Getting Serious About Climate Change in Australia

On 12 October 2011, the Lower House of the Australian Parliament passed the Clean Energy Legislation. Given that the Australian government currently holds a majority in the Upper House, this event will result in the staged introduction of a carbon pricing mechanism from 1 July 2012.

A Long and Winding Road

Australia’s journey towards the introduction of a price on carbon has been a rocky one. The key milestones encountered along this journey can be summarised as follows:

The Emissions Trading Scheme (ETS) agenda (2007)

The release of a government whitepaper on the introduction of an ETS by the previous Howard Liberal Government was the first manifestation of serious consideration of a carbon price for Australia. This agenda subsequently dissolved following the election of the Rudd Labour Government in 2008.

The Carbon Pollution Reduction Scheme (CPRS) (2008)

The Rudd Labour Government built on the early work performed by the Howard Administration in developing its own solution – the CPRS. The release of the draft CPRS legislation occurred following the release of two further discussion papers seeking public comment on the construct of the proposed scheme. Debate about the legislation faltered in the parliament and the legislation was subsequently defeated in late 2009. In fact, the protracted debate in parliament arguably resulted in both the prime minister and the Liberal opposition leader being ousted from their positions over the issue.

The 2010 federal election

The subsequent election of the Gillard Labour Government in August 2010 was the ‘game changer’ in respect of the national debate about carbon pricing in Australia. This administration formed a minority government with the aid of the Australian Green party and a small number of independents. During the course of the negotiations on the nature of the future political collaboration, a commitment was given to revisit the introduction of a carbon pricing scheme in Australia.

The rest, as they say, is history. Twelve months on, and against the background of an often vicious public debate, the draft legislation for the Clean Energy Bill of 2011 was released for public comment in July 2011 and subsequently ratified by the Lower House of the Australian Parliament in October 2011.

And so here we now sit, with the year 2011 rapidly drawing to a close and the Australian government on the verge of introducing a carbon pricing mechanism from 1 July 2012.

Key Elements of the Clean Energy Bill

The Clean Energy Legislation comprises 19 legislative bills – a primary bill and 18 supporting and associated legislative amendment bills. As a consequence, the provision of a detailed discussion of the legislation is outside the scope of this short paper.

Nonetheless, the key elements of the legislation can be summarised as follows:

Scheme coverage

The scheme extends to emissions from all industry sectors other than agriculture, forestry and fishing. Emissions from road transport fuels are specifically excluded (although the government has indicated an intent to incorporated heavy vehicle fuel use in 2014, subject to approval of future legislation). Coal facilities producing less than 25kt CO2eq (i.e. 10,000 tonnes of coal) per year are also excluded from the scheme. A ‘shadow carbon’ price will be applied to the use of liquid and gaseous fuels in non-transport applications via changes to current fuel excise concessions.

Pricing mechanism

The pricing mechanism will evolve over three discrete stages – from a fixed tax to an unconstrained market scheme. Between 1 July 2012 and 30 June 2015, the scheme will operate with a fixed price of AUS$23 per tonne rising at 2.5% above the consumer price index (CPI) until 1 July 2015. In the three years between 1 July 2015 and 30 June 2018, the carbon tax will be replaced by a market price constrained within a price floor and price ceiling. The price floor will be set at AUS$15 per tonne (rising by 4% per annum) and the price ceiling with be AUS$20 above international pricing (rising by 5% per annum). From 1 July 2018, the price caps will be removed. The staged transition is intended to provide certainty in the first three years of scheme operation and then smooth the transition to a flexible market price over time as shown in Figure 1.

Figure 1:
Graphical Representation of the Staged Pricing Mechanism (Fixed Price to Variable) to be Adopted by Australia

Source: RARE Consulting
Point of obligation

Energy producers with direct control over a facility that emits more than 25kt CO2eq per year will be liable for their emissions (known as liable entities). Provision has been made for liable entities to transfer liability to a third party under certain circumstance. This transfer will be formally booked using an obligation transfer number (OTN) to be quoted by both the energy producer and the third party.

Carbon trading limitations

Permits will be offered by the government via an initial auction process and liable parties will then participate in the secondary trading market post-1 July 2015. Liable parties will be permitted to purchase up to 50% of their credits from international schemes and a further 5% (maximum) from domestic offsets.

