News
Jan 2009 - Emissions Trading Scheme - Commences 1 July 2010
Introduction
In December 2008, the Federal government released its White Paper on Carbon Pollution Reduction. The scheme is a Cap and Trade one where aggregate emissions are capped at a level that is consistent with the environmental objective. There are several different types of greenhouse gases and many different sources of emissions across the Australian economy. The Scheme coverage establishes what types and sources of emissions are subject to the cap. Entities responsible for emissions sources covered by the Scheme will be obliged to surrender a permit for each tonne of carbon dioxide equivalent (CO2-e) that they have emitted during the compliance period.
The Government's strategy for tackling climate change in Australia is built on 3 pillars: (1) reducing Australia's carbon pollution; (2) adapting to unavoidable climate change; and (3) helping to shape a global solution. The goal is to achieve reductions - with respect to 2000 emissions - by 5-15% by 2020 and by 60% by 2050.
Mechanics of a cap and trade scheme
- 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 is to have maximum coverage of greenhouse gas emissions and sectors. Maximum Scheme coverage is seen as a key element in minimising the overall cost to the economy of achieving emissions reductions. It will increase opportunities for low cost emissions reductions and ensure the cost of achieving these reductions is shared equitably across the economy. Broad coverage will also ensure that competing firms and sectors operate within equivalent market rules.
The Scheme will cover around 75%of Australia's emissions and involve mandatory obligations for around 1000 entities. There are around 7.6 million registered businesses in Australia: the overwhelming majority will not, therefore, face any direct obligations under the Scheme.
The Scheme will cover all six greenhouse gases that are covered under the Kyoto Protocol. Different activities emit different types of greenhouse gases, and these gases differ in their global warming potential—the ‘strength' of the greenhouse effect that they create. By covering all of the gases accounted for under the Kyoto Protocol, the Scheme will best encourage the broadest range of cost-effective abatement activities.
The Scheme will cover emission from stationary energy, transport, fugitive, industrial processes, waste and forestry sectors. This 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.
Agriculture
Initially, the Scheme will NOT cover emissions from agriculture. The agricultural sector is characterised by thousands of small emitters and the calculation of emissions is complex, so it would not be practical at this stage to cover those emissions directly. However, agriculture's eventual inclusion in the Scheme is desirable, if it can be cost-effectively achieved. 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. Australian deforestation emissions have reduced markedly since 1990, largely due to increased protections against land clearing. Given the sporadic nature of remaining land clearing emissions, covering deforestation under the scheme would pose large practical difficulties. It also raises the risk of pre-emptive 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 Government will further investigate the opportunity to reduce emissions from savanna burning in Northern Australia and the potential for carbon offsets from this activity. The Government will facilitate the participation of Indigenous land managers in carbon markets and will consult with Indigenous Australians on forestry and other opportunities under the Scheme.
The Carbon Market
The rapid development of a stable, well-informed and efficient carbon market, which is appropriately monitored and regulated to guard against market manipulation, will allow the Scheme to achieve emissions reductions in a cost-effective way.
There are several elements of Scheme design that will contribute to an effective and efficient 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). When combined with the issuance of future years' permits, this should help create confidence in the longer term durability of the Scheme.
Permits will be tradable–an important element in seeking cost effective abatement outcomes.
Permits 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. Banking and borrowing help to lower overall Scheme costs (by providing some flexibility over when abatement should occur) and help promote a smoother carbon price path.
In response to the Green Paper, several stakeholders were concerned to ensure that the carbon market would be appropriately structured and regulated to avoid market manipulation. While the likelihood is low, permits, like other financial products, could be the subject of market misconduct, including market manipulation and insider trading. Market manipulation includes manipulation of the auction process (for example, through collusion) and of prices in the secondary market. There is also the possibility of one or more participants attempting to corner the market for permits close to the time for surrender.
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. Some adjustments to that regime will be necessary to fit the characteristics of permits and to ensure no unnecessary compliance costs. 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. Rules will be put in place to provide additional safeguards against individual entities manipulating auctions, and banking and borrowing provisions provide a powerful check against such behaviour. The economy-wide competition provisions of the Trade Practices Act 1974 will also apply.
The carbon price
Seeking to meet national emissions targets through the Scheme will generate an explicit carbon price. The price of carbon will be determined by the balance of supply and demand for permits. The Scheme design incorporates a number of internal stabilisers and constraints on carbon prices. Pricing volatility, and upside price risk, will be reduced by:
- widespread coverage, as excluding sectors will push up the cost on the economy
- the ability to bank (i.e. save) and borrow permits, which can help promote a smoother carbon price path
- a ban on the export of permits in the Scheme's initial years, to reduce upward price pressure on the Scheme
- unlimited access to international abatement delivered through the Kyoto Protocol's project-based flexibility mechanisms, which acts to cap permit prices and total Scheme costs
- a transitional cap on the price of permits which provides a further safety valve for the Scheme.
One of the outputs of the Treasury modelling was a time profile for carbon prices for different scenarios. It is important to recognise that the Treasury modelling focuses on the medium to long term economic impacts of policies to reduce emissions. It does not attempt to predict short term international emission prices.
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 A$23/t 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.
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. Each year the Government will review the adequacy of the household assistance package in the context of the Budget.
Household assistance
Carbon costs will be incorporated in the prices of goods and services, and will ultimately be borne by consumers. The Government has recognised this impact, and is providing a substantial package 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.
