On May 4th 2009 the Carbon Pollution Reduction Scheme Bill 2009 (CPRS) was introduced into the Australian Parliament.
The CPRS is the foundation of the Government’s whole of economy strategy to tackle climate change.
Overview
A key element is that an emissions trading scheme will be established, and will commence on 1 July 2010.
Approximately 1000 companies that are responsible for about 75% of Australia’s greenhouse gas emissions will have to obtain and surrender carbon pollution permits equal to their emissions each year.
The Scheme will cover the major greenhouse gases: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons.
Each year there will be a cap that limits annual emissions from all covered types and sources of emissions.
Tradeable carbon pollution permits will be issued annually that will be equal to the Scheme cap.
In line with the reducing cap target, a decreasing number of permits will be issued each year.
Cap
The Government has committed to reducing emissions to 5% below 2000 levels by 2020, irrespective of the action of other nations.
Should global agreement be reached, where all major economies commit to substantially restrain emissions and all developed countries take on reductions comparable to that of Australia, the commitment will be increased to 15% below 2000 levels.
If there is a storage Global commitment to stablise greenhouse gases at 450ppm or lower by 2050, the Australian target will become 25%$ below 2000 levels.
Longer term, the Government has committed to reduce greenhouse gas emissions to 60% of 2000 levels by 2050.
Coverage
The coverage of the Scheme will be broad and will include emissions from stationary energy, transport, industrial processes, forestry and waste as well as fugitive emissions from the oil and gas industry.
A decision will be made in 2013 on whether agricultural emissions will be included from 2015.
Forest owners will be able to opt into the Scheme on a voluntary basis.
They will be eligible to receive permits where the forests sequester more carbon than they emit, but would have to surrender permits when emissions exceed the carbon sequestered.
Price
For the first 4 years the price is capped at $40 per tonne, rising at 5% per annum thereafter.
For the first 12 months the carbon price will be fixed at $10 per tonne.
Subsidies and Assistance
All money raised from the sale of permits will be reinvested to help households, businesses and the economy to adjust.
Initially, approximately 25% of permits will be allocated to Emissions Intensive Trade Exposed (EITE) industries:
- activities with emissions intensity of at least 2000t CO2/-e/$m revenue or 6000t CO2-e/$m value-added will be allocated 94.5% of their permits for free;
- activities with emissions intensity of between 1000t and 1999t CO2-e/$m revenue or between 3000t and 5999t CO2-e/$m value-added will be allocated 66% of their permits for free;
In addition, the emissions-intensive coal-fired electricity generators will receive free permits to the value of $3.9 billion over the first five years of the Scheme.
For the first three years of the Scheme fuel taxes will be cut on a cent-for-cent basis to offset the initial price impact the Scheme will have on fuel.
Assistance measures will be provided to low and middle income households, at levels estimated to be equal to or greater than the resultant increase in the cost of living attributable to the Scheme.
A Climate Change Action Fund of $2.15 billion over 5 years will be established to assist the transition for business, community sector organisations, workers, regions and communities.
More detailed guidelines have been issued on the eligibility criteria for industry assistance under the CPRS.
Businesses Requiring Permits
A Facility will be captured by the CPRS if it emits more than 25,000 tonnes of CO2equiv per year.
Relevant emissions are Scope 1 emissions only.
This contrasts with the National Greenhouse and Energy Reporting Act, which applies to all facilities that have combined Scope 1 and Scope 2 emissions of more than 25,000 tonnes of CO2equiv per year.
Participating organisations can surrender international Kyoto units for compliance purposes, in lieu of Australian carbon pollution permits.
There is no limit on the number of these units that can be surrendered.
However, Australian permits will not be able to be exported (without five years notice).
The Government has also confirmed that the expanded national Renewable Energy Target requires 20% of Australia’s electricity to be sourced from renewable generators by 2020.
Voluntary Carbon Offsets Market
Carbon offsets can currently be purchased in order to make a product or service carbon neutral, or to offset the carbon emissions generated by a specific activity.
Currently, offsets can be sourced from Australian or international offset projects.
From July 2011, Australian carbon offset projects will not result in any net reduction in Australia’s emissions, and so will not generate valid offsets. International offset projects will continue to be valid.
In addition it will be possible to buy Australian Emission Units under the CPRS and voluntarily retire them.
Governance and Legislation
The Australian Securities and Investments Commission will be given the power to investigate and prosecute market manipulation in the carbon market.
Draft legislation to underpin the CPRS was presented to Parliament in May 2009 but has yet to be passed.
The CPRS White Paper (Dec. 2008) provided the following summaries on specific aspects of the CPRS:
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.
A Company Perspective
Different companies will have different abatement costs and opportunities.
Under the Scheme, the decision whether to emit or abate will differ from company to company.
Consider an example where the market price for a carbon pollution permit is $25.
Company A can reduce its emissions for a cost of $20 per tonne of emission.
Its cost of abatement is lower than the market price for a permit.
If the company had permits, it would sell them.
If the company had no permits, it would be cheaper for the company to abate than to buy a permit so that it could emit.
Company B can reduce emissions for a cost of $50 per tonne of emissions.
Its cost of abatement is higher than the market price for a permit.
If the company had permits, it would use them and emit.
If the company had none, it would buy them in the market so it could emit.
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