1 Summary

1.1 CPRS

On 2 February 2010, the Federal Government introduced legislation for its Carbon Pollution Reduction Scheme (CPRS) to Parliament for the third time, in a form reflecting agreement reached in late 2009 with the then Turnbull-led Coalition. The legislation was passed by the House of Representatives on 11 February 2010. Given the Coalition’s current stance, the legislation is likely to be rejected again by the Senate this month. If reintroduced in three months time, it will provide a trigger for a double dissolution election.

1.2 Coalition policy

On the same day (2 February 2010), Coalition leader Tony Abbott unveiled the Coalition’s alternative climate change policy. The primary focus of the Coalition’s policy is an Emissions Reduction Fund (ERF) which would be used to finance direct emissions reduction actions (primarily soil carbon sequestration) intended to achieve by 2020 a five per cent reduction in national emissions of greenhouse gases against 1990 levels, but which would allow emissions to continue unpenalised at ‘business as usual’ levels.

The Coalition’s policy is presented as being a simpler policy than the CPRS. However, concerns about its details remain.

1.3 Copenhagen

Increasing numbers of developed and developing nations have identified their 2020 commitments under the Copenhagen Accord. However, doubts remain for the UN process’s ability to deliver a comprehensive global agreement.

1.4 Other countries emissions trading systems (ETSs)

The USA is progressing a cap-and-trade scheme similar to the CPRS. The likelihood of the legislation being passed by its Senate and its timing remains unclear. President Obama continues to support legislation for such a scheme, but there are some suggestions the USA could take a direct action approach, similar to that proposed by the Coalition, prior to an ETS coming into effect. Several other important greenhouse measures are being progressed in the USA.

In addition to the USA, the EU, Canada (to match the USA), Japan and New Zealand will continue to progress their respective ETSs.

1.5 What does it mean?

The government and Coalition appear to have intractable positions that can only be resolved through an election, likely to be later this year. Potentially, it will be a double dissolution election.

Considerable uncertainty remains regarding future climate change regulation and carbon pricing in Australia. The signs still remain that some form of carbon regulation in Australia is inevitable, but the precise format is not certain between the two proposed alternatives. Therefore it is appropriate for commercial agreements to be prepared with both alternatives in mind.

A table comparing the CPRS and Coalition policy is presented below.

2 CPRS

The reintroduced Carbon Pollution Reduction Scheme Bill 2010 (Cth) includes the government-sponsored amendments1 moved and requested in the Senate between 25 November 2009 and 2 December 2009.

The legislation was passed by the House of Representatives on 11 February 2010, with both former Coalition leader and CPRS supporter Malcolm Turnbull and independent Rob Oakeshott voting with the government. Malcolm Turnbull has publicly criticised the Coalition’s alternative policy.

The Tony Abbott led Coalition is opposed the passage of the legislation and it is therefore likely to be quickly defeated in the Senate again. As this legislation differs from that rejected in 2009 it would need to be reintroduced to Parliament after a further three months, and then defeated for a second time in the Senate (in May 2010 at the earliest), before it could provide a double dissolution election trigger.

In a likely election year there are several constitutional factors that may determine the likely election date.2 The earliest date for a normal House and half-Senate election is 7 August 2010, but is expected to be around October 2010. The Government could effectively generate and then hold onto a double dissolution election trigger for use later this year if it desired.3

Climate change is likely to be a significant election issue, with the election likely to determine whether the CPRS will be finally passed, or an alternative approach taken.

3 Coalition policy

A comparison of the CPRS and Coalition policy4 is presented in section 4 below.

3.1 Emissions Reduction Target

The Coalition’s policy targets a five per cent reduction of greenhouse gas emissions by 2020 based on 1990 levels. The government’s target operates against 2000 levels. However, Australia’s 1990 and 2000 emissions levels were similar and therefore this is not a key point of difference.

The Coalition’s policy states that achievement of its target equates to 140 million tonnes of CO2 equivalent (CO2e) abatement per annum by 2020, and by 2020 will hold Australia’s annual national emissions at approximately 525 million tonnes of CO2e.

There is no other emissions target beyond 2020.

The Coalition policy states that targets could change to reflect changed global agreement obligations or changed approaches taken by major trading partners and big global emitters. However, during the policy release press conference Mr Abbott did not commit to target changes.

