The long awaited White Paper defining the Carbon Pollution Reduction (Emissions Trading) scheme has been released by the Australian Government. The White Paper (policy position) builds on the earlier Green Paper (options and consultation), and the recommendations of the Garnaut review.

The White Paper position has a number of important implications. Firstly, the 5% unconditional target will result in carbon concentrations stabilising at above 550ppm, implying temperature increases above 2°C. The 5% target is presented as comparable on a per-capita basis to the 20% commitments by the EU, UK and stabilisation target mooted by the new US administration.

A maximum reduction of up to 15% below 2000 levels is set if similar commitments from major emitters are agreed at Copenhagen in 2009. The White Paper acknowledges Professor Ross Garnaut’s finding that Australia’s national interests are best served by a global agreement to stabilise atmospheric concentrations at 450ppm, from which it is reasonable to assume Australia will push for international agreement that would push the nation towards the 15% abatement target by 2020.

In essence, this means the initial abatement trajectory is still uncertain, and will remain so for another 12 months at least. Businesses will have only a few months of certainty prior to the commencement of the CPRS in 2010, meaning they must continue to plan and develop strategies to deal with this uncertainty. This includes understanding your emissions profile, value-chain emissions, your abatement cost curve, and planning around multiple trajectory scenarios until there is greater certainty.

The White Paper abatement targets also lock in temperature rises of at least 2°C, which will require a significant adaptation response. For businesses making investments in assets with a life of 20 years or more, understanding risks and financial implications of climate change is crucial.

Implications for Emissions Intensive Industries

Assistance to EITE industries has been increased, and the definition expanded to all sectors where imports/exports are greater than 10%, or it can be demonstrated there is limited capacity to pass on price increases. A second intensity threshold based on value-add has been included to the previous revenue definition. The total amount of assistance to EITEs has also increased, starting with a free allocation of around 25% of permits and expected to increase to 45% over 5 years.

Assistance will be based on historical per-unit levels to retain abatement incentives, meaning additional analysis and inventories for past years will be required. For emissions intensive industries there is a short window to develop a robust case to Government for assistance, backed up by credible data and analysis.

In the resources sector, coal mines with high fugitive emissions will receive adjustment assistance of up to $750M over 5 years. No other specific assistance is proposed for the mining and resources sector, although with falling commodity prices some operations may be eligible for EITE assistance. This will require a thorough understanding of historical emissions to build a solid case to the Government for assistance.

Assistance for coal-fired power stations

The coal-fired generation sector will also receive $3.9 billion assistance over 5 years, for emissions above 0.86 t CO₂e/MWh. This is based on detailed modelling, that SKM expects will be released shortly. This implies not all coal generators will receive assistance, with brown-coal or the most inefficient black coal generators being the major beneficiaries. The one-off 5 year allocation of permits will be complicated with a 2 year “windfall profits” clawback and energy security tests before generators can withdraw unprofitable capacity. This will result in ongoing uncertainty for some generators.

Cost increases for energy users

All energy users will face cost increases, even those below the CPRS thresholds, as electricity and gas prices increase to reflect emissions. SKM’s modelling shows electricity prices in particular are set to rise significantly through a combination of CPRS, MRET, and growing network growth and replacement capital expenditure. Financial assessment of projects and efficiency options based on today’s electricity prices is not considered to be an accurate or reasonable basis.

Impact on the Energy and Water sectors

SKM also believes the introduction of the CPRS will bring the convergence of the energy and water industries into sharper focus. The CPRS will increase the cost of water supply and treatment, particularly desalination and recycled water supply options. This, coupled with climate change and increased climate variability, will put new challenges and costs on water availability, including for power generation. Managing these risks to deliver both water and energy security at reasonable cost will be one of the key policy challenges over the coming decades.

What has changed from the Green Paper:

• A 2020 target of a 5% reduction on 2000 emission levels, increasing to 15% if international agreement results in similar commitments from other major emitters.
• Carbon prices are expected to start at around $25, 
• Initial targets won’t be confirmed until early 2010, following the Copenhagen 2009 negotiations.
• Price cap of $40 / tonne for first 5 years, rising at 5% pa.
• New definition of trade exposure based on the ratio of imports + exports compared to domestic production.
• Assistance to emissions intensive industries based on either revenue or value-added.
• Unlimited Kyoto offsets (clean development mechanism), with domestic offsets to be considered after 2013.
• Assistance to strongly affected industries, Electricity generators with a carbon intensity >0.86 tonnes CO₂e/MWh to receive a one-off allocation of permits for 5 years, with a 2 year clawback subject to a “windfall profits” test.
• Assistance to low and middle income households, and cent-for-cent reduction in fuel excise for 3 years.
• Permits to be auctioned monthly using an ascending clock method, with permits able to be purchased up to 4 years in advance, with the possibility of deferred payment for future dated permits.
• Legislation to be introduced in March 2009, aiming to be passed by the middle of the year.
• National energy efficiency strategy to be developed and implemented in 2009.
• Complementary funding for innovation and renewables have been increased or brought forward. The principles for assessing complementary measures have been released, focussing on addressing specific market failures, efficiency, effectiveness, equity and administrative simplicity.

What is unchanged from the Green Paper:

• A July 2010 start date for CPRS, with obligations for emitters >25,000 tonnes of CO₂ pa. The global financial crisis is not considered a sufficient reason to delay the start of CPRS.
• A long term target of 60% reduction by 2050.
• The operational control definition has been expanded to include “financial control”
• Coverage – 6 Kyoto gases; Energy, transport, industrial, fugitive and waste sectors have been included, with forestry able to opt-in, and agriculture no earlier than 2016. Previously closed landfills to be excluded.
• Unlimited banking of permits confirmed, with limited borrowing for 1 year.
• Reconfirms commitment to 20% renewable energy target by 2020.

How SKM can help

SKM can assist its clients to understand:

• Climate change impacts, risks, and adaptation strategy
• Emissions inventories, reporting and verification
• Abatement cost curves
• Costs, risks and opportunities to their business, and analysing strategy options to best position them for a carbon constrained economy
• Incorporating CPRS and adaptation costs and risks into Due Diligence and project feasibility studies
• Technology assessments, risks and valuations
• Clean Development Mechanism and Carbon Finance.

NB: All $ in AUD

© Sinclair Knight Merz
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