Details of the Clean Energy Future Package

The Government’s Clean Energy Future is underway, with 18 bills – the Clean Energy Legislative Package  – being introduced to Parliament on September 13th.

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 (henceforth: 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 arguable 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 (see Compensation and Assistance, below), or farmers who have generated permits through the Carbon Farming Initiative (see Regulatory Bodies and Complementary Measures, below). 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 (CERs), Emissions Reductions Units (ERUs), Removal Units (RMUs), 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 (EUAs) or New Zealand Units (NZUs) – 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 Parliament, 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).

Regulatory Bodies and Complementary Measures

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 –, the Renewable Energy Target, and the National Greenhouse and Energy Reporting System.

To encourage the construction of renewable energy generation, the CEF 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.

Compensation and Assistance

Simultaneous to the introduction of the ETS on July 1, 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 post draw on material prepared for an upcoming annual report by the International Emissions Trading Association [http://www.ieta.org/]. It was first published by New Matilda, in two parts.