3.2 Emissions Reduction Fund (ERF)

Central to the Coalition’s emissions reduction target is the proposed ERF.  

Funding

The details supplied concerning the amount of the funding for the ERF are that it will have approximately $2.5 billion over four years as follows:

  • $300 million in 2011-12  
  • $500 million in 2012-13  
  • $750 million in 2013-14, and  
  • $1 billion by 2014-15.

Although details of funding in further years have not been supplied, the Coalition envisages that the ERF will invest an annual average of around $1.2 billion in direct emissions reduction activities in the years to 2020.

These costs would not be funded by new revenue measures but through normal budget processes as part of the Coalition’s fiscal strategy.

The Coalition’s total policy package, include the funding items outlined below for renewable power, tree planting and research, would cost $3.2 billion over four years.

Direct action focus

Soil carbon

The major focus of the ERF would be to support ‘direct action’ though soil carbon. The aim is to support by this means 85 million tonnes per annum of CO2e abatement by 2020. This commits approximately 61 per cent of the target of 140 million tonnes of CO2 equivalent (CO2e) abatement per annum by 2020 to being achieved through soil carbon.

The ERF would offer to purchase 10 million tonnes CO2e soil carbon abatement for 2012-13.

The policy states that ‘Farmers will be entitled to tender for all verified new additions in soil carbon beyond commencement of the Fund.’ The intent of this statement is unclear, but suggests farmers could tender on an unlimited basis for soil carbon sequestration.

Reducing emissions in the electricity sector

The ERF would also make incentives available for ‘the oldest and most inefficient power stations to reduce their emissions’. Support from the ERF would only be considered if appropriate guarantees were received in relation to jobs, energy security, and electricity prices.

Other

The ERF would also be available to support a wide range of other ‘direct action’ activities. They include, but are not limited to, activities in the following fields:

  • forestry measures – whose assessment for possible support through the ERF would include consideration of their impact on agriculture, as well as on surrounding ecosystems and water systems waste coal mine gas  
  • green buildings and energy efficiency  
  • reducing landfill emissions  
  • composting, with farmers’ potential opportunities noted  
  • recycling, and  
  • transport fuels – whose assessment for potential support through the ERF will be assessed against strict (but not expanded on) criteria relating to Government revenue and fuel prices.

Summary

The following information is provided in the Coalition’s policy on potential abatement, ERF allocations and indicative carbon prices

This information indicates that, of the potential abatement achievable by these ‘direct action’ measures by 2020 (450mt), the ERF would only fund 31 per cent. As mentioned, 61 per cent of that funding would be directed to soil carbon measures.

It is not clear whether the ‘electricity generators and industry’ category means that energy efficiency measures in industries other than the electricity generation sector, such as manufacturing and mining sectors, could also access the ERF. The eligibility of other industries is not canvassed in the Coalition policy’s section that deals with electricity generators. However, the policy’s discussion of the ERF’s operation (discussed below) suggests that any industries could access such funding.

Overseas projects

The ERF would not support overseas projects. This is presented as a favourable differentiation from the CPRS. The CPRS which would allow the unlimited use in Australia of Kyoto protocol recognised international permits, for example Certified Emissions Reductions (CERs) under the Clean Development Mechanism (CDM) program conducted in developing countries.

Tendering

The Coalition’s policy document indicates that it will call for tenders for projects that will:

  • reduce CO2 emissions  
  • deliver additional practical environmental benefits  
  • not result in price increases to consumers  
  • protect Australian jobs, and  
  • not otherwise proceed without Fund assistance.

It is not clear from Coalition’s policy document how projects that meet these criteria will be assessed against each other if the tender process is oversubscribed. Nor is it clear how the amount and duration of support from the ERF will be determined for any particular qualifying project.

The Coalition’s policy document states that an expert body would be established to assess tenders and make recommendations on activities to be supported by the ERF with an aim of ensuring that the ERF supports a broad range of direct action initiatives.

The Coalition’s policy document indicates that, in assessing any particular tender, the existing National Greenhouse and Energy Reporting Scheme (NGERS) will be used to determine proposed emissions reductions below baselines determined for individual firms.

