clean Energy Future package. On Friday, Martin Jones examined the nitty gritty of the package with reference to the Emissions Trading Scheme, its operation, targets and coverage.
How will the scheme be regulated? An independent Climate Change Authority (CCA) will be established to report publically on the Emissions Trading Scheme (ETS). Beginning in February, 2014, and then every two years, it will examine all aspects of the scheme, including the price floor and ceiling, and recommend targets and emissions caps. The CCA will be made up of nine experts with a particular focus on climate science, economics, climate change mitigation, emissions trading, investment, and business, and will be chaired by Bernie Fraser (formerly head of the Reserve Bank of Australia).
The CCA’s recommendations are not binding on the government of the day, but the government must justify any difference between its legislation and the recommendations.
This is stronger independent regulation than was proposed under Kevin Rudd’s CPRS, and is complemented by a new Clean Energy Regulator and reviews by the Productivity Commission. The Productivity Commission will review industry compensation and assistance, in particular to emissions-intensive and trade-exposed industries, fuel taxation arrangements, and foreign action. The Clean Energy Regulator will combine administration of the ETS, the Carbon Farming Initiative — where farmers generate credits for storing carbon in soil or trees, or reducing/avoiding emissions— as well as the Renewable Energy Target and the National Greenhouse and Energy Reporting System.
To encourage the construction of renewable energy generation, the Clean Energy Future package will establish a Clean Energy Finance Corporation to invest — via loans or equity — $5 billion in renewable energy technologies, and $5 billion in low-pollution, and energy efficiency technologies which may include renewable energy projects. The Corporation will not invest in carbon capture and storage technology, though this is still supported by existing programs.
The Government will also establish an Australian Renewable Energy Agency (ARENA), which will provide grant-based funding for renewable energy projects. ARENA largely brings existing programs together into one organisation — and this should result in more coordinated and consistent operation of these programs. Both ARENA and the Clean Energy Finance Corporation will be independent agencies.
Australia’s Renewable Energy Target remains at 20 per cent by 2020. (Currently 8 per cent of Australia’s electricity is renewable; gas accounts for 16 per cent and coal 75 per cent.) The CEF package includes an Energy Security Fund, which will tender for bids to shut down 2000MW of highly emissions-intensive coal-fired power by 2020. The Fund will also offer transitional assistance of $5.5 billion, in the form of free permits and cash, to coal power generators facing significant asset loss. An Energy Security Council will advise the Government on emerging risks to energy security.
Who will get compensation and assistance? Simultaneous to the introduction of the ETS on 1 July 2012, personal tax-free thresholds will be trebled to $18,200, rising to $19,400 in 2015. This is designed to fully or over-compensate lower income households (yearly earnings of up to $30,000 for singles) for increased costs resulting from pricing CO2-e, and to partially compensate middle income households ($30-80,000 pa). Marginal tax rates for the new lower brackets will rise, so that those on higher incomes ($80,000 and above) do not pay less tax. The average increase in household costs from pricing CO2-e is expected to be $9.90 per week, with average compensation of $10.10 per week. There are also increases to the Pension, Senior Supplement for self-funded retirees, and Family Tax Benefit.
The ETS is expected to increase electricity prices by 10 per cent during its first year of operation. However, electricity prices have risen rapidly in recent years and are expected to do so in the future, largely in response to network infrastructure investment by operators; these increased prices are being conflated by many — sometimes deliberately — with the future effects of the carbon price.
Many industries covered by the ETS will receive some form of government assistance. A Jobs and Competitiveness Program ($9.2 billion) will be available for the most emissions-intensive sectors (primarily manufacturing and heavy industry), with a Clean Technology Program ($1.2 billion) for less emissions-intensive sectors, and further programs for small businesses and supply chains. Most assistance will be in the form of free permits, the rest in grants.
Emission-intensive trade-exposed (EITE) industries will receive:
• 94.5 per cent of their expected permit requirement for industries with average baseline of at least 2,000 tCO2-e/$m revenue or 6,000t CO2-e/$m value-added • 66 per cent of their expected permit requirement for industries with average baseline of at least 1,000 tCO2-e/$m revenue or 3,000t CO2-e/$m value added • 50 per cent of their expected permit requirement for the LNG industry
A trade-exposed industry is one whose value of imports and exports to domestic production exceeds 10 per cent, and that demonstrates a lack of capacity to pass through costs due to the potential for international competition.
Baseline for the free permits will be the historic industry average level of emissions per unit of production, and are based on those from the CPRS (including the extra free permits added as a "recession buffer" in 2009). Assistance will reduce 1.3 per cent each year, and be reviewed by the Productivity Commission from 2014-15 onwards with a view to winding assistance back to the levels suggested in the 2011 Garnaut Review.
The CEF package also includes an Energy Security Fund, which will tender for bids to shut down 2000MW of highly emissions-intensive coal-fired power by 2020. The fund will also offer transitional assistance of AU$5.5 billion, in the form of free permits and cash, to coal power generators facing significant asset loss. An Energy Security Council will advise the Government on emerging risks to energy security.
In addition to the assistance described above, the Government plans to give the coal sector $1.3 billion over six years for "gassy" mines — those with high levels of fugitive emissions. The steel industry will also receive $300 million over five years. This assistance is separate to the CEF package, as not all members of the MPCCC agreed with it.
The CEF is highly likely to pass both Houses of Parliament before the end of the year, and then the next challenge beckons: implementation. I, for one, look forward to it.
This article draws on material prepared for an upcoming annual report by the International Emissions Trading Association.
This is the second part of a two-part explainer by Martin Jones on the Clean Energy Future package. Read the first part here.