Compensation arrangements

The scheme provides compensation for energy intensive trade exposed industries (such as petroleum producers and mining companies) via the Jobs and Competitiveness Programme. Compensation will be provided by way of ‘free permits’ of up to 94.5% of permits, decreasing at 1.3% per year.

Unusually, the scheme also makes provision for direct payments to households as compensation for increased energy costs arising from the scheme.

Scheme revenue

All revenue derived from the scheme will be redeployed into the national economy. Half of the revenue will be handed to households while the other 50% will be divided between:

  1. The Jobs and Competiveness Programme.
  2. Energy security and transformation packages.
  3. Clean energy technology funding and business energy efficiency measures.

Supporting Legislative Agendas

In considering the policy environment in which the clean energy legislation will operate, it is also worth noting that the effective operation of the legislation will be supported by the continued operation of two existing pieces of legislation. This legislation includes:

  • Energy Efficiency Opportunities (EEO) Act (2006): the EEO requires that large energy using corporations (>0.5PJ of energy per year) report annual energy use and develop energy efficiency improvement plans. Annual reports demonstrating both actions must be lodged with the Australian government on an annual basis.
  • National Greenhouse and Energy Reporting Scheme Act (NGERS) (2007): NGERS requires large and moderate energy using corporations to report energy use and greenhouse gas (GHG) emissions to the Australian government on an annual basis.

Likely Future Challenges

As with any piece of legislation, the carbon pricing mechanism identified in the clean energy legislation will create significant challenges for the Australian community in terms of structural adjustment. In addition, the negotiation process has resulted in several concessions that are likely reduce the environmental effectiveness of the scheme in the near term.

Key challenges likely to be encountered in the future management of the scheme include:

Future management of transport sector emissions

As has occurred with most of the national schemes introduced to date, the Australian government has chosen to exclude emissions from fuels consumed in road transport. The Gillard government has publicly stated that fuel used in passenger cars will not be included in the future, but has foreshadowed the inclusion of heavy vehicle transport fuels under separate legislation to be drafted and ratified by 2014. Given that the direct GHG emissions from road transport are the second largest contributor to GHG emissions, and the sector with the fastest annual growth in emissions, it is hard to understand why road transport has not been formally incorporated in the future staging of the scheme (apart from the obvious political risks of course). Ultimately, emissions from the sector will have to be addressed. Failure to do so risks undermining the achievement of national GHG emission reduction targets.

Maintenance of competitive neutrality between electricity and gaseous fuels for stationary energy applications

The scheme proposes the application of a dynamic market price for electricity and a shadow carbon price (by way of six month rolling average) for liquid and gaseous fuels used for non-transport applications. The collection of the carbon tax via the fuel tax mechanism essentially ‘locks in’ the costs of the carbon price component for the liquid and gaseous fuels industries. Conversely, the electricity industry will have the opportunity to reduce the cost of the carbon price component on their energy product via selective purchasing and price hedging strategies for the purchase of carbon permits. The net effect of these differences is the likely creation of a competitive distortion in the stationary energy market that could result in the inherent carbon price component of gas use being higher than electricity, despite the fact that use of gas in stationary applications typically delivers lower GHG emissions than use of coal-fired electricity.

Revenue leakage

The move to allow Australian corporations to purchase up to 50% of their liability from international markets constitutes a significant risk to future scheme revenues – at least in the early years of market operation. The proposed floor price of AUS$15 tonne CO2eq is higher than current international trading prices and therefore it is very likely that liable parties will choose to take advantage of hedging opportunities by pre-purchasing international permits. This in turn, will result in the leakage of carbon capital from the Australian economy and reduce the pool of revenue available for the proposed compensation and industry adjustment programmes.

While a number of additional challenges have been cited by others, it is strongly suggested that the successful management of these three challenges will be crucial to ensuring the integrity of the scheme in the near term.

Some Certainty, but for How Long?

The 2011 Clean Energy Legislation marks the end of a long road towards the development of a carbon pricing mechanism for Australia. While the scheme has attracted well- founded criticism from both business and environmental groups (albeit from different ends of the carbon pricing debate), the legislation provides a good foundation for the future operation of a carbon pricing mechanism in Australia.

That said, the federal opposition has committed to repeal of the legislation in the event that they win office during the 2013 federal election.

And so, business, industry, the environmental movement and the Australian community face a degree of continued uncertainty despite the almost certain introduction of the scheme on 1 July 2012.


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