While it is not clear from the Coalition’s policy document, the intended process appears to be as follows:

  • a proponent tenders a particular project meeting the criteria described above
  • included in the tender will be details of the emissions reductions proposed to be achieved by the project below the proponent’s existing baselines (determined under the NGERS), and  
  • following approval of the project, and if the proponent implements the project and achieves the reductions (verified under the NGERS), the proponent will be paid from the ERF a price for those reductions (a ‘carbon price’) agreed at the time of approval.  

It appears that a proponent of an emissions reduction project must bear the cost and risk of tendering, implementing, and achieving verified reductions through, the project before receiving an ERF payment.

Verification of a project carried out in any particular financial year could inevitably involve a time lag, given that the NGERS reporting cycle is based on reporting by 31 October, and publicly released on 28 February, following the relevant financial year.

It is not clear how baselines would be established. The process for doing this may be considerably complex, similar to the establishment of Emissions-Intensive, Trade-Exposed baselines under the CPRS. It is not clear what role (if any) the proposed ‘liability transfer certificate’ and ‘obligation transfer number’ mechanisms in the NGERS are to perform, and whether ‘scope 1’ as well as ‘scope 2’ emissions are to be brought into account.

Presumably, the existing thresholds in the NGERS (which increase in stringency over time and are both ‘group–based’ and ‘facility-based) will be retained in establishing baselines.

The existing NGERS legislation does include provisions that allow for reporting in respect of ‘greenhouse gas projects: reduction of greenhouse gas emissions and removals of greenhouse gases’. However, they have not been utilised yet and no necessary machinery has been put in place to support them. The Coalition’s policy may necessitated amendments to the NGERS legislation and an expansion of its machinery.

It is not clear from the Coalition’s policy document how small businesses and other entities not covered by NGERS will be able to participate in the ERF process. The Coalition’s policy document states simply that they will be able to do so on an ‘opt-in’ basis.

Penalties

It is not clear whether, and (if so) how, a proponent which fails to implement an approved project or which implements the project but fails to achieve verified reductions will be penalised (if at all). Also, it is not clear whether, and (if so) how, businesses will be under any obligation to seek to propose projects and achieve reductions.

The Coalition’s policy document states (on the one hand) that businesses will not face additional costs for continuing to operate at ‘business as usual’ levels. On the other hand, it states that businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty.

In relation to penalties, the Coalition’s policy document states that they will be on a sliding scale at levels commensurate with the size of the business and the extent to which they exceed their ‘business as usual’ levels. The value of the penalties will be set in consultation with industry. Provision will be made to ensure penalties will not apply to new entrants or business expansion at ‘best practice.’

We expect that such penalties will be passed through to consumers, including potentially under existing carbon cost pass through or impost clauses.

Sale of Abatement

The Coalition’s policy document states that businesses that reduce their emissions below their individual baseline (‘historic average’) will be able to offer this abatement ‘for sale’ to the government. Relatedly, the Coalition’s policy document states that the ERF would offer to ‘purchase’ 10 million tonnes of CO2e soil carbon abatement for 2012-2013. It is not clear whether, and (if so) how, these remarks refer to the sale or purchase of anything legally fungible on a secondary market.

Carbon price

As identified in the table above, the Coalition Policy refers to potential carbon prices at which its discussed abatement measures could be commercially achieved, ranging between a minimum of $8/t for soil carbon and up to $35/t for electricity generators and industry.

However, with a total funding of $1.2 billion per annum through to 2020 with 140mt of abatement in that year the average carbon price offered would be $8.57/t, if offered equally.

If the lowest rate of $8/t was offered to all soil carbon projects up to 85mt of abatement that would consume $680 million leaving $520m for other projects to contribute 55mt of abatement at a carbon price of $9.45/t. However, that would be below the minimum indicative $10/t price which the policy indicates such projects would require. If a greater carbon price was provided to soil carbon projects then the carbon price for other projects would necessarily decrease.

While the Coalition’s policy is clearly designed with the intent to benefit the agricultural industry, in part to appease the Nationals, the Wentworth Group of Scientists has criticised the policy as offering less advantages to farmers than the revised CPRS would which would offer unrestricted recognition of their abatement (subject to being accredited and meeting international requirements) which could be sold at a higher price.

