Today the Multi-Party Climate Change Committee (MPCCC), which was established in the wake of the 2010 general election to recommend to the government a design for a carbon pricing mechanism in the Australian economy, released a proposal agreed to by the government and the Greens setting out a broad architecture for the establishment of such a carbon pricing mechanism.
Announced today by the Prime Minister, flanked by members of the MPCCC including Independent MPs Tony Windsor and Rob Oakeshott, and representatives of the Greens, the proposal states that the carbon pricing mechanism "could commence with a fixed price (through the issuance of fixed price units within an emissions trading scheme) before converting to a cap-and-trade emissions trading scheme" and have the following broad architecture:
- a start date of 1 July 2012
- an initial fixed price (not yet determined), for a fixed period of 3 to 5 years
- a smooth transition to a flexible price cap-and-trade emissions trading scheme upon the expiry of the initial fixed price period, with the option to defer that transition based on a range of criteria
- coverage of all six greenhouse gases counted under the Kyoto Protocol and broad coverage of sectors of the Australian economy, excluding those sectors covered by the government's proposed Carbon Farming Initiative and including:
- the stationary energy sector
- transport sector
- industrial processes sector
- fugitive emissions (other than from decommissioned coal mines)
- emissions from non-legacy waste
- linking with international markets, allowing for the use of international units for compliance within the scheme after the expiry of the fixed price phase.
As to the broad inclusion of economic sectors within the scope of the proposed scheme, the Minister for Climate Change and Energy Efficiency, Greg Combet, noted that a phased introduction of economic sectors into the scheme is a possibility. This is the first time that the concept of a phased approach has been considered in Australia and no doubt draws from the success of such an approach in Europe and New Zealand.
The agriculture sector will not be included in the scheme, for various reasons including the complexity of measuring emissions: however it was noted that farmers can benefit from the scheme through participation in the Carbon Farming Initiative.
The transition to a cap-and-trade emissions trading scheme
Transition to a cap-and-trade emissions trading scheme, in the words of the Prime Minister, will be “hard-wired” into the design of the scheme. However the proposal raises the possibility of an option to defer the commencement of a flexible price scheme, making the transition to a flexible carbon price a little more “soft-wired”. This is a factor that will no doubt continue to contribute to investment uncertainty. A decision on whether to exercise the option to continue with a fixed price could be taken at least 12 months before the end of the fixed price phase. The proposal noted that such a decision could be made based upon the following criteria:
- 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.
In response to questions, the Prime Minister confirmed that it was “not a condition” of transition to flexible pricing, that a legally binding international agreement be in place.
Where is the detail?
The document released today is a broad framework that leaves much of the detail for further discussion, including consideration of ways to promote the environmental effectiveness of the scheme, to support technological innovation, and ways to manage the impacts of the scheme on households, communities and business. The extent of assistance to Emissