Prime Minister Julia Gillard has announced the details of an agreement which will see the introduction of a carbon trading scheme.  This announcement brings an end to months of speculation and will allow the business community to start preparing in earnest for this major economic reform.

The deal struck by the Multi-Party Climate Change Committee follows months of intense negotiations between the Labour government, the Greens and two key lower-house independents.  The minority government hopes that this inclusive process will ensure the enacting legislation will successfully pass through Parliament in the Spring term.  While the new carbon package shares considerable likeness to the failed Carbon Pollution Reduction Scheme (CPRS), there are some significant departures in key areas.  We introduce the scheme and highlight some initial areas for consideration.

Emissions trading scheme

The proposed mechanism is based on an emissions trading scheme and will commence on 1 July 2012.  Under an emissions trading scheme, liable entities must report on their emissions and buy and surrender to the government a carbon permit for each tonne of carbon pollution they produce. For the first three years the permit price will be fixed at $23 per tonne of CO2-e (increasing at 2.5% per annum) establishing an effective carbon tax.

Following this initial phase the scheme will transition into a cap-and-trade scheme where the total volume of permits are capped, permits are tradeable between businesses and the price will fluctuate with the market.  A price ceiling and a price floor will operate during the first three years of this flexible price phase to prevent large fluctuations.  In 2015-16 the floor will be $15 and the ceiling will be $20 above the expected international carbon price.  These limits will increase at 4% and 5% in real terms each year, respectively, with scope to extend their operation beyond three years.

Annual caps will be set five years in advance and linked to a 2020 target of a 5% reduction in 2000 levels.  Unlike under the CPRS there will be no guidance on caps beyond five years. A new independent authority will advise the government of pollution caps and the performance of the carbon price.

Coverage and liability

Liability under the scheme will attach to facilities generating emissions in excess of 25,000 tonnes of CO2-e per year.  While this is the same threshold as the CPRS, alternative arrangements for fuel and synthetic greenhouse gases mean only about 500 businesses will be liable, not 1,000 as would have been affected under the CPRS.

Coverage of the scheme will extend over:

  • the industrial processes sector;
  • the stationary energy sector;
  • the rail, domestic aviation and shipping components of the transport sector;
  • fugitive emissions; and
  • emissions from non-legacy waste.

The government would like to include heavy on-road vehicles from 2014, however this was not agreed on by the negotiating parties.

Notable exclusions from the scheme include:

  • the agricultural sector;
  • emissions from most on-road vehicles;
  • emissions from decommissioned coal mines; and
  • emissions of certain synthetic greenhouse gases.

Compensation

A number of compensation programs have been included to assist heavily affected industries.  Firstly, the emissions intensive trade exposed (EITE) industries will receive an assistance package largely unchanged from the CPRS.  Branded as a Jobs and Competitiveness program, EITE industries will receive assistance at a rate of 94.5%, with second-tier assistance provided at 66%.  These rates will reduce by 1.3% per annum.  As under the CPRS, it is expected that 40-50 different activities will be covered.  The program will provide $9.2 billion in assistance over 2011-12 to 2014-15.

The electricity sector will receive compensation for strongly affected coal-fired power generators in a number of forms.  Firstly, the government will seek to close around 2,000MW of coal-fired generation capacity by 2020 through the negotiation of closure contracts.  Secondly, emissions-intensive generators will receive free permits and cash until 2016-17, worth $5.5 billion.  Finally, short-term loans will be available to generators to finance carbon permit purchases. 

Additional packages include:

  • assistance to LNG projects at a rate of 50%;
  • a Coal Sector Jobs Package, providing $1.3 billion to assist the most emissions-intensive mines;
  • a $300 million Steel Transformation Plan for the steel industry (in addition to EITE assistance);
  • a $10 billion Clean Energy Finance Corporation to support commercial investments in clean energy; and
  • household assistance in the form of tax cuts and other assistance payments of $14.9 billion from 2011-12 to 2014-15.

Next steps

With details of the scheme now available, it will be important for all businesses to undertake a carbon risk analysis.  The impact of the scheme, directly or indirectly, may be considerable in some cases.  Consideration should turn to:

  • disclosure requirements under ASX listing rules and under AFSL requirements;
  • identifying corporate entities that may face liability under the scheme;
  • identifying compensation that may be available; and
  • assessing the potential for carbon costs to be passed through under current structures.