Issues

It remains uncertain whether the ERF proposal can deliver a real 5 per cent emissions reduction. This is because it focuses on only one side of the emissions equation:

  • a set physical amount of annual abatement, being up to 140 million tonnes CO2e per annum by 2020, being the amount proposed under the CPRS, but
  • not on the level of emissions being produced under business as usual.  

The CPRS which would use an emissions cap to ensure the five per cent emissions cut is achieved. The economy would not be able to emit over that cap, individuals that emitted without permits would be subject to penalties which could be used by the Government to purchase international permits to offset Australia’s national emissions.  

However, the ERF proposal will not restrain emissions from increasing at business as usual levels, with allowed new entrants and expansion (though expansion only at best practice emissions levels).

The government has claimed that the Coalition policy would result in a 13 per cent rise in emissions by 2020, and deliver less than a third of the required cuts needed to reach a five per cent target.

In addition, the Coalition’s policy will not effect an economy wide structural change that many argue is necessary to point Australia towards a clean economy future and the economic benefits that would bring.

Further, soil carbon abatement is not currently formally recognised internationally. Recognising it domestically without international recognition would lead to issues with Australia meeting any international targets it commits to. The Government is lobbying for soil carbon to receive such international recognition, and had proposed to allow non-capped recognition for it under the CPRS following such international recognition.

These issues may require further consideration by the Coalition.

3.3 Renewable energy support  

The following measures will be provided in addition to the ERF.

One Million Roofs Solar Program  

For a target of one million additional solar energy roofs by 2020, the Coalition will provide an extra $1,000 rebate for either solar panels or solar hot water systems, capped at 100,000 rebates and cost of $100 million per year. This would be on top of existing incentives and replace the current solar hot water incentive when it ends.

Heat pumps will be eligible under the program.  

Supporting Solar Towns and Schools

$100 million will be allocated to a Solar Towns and Solar Schools Initiative, supporting 125 mid-scale solar projects established in schools and communities.

Solar Towns

Competitive tenders will be taken from 1 July 2011 for towns and non-capital cities to access direct solar energy for on site use and return to the grid. Grants will be for a maximum of $2 million each and will be allocated on the basis of greatest savings of CO2 per dollar of funding. The program will run for four years and support a minimum of 25 ‘Solar Town’ projects.

Solar Schools

In addition to the existing (but suspended) Solar Schools program, a Coalition Government will hold competitive tenders commencing on 1 July 2011 for Flagship Solar Schools across the country to access major solar energy projects for on site use and return to the grid.

Grants will be for a maximum of $500,000 each and will be allocated on the basis of greatest savings of CO2 per dollar of government funding. The program will run for four years and support a minimum of 100 Solar Schools projects.

Geothermal and Tidal Towns

$50 million will be allocated to this initiative.

Competitive tenders will be taken from 1 July 2011 for towns and non-capital cities to submit proposals for projects that access direct geothermal or tidal energy for on site use and potential return to the grid.

Funding will be provided to support the establishment of micro, pilot and demonstration projects with the potential to provide renewable power to local communities.

Grants will be for a maximum of $2 million each and will be allocated on the basis of greatest savings of CO2 per dollar of Government funding.

The program will run for four years and support a minimum of 25 Geothermal and Tidal town projects.

High Voltage Direct Current Transmission: Cleaning up our Cities and Supporting Remote Renewable Energy

$2 million for a major study into the use and application of High Voltage Direct Current transmission within Australia, funded from the Solar Towns and Schools initiative. The study would examine the potential land recovery from conversion of overhead power line corridors to urban parklands and inner urban housing.

Renewable Energy Target (RET): Support for Emerging Technologies

Aimed in response to issues with the Renewable Energy Certificate price under the 2009 RET scheme amendments, the Coalition proposes to create a band within the RET to be reserved for:  

  • larger renewable energy projects (over 50 megawatt), or
  • emerging technologies such as solar fields, geothermal projects or tidal and wave projects over 10 megawatt.

The band to be reserved for these projects will be for up to 6000 gigawatt hours by 2020.

It is uncertain what effects these proposals would have on other RET projects.

Clean energy hubs

The Coalition will provide $60 million to develop the La Trobe Valley, Hunter and Central Queensland regions as Clean Energy Employment Hubs to drive additional clean energy research and development. These hubs would aim to ‘drive additional clean energy research and development’ and to ‘support the identification and attraction of new employment opportunities to assist the transformation of local coal industry jobs transformation to clean energy jobs’.  

