The Australian Government has finally settled upon a carbon price mechanism, after an agreement was struck with the Greens in the Multi-Party Climate Change Committee and announced this morning. The Independent MPs who are members of the Committee are yet to endorse the agreement but have agreed to its release to demonstrate the progress the Committee has made and encourage discussion.

As widely expected, the mechanism will start with a fixed price (via fixed price units within an emissions trading scheme) before converting to cap-and-trade, but we still don't know what that set price will be.

How long will we have a fixed carbon price?

At this stage, the intention is to have a fixed price for at least three years, and possibly up to five. It would be increased annually.

International emissions units couldn't be used for compliance during this period.

Conversion to cap-and-trade and flexible price

At least 12 months before the end of the fixed price phase, the Government would review whether to switch to flexible carbon pricing, or to defer the switch. A particular 2020 target could be set no later than this date, unless there is a deferral.

The factors that would guide the decision to defer include:

  • the state of the international carbon market including the availability, integrity and price of international units;
  • developments in carbon pricing in key competitor economies, including carbon price forms and levels;
  • Australia’s internationally agreed targets and progress towards meeting them, including whether they have been incorporated into a binding legal agreement;
  • the fiscal implications of any on-budget purchases of internationally accepted emissions units that may be required for Australia to comply with any internationally agreed emissions target;
  • potential impacts on the Australian economy including impacts on households, workers, regions and communities, and the competitiveness of Australian industry; and
  • the implications for investment certainty in clean technologies, energy efficiency and carbon markets.

The types of emission sources covered – and excluded

All six Kyoto greenhouse gases would be covered, as would the following sources and sectors:

  • stationary energy;
  • transport;
  • industrial processes ;
  • fugitive emissions (other than from decommissioned coal mines); and
  • emissions from non-legacy waste.

Agriculture would be excluded as well as emission sources covered under the Carbon Farming Initiative. The mechanism also permits phased coverage of sectors over time, and coverage of the electricity sector via an intensity-based allocation scheme.

In advance of the move to emissions trading, decisions will also be made regarding the quantity and characteristics of any international credits that can be used for compliance purposes under the scheme.

What's still to be decided – and what's next

The proposed start date is 1 July 2012, but that depends upon getting a bill drafted, introduced and passed this year. Based on the dramas we saw with the last ETS bill, and the Independents' statements this morning that there is a lot of further discussion still needed, it remains to be seen if this can be achieved.

Crucially, the actual fixed price and its escalation rate is still undecided, and there's no indication when it will be.

How existing Commonwealth, State and Territory policies will work with the carbon price mechanism also is yet to be determined.

The environmental effectiveness of the scheme and other policy details, such as industry or household assistance, are yet to be thrashed out. A noteworthy aspect of the agreement is the emphasis on maintaining energy security as a key consideration in addressing issues of industry competitiveness.

Industry transitional assistance is likely to be a significant sticking point given the currently entrenched positions of the Government and Greens, and the 2020 emissions target is also still to be settled.

Together with the issue of the carbon price, these were the three key objections of the Greens to the previous CPRS bills, so in this respect today's announcement does not move much on from where we were in February 2010, other than to make clear that the Government now wants to implement a carbon price during this term and it does not plan to move far from the previous CPRS bills.