Australian Emissions Trading Scheme developments

The past few months have seen rapid developments towards an Australian domestic greenhouse emissions trading scheme. Emissions trading will affect virtually every Australian business and household, either through direct participation or pass-through effects on energy prices, particularly electricity. Effective strategic planning to mitigate the risks and capitalise on the opportunities presented by emissions trading requires an understanding of competitor, upstream and downstream emissions, as well as abatement cost curves. In addition critical reporting, methodology and design issues are being resolved now, and businesses need to understand the options being considered and the implications to develop an effective influencing position

In this article we discuss:

• Federal Election
• International Negotiations
• National Greenhouse and Energy Reporting Act
• Early Abatement Incentives Discussion Paper
• NSW Greenhouse Gas Abatement Scheme
• Garnaut Review Interim Report

Federal Election November 2007
While both major parties went to the election with a commitment to introduce an Australian Emissions Trading Scheme (AETS) by 2010 or 2011, the practical impacts of the stronger commitment to tackling the greenhouse issue by the Rudd Labor Government is now being felt.

The first act of the new Government was to ratify the Kyoto protocol, meaning that from January 2008 Australia is now officially committed to its target of 108% of 1990 emissions over the first commitment period 2008-2012. New projections released this week show that with the expanded Mandated Renewable Energy Target (MRET) of 20% by 2020 Australia is now on track to meet its Kyoto 108% target.

The implication of this is that the AETS will not need to bring forward significant abatement prior to 2013, but the new MRET will increase electricity costs, adding an additional $6/MWh or more between 2010 and 2020 based on an additional 10% renewable energy at REC prices projected to be above the current $57 penalty cap.

International negotiations
Australia’s strong stance at the UN Bali conference in December arguably provided a tipping point and providing impetus for a strong international commitment to agree Kyoto targets beyond 2012 within two years.

This week we have seen indications from the White House that the US will accept “binding international obligations”, which could be announced as soon as the July G8 summit in Japan.The three front-runners in the US Presidential race, Clinton, Obama and McCain are all advocating a domestic cap-and-trade emissions trading scheme for the US.

In short, the barriers to concerted international action to cut greenhouse emissions are being pushed aside faster than most commentators would have expected.

National Greenhouse and Energy Reporting Act 2007
The NGER Act came into force in September 2007, and will require around 700 large emitters, energy generators and energy users covering 70% of Australian emissions to report emissions and energy use from 1 July 2008. NGER reporting will underpin the future Australian Emissions Trading Scheme.

Thresholds triggering reporting obligations are sites with 25 kt of emissions or 100 TJ of energy production or consumption, or corporate groups with 125 kt / 500 TJ, falling to 50 kt / 200 TJ by 2010/11. Parties not meeting these thresholds will be able to register and report voluntarily.

A Technical Guidelines discussions paper (Dec 07) and Regulations policy paper (Feb 08) have been released as part of the consultation process to develop regulations defining the detail of the reporting scheme.

It is important that businesses understand the content of these papers and the options being canvassed, as the decisions that flow from this process will effectively define the calculation and reporting methodologies that will be used for future Emissions Trading obligations.Issues such as the definition of a “site” and “operational control” of emissions will ultimately decide which parties are liable for certain emissions, while alternate calculation approaches can affect the quantum of emissions reported and hence future permit allocations and costs.

NGER also provides for voluntary reporting of greenhouse abatement activities, which could be important for companies claiming credit for early action (see next item).

Early Abatement Incentives Discussion Paper
The Prime Minister's Task Group on Emissions Trading (now part of the new Department of Climate Change) has released a discussion paper on incentives for abatement in the period leading up to the commencement of a national emissions trading scheme.

The paper looks at definitions and boundaries for what can be called “early action”, and what types of mechanisms provide appropriate incentives. Lines are now being drawn that will define who does and doesn’t receive compensation. Some critical issues are:

• The definition of trade exposed energy intensive industries (TEEI).
• Cut-off dates for eligible activities – with the current interpretation based on Prime Minister Howard’s address on 3 June 2007 announcing a commitment to a National Emissions Trading Scheme.
• What defines an asset “in existence” or “committed” at the cut-off date – incorporating legal, financial and project hurdle criteria.
• What is considered abatement, including consideration of additionality beyond business as usual abatement, permanence, measurability and verifiability.
• Whether offsets and international credits should be eligible.
• Administrative arrangements, including the existing Greenhouse Friendly program.

There is some confusion regarding the status of earlier “no disadvantage” commitments given by governments, particularly statements by Minister Minchin in 2000.Businesses that have implemented abatement projects after 2000 should understand the various commitments, and have their projects, abatement, and the investment decision well documented and preferably independently audited to be in the strongest position to make a claim for early action. This also applies to assets or abatement projects with commitment dates near critical deadlines, particularly 3 June 2007.

Strong consideration should be given to utilising the voluntary reporting provisions in the NGER to document and verify abatement from projects that may be eligible.Independently verified emissions inventories will also be an important consideration in the allocation of credits or permits for early action or trade exposed energy intensive industries.

NSW Greenhouse Gas Abatement Scheme
The NSW GGAS is scheduled to finish with the introduction of an Australian Emissions Trading Scheme. With GGAS structured around “abatement credits” and AETS structured around “permits to emit” there are fundamental incompatibility issues that will make this transition problematic.

Where multiple parties are involved in a project under GGAS, it is likely that costs, benefits, permit allocations and liability for future emissions will land differently between the parties under the two schemes, and many contracts have inadequately contemplated this eventuality. Parties to existing or planned projects eligible for GGAS NGACs should understand the differences between the two schemes, and how these will affect future costs and benefits.

The NSW Government has formed a working group to consider transitional issues, and held its first meeting on 1 February 2008.

Garnaut Review interim report
Professor Ross Garnaut released the interim report of the Garnaut Climate Change Review on 21 February 2008.The Garnaut Review is billed as an Australian version of the Stern Report, looking at the economic case for action to combat climate change and will form a key input to the Rudd Government’s views on interim and long term abatement targets.

The interim report provides “a flavour of early findings” of the Review, noting these are genuinely interim judgements. The draft report is due in June 08, with the final report in September 08 – until then considerable uncertainty will remain.

The interim report finds that global emissions are rising faster than expected, and accepts on the balance of probabilities the IPCCs view that business as usual emissions carries a high risk of dangerous climate change. It concludes “it is in Australia’s interest to seek the strongest feasible global mitigation outcomes” with reductions of 60% or more by 2050.

The Report also raises some contentious arguments – including that industry has known about greenhouse risks for a long time and that compensation for non-trade exposed sectors may not be appropriate. It also contemplates “convergence” of global per-capital emissions allowances – a “one man one permit” approach that would dramatically alter the distribution of allowances between developed and developing countries.

With Australia withholding support at Bali for long term abatement targets until the Garnaut Review was completed, it now looks likely the outcome of the Review will support aggressive abatement targets in the future.The emerging picture is that there will almost certainly be an emissions trading scheme with challenging interim and long term targets, and lower levels of compensation or insulation from early costs and transition effects than most businesses had expected.

The attached summary provides more detail of the findings and opinions expressed in the Interim Report.

© Sinclair Knight Merz
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