3.4 Algal synthesis and biofuels

The Coalition would conduct a one-year testing process to ensure that algal energy and biofuels are both effective in reduction of quantifiable levels of CO2 and that they will not distort the Australian food chain and food production processes.

The Coalition would allocate $5 million to this analysis, subject to matching funding from within the Algal Energy and biofuels sector.

3.5 Greenhouse Friendly programme

The Greenhouse Friendly programme would be retained, with $10 million funding over a period of five years at $2 million per annum.

The potential extension of the programme beyond this period would be reviewed after three years.

No comment is made in respect of the National Carbon Offset Standard recently released by the government.

3.6 Green Corridors and Urban Forests

The Coalition commits to the planting of an additional 20 million trees by 2020, for re-establishing urban forests and urban green corridors, using suitable public spaces in urban and regional corridors.

It is estimated this would require 200 to 400 square kilometres of land, ie between 10km x 20km and 20km x 20km, at a cost of around $5 per tree. It is unclear if that price is only for the cost of the tree and planting or for any land cost also. At this rate the initiative would cost at least $100 million. It would be done in combination with the Coalition’s previously announced ‘Green Army’ initiative.5

3.7 Further consultation

The Coalition’s policy paper indicates that a significant amount of detail remains to be provided and various matters are intended to be the subject of further consultation, including:

  • a series of public and industry forums and opportunity for written submissions to allow the Coalition to outline its policy
  • the development and operation of the ERF will be determined following an extensive consultation process involving industry, environmental groups and the wider community
  • work with the electricity sector regarding the design of potential ERF assistance to ensure fairness and cost parity for consumers
  • details on the establishment of the Clean Energy Hubs will be determined in close cooperation with local business and community leaders from each chosen region
  • working with a range of industry groups including the Clean Energy Council, the Energy Efficiency Council, the Green Buildings Council and the Property Council to develop complementary energy efficiency measures, in addition to ERF projects
  • consultation with the renewable energy sector, to consider the inclusion under the One Million Roofs Solar Program of ceramic fuel cells and other new domestic technologies which may emerge
  • details for the RET): Support for Emerging Technologies program will be determined with the Clean Energy Council and other representatives from the renewables sector
  • consultation with local authorities and communities as well as conservation groups in respect of the Green Corridors and Urban Forests initiative, and
  • with conservation and environmental groups for Tony • Abbott’s ‘Green Army’.  

3.8 Responses

Business responses have so far been generally positive, or at least open, to the Coalition policy, including from:  

  • the Minerals Council of Australia  
  • the Australian Industry Group 
  • the Retailer’s Association, and  
  • the Australian Trucking Association.  

The Energy Efficiency Council has stated the policy does not sufficiently disclose the Coalition’s policy on energy efficiency issues, which it looks forward to further information on.  

Some conservation groups have been open to the policy in respect of the tree planting and soil carbon opportunities, but generally critical of the overall emissions reduction outcomes.  

As noted above the Wentworth Group of Scientists has been critical.  

John Hewson and Malcolm Turnbull have also spoken out in opposition to the policy.  

4 CPRS v Coalition policy

5 Greens

The Greens have called for an interim carbon tax before developing a more robust ETS delivering at least 25-40 per cent emissions reductions by 2020, and have met with the government to discuss. However, that option appears highly unlikely. Caught in between the two alternative proposals with no clear support for either, while they are likely to pick up additional seats in the upcoming Federal election, the Greens are risking making themselves politically irrelevant.

6 Copenhagen

The Coalition has strongly argued that the UN Copenhagen Climate Change Conference was a failure and the government needs to move beyond its ETS approach. The Coalition argues that Australia should not take action ahead of the rest of the world, especially its major trading partners and competitors which risks damage to our emissions-intensive, trade-exposed industries and ‘carbon leakage’.6 The absence of a binding international agreement (especially one that includes emission reduction commitments from major developing emitters such as China and India) undoubtedly makes it harder for the Rudd Government to sell its CPRS domestically.

