The New Zealand Emissions Trading Scheme Review Panel has been asked to update its report to take into account recent Australian announcements on carbon pricing. With the Review Panel's report expected to be publicly released any time soon, Elisabeth Welson and Joanna Lim report on Australia's Clean Energy Package, and what it might mean for New Zealand.

What is the Australian Clean Energy Package?

The Australian Clean Energy Package comprises the Clean Energy Future Plan (CEFP) and the Carbon Farming Initiative (CFI). The CEFP is in the proposal stage, while the CFI has already been passed into law.

Is the Clean Energy Package a trading scheme like the New Zealand ETS?

The CEFP is a carbon pricing scheme that will start off like a tax, and then turn into an emissions trading scheme. The CEFP scheme will start from 1 July 2012. The CFI establishes a framework for land based "eligible offsets projects" capable of generating tradable carbon credit units.

Who is affected by the CEFP?

The "biggest polluters" will have to participate in the CEFP scheme. It is expected that there will be about 500 entities across the stationary energy, industrial processing, mining and waste sectors in Australia who will have to participate. As in New Zealand, Australians can expect to see the costs of the carbon pricing scheme passed down in price rises. There are, however, significant household assistance measures included in the package.

How is the price of carbon determined under the CEFP?

In the first three years, liable entities will pay a fixed price of A$23 per tCO2-e, increasing annually against an index. International Kyoto units cannot be used to meet liabilities in the fixed price period, but Kyoto compliant units from the CFI will be able to be used for up to 5% of annual liability.

From 1 July 2015, the CEFP scheme will enter a "floating price phase", where prices will be set by market forces, subject to a A$15 floor and maximum of A$20 above the expected international price (both of which are indexed to increase annually). During this phase, liable entities will be able to use an unlimited number of Kyoto compliant units from the CFI, and up to 50% of their liability can be met from other international permits, making the CEFP scheme more like a trading scheme.

How does the price of carbon under the CEFP compare to New Zealand?

New Zealand's effective cost per tCO2-e until the end of 2012 is a maximum of NZ$12.50, because of transitional arrangements that are in place in this period (including the 1 unit surrender obligation for every two tCO2-e). After 2012, the price in New Zealand will be determined by market forces, unless the Government extends any of the transitional arrangements.

This price difference compared to Australia might be expected to influence the New Zealand Government's decision on whether, and how, to continue to provide transitional support beyond 2012. Many are still lobbying for the transitional support to continue in New Zealand.

How does the CEFP affect competitiveness between New Zealand and Australian goods and services?

The Australian package includes direct assistance programmes to Australian households and the exclusion of many parts of the transport sector. These assistance measures need to be part of any assessment considering the real cost of the pricing of carbon into the Australian and New Zealand economies.

Transport fuels is one of the key sectors of the New Zealand economy affected by our emissions trading scheme. In Australia, this sector is outside the trading scheme framework in the CEFP scheme but will be covered through changes to the Australian fuel excise tax and credits regime.

Australian domestic aviation and shipping, rail transport, off-road transport use of liquid and gaseous fuels (except in agriculture, forestry and fisheries), and non-transport use of liquid and gaseous fuels will face a fixed carbon price through the fuel excise regime. A carbon price will not apply to fuel used by any of: households for transport; light on-road commercial vehicles; biofuels; gaseous fuels used for on-road transport; off-road fuel use by the agriculture; forestry and fishing industries; or transport fuels when used as lubricants and solvents.

What about Agriculture and Forestry?

Agricultural and land sector emissions (including deforestation) are excluded from the CEFP scheme, but these sectors will be incentivised to reduce or remove emissions through the ability to participate in the CFI, and earn Kyoto compliant units. All projects must meet prescribed eligibility criteria, and be approved by the administrator of the CFI scheme. Much of the detail of the CFI will be developed through regulation.

Eligible offsets projects include "agricultural emissions avoidance projects". These projects avoid methane or nitrous oxide emissions associated with agricultural activities, such as projects that reduce emissions from the soil that arise through fertiliser use, emissions from livestock or decomposition of livestock effluent, or emissions from burning off activities.

Also included are "sequestration offsets projects". This type of project includes reforestation, avoided de-vegetation, improved forest management and other specified projects of a similar nature.

Projects that might otherwise meet the necessary qualification criteria may nonetheless be excluded if they also fall within certain specified criteria, which generally relate to adverse environmental effects around defined environmental values. There has been some comment that these rules may make it difficult for commercial forestry to participate.

The treatment of agriculture in the Australian Clean Energy Package will no doubt bring further pressure on the New Zealand Government to exclude it from the New Zealand scheme. At the moment agriculture is scheduled to enter the New Zealand emissions trading scheme from 2015.

Will Australian trade exposed Industry have more support than New Zealand industry?

Emissions intensive trade exposed industries will be given free carbon permits in the Australian scheme, as we do in New Zealand. However the method of calculation is not the same, with the levels of emissions intensity and permit compensation differing and different emissions included in the calculations. The key differences are summarised as follows:

Click here to view the table.

Will the CEFP and the New Zealand Emissions Trading Scheme be linked?

It is too early to say if, or whether, the two schemes can be linked. During the floating price phase there may be the opportunity for linkages between the New Zealand and Australian schemes. Official comment on this aspect has been positive but vague. Industry commentators have commented that there is a risk that the linking of the Australian and New Zealand schemes will expose New Zealand participants to higher prices for units because of the increased demand, but not the protections and compensation available to Australians in the overall Clean Energy Package.

Aside from the different assistance measures, there are a number of other aspects of the CEFP scheme that the New Zealand scheme does not have, such as Government auctions of units once the floating price phase starts, and banking and borrowing. These different aspects of the two schemes would need to be resolved as part of any formal linkage between the different schemes.

The Review Panel's comments on this issue will no doubt be carefully scrutinised on both sides of the Tasman.

Can carbon credits awarded under the CFI be used to meet NZ ETS obligations?

If the Australian and New Zealand schemes are linked this could enable direct trading of New Zealand Units (without the need for exchanging them into AAUs first) along with direct trading of Australian units generated by the CFI, and the ability to use these units to meet obligations under each country's scheme. If the schemes are not directly linked, trading would be the same as trading with counterparties in any other country at present, and would need to be based on internationally accepted Kyoto units. It is expected that some carbon credits awarded under the CFI will be able to be converted into Kyoto units.

When will New Zealand business get more information about how the Australian package could affect us?

The Review Panel charged with reviewing the emissions trading scheme for the New Zealand Government presented its report to Government on 30 June 2011, but this report has not been made public. The Minister has asked the Review Panel to update its report to take into account the Australian CEFP, and it is now expected that the report will be released in September 2011. Clearly the Government wants to be in a position to comment on how New Zealand's emissions trading scheme compares with what Australia is proposing, and on how the schemes could be linked.