While debate continues regarding Copenhagen’s outcome, the evolution towards a binding international agreement has continued with increasing numbers of developed and developing nations identifying their 2020 commitments under the Copenhagen Accord. However, this process has already been allowed to slip from the originally proposed 31 January 2010 deadline, described by the UN's chief climate change negotiator Yvo de Boer as a ‘soft deadline’. This slippage further questions whether the UN process will be able to achieve a more concrete consensus at the Mexico Conference in November – December 2010, with only one formal UN meeting planned before Mexico.

Doubts remain about the ability of the UN process to deliver a comprehensive global agreement. Potentially a global consensus is not possible and smaller bi and multi-lateral treaties may be more productive, such as the EU ETS. Potential links between Australia and New Zealand, which is proceeding with its own ETS, have previously been suggested.

The national commitments identified so far are:

Appendix I – Developed nations quantified economy-wide emissions targets for 2020

Appendix II – Nationally appropriate mitigation action of developing country parties nations quantified economy-wide emissions targets for 2020

As well as developing nation commitments by: Armenia, Benin, Bhutan, Botswana, Congo, Costa Rica, Ethiopia, Georgia, Israel, Jordan, Madagascar, Marshall Islands, Mexico, , Mongolia, Morocco, Papua New Guinea, Republic of Korea, Republic of Moldova, Sierra Leone, Singapore and the former Yugoslav Republic of Macedonia.

These commitments are broadly in line with nations statements prior to and at Copenhagen.7 The developing nations commitments generally focus on emissions intensity reductions rather than total emissions reductions.

What the nominations do show is a general intent by all major emitting nations to take significant action, though generally contingent on other countries taking similar action. Noticeably the Australian minimum commitment of a five per cent reduction is generally below that of other comparable countries, though is broadly equivalent to the USA & Canada commitment, which while being 17 per cent against 2005 levels is closer to five per cent against 1990/2000 levels.

7 Other countries’ ETSs

7.1 USA

The future of a USA cap-and-trade scheme, outlined to be similar to the CPRS, is likely to have significant ramifications for both international and Australian emissions reduction policies.

Tony Abbott is previously on record as not supporting an ETS in Australia until there was an equivalent scheme in the USA. However, the Coalition’s policy and rhetoric this week appears to eliminate any chance of it supporting an ETS in Australia prior to 2020 and a significant movement towards global agreement. That is failing another radical change in leadership and direction. Passage of a USA ETS may challenge the Coalition’s anti-ETS position.

The American Clean Energy and Security Act of 2009 (Bill)8 was passed by the USA House of Representatives in June 2009 (narrowly: 219 > 212) and is now before by the USA Senate for debate.

Media releases indicate that voting on the Bill is expected to be delayed until the US spring9 months (April, March, May) The Bill is also scheduled to be reviewed by at least five other Senate Committees prior to being voted on by the Senate which will contribute to the delay.10

The likelihood of the Bill being passed by the Senate, however, is less clear. While Republican Scott Brown’s victory in the bi-election for Democrat Edward Kennedy’s former seat of Massachusetts means that the Democrats no longer have a filibuster-proof majority in the Senate, it is not entirely clear whether Mr Brown will automatically vote against the Bill. While Mr Brown has been described as a climate sceptic, he did previously vote for, as a Massachusetts state senator, a regional cap-and-trade scheme (similar in concept to the national one proposed in the Bill).11

President Obama continues to support the Bill, using his recent State of the Union address to both houses of congress to urge them to deliver the legislation. However, he has indicated he may accept an ETS not being passed at this stage provided his proposed clean energy measures are. The US could take a direct action approach, similar to that proposed by the Coalition, prior to an ETS coming into effect.

A potential impression that climate change focused developments in the USA have stalled is not correct. In addition to developments regarding its cap-and-trade ETS and clean energy initiatives, the following matters are also progressing:

  1. the US Securities Exchange Commission has provided guidance for public companies’ potential disclosure filing obligations in respect of climate change related issues  
  2. the US Environmental Protection Agency is working to release regulations in March 2010 to regulate greenhouse gas emissions under the Clean Air Act, and step
  3. s are underway to require consideration of greenhouse gas emissions and climate change impacts in project environmental assessments.  

7.2 Other

In addition to the USA: the EU, Canada (to match the USA), Japan and New Zealand will continue to progress their respective ETSs.

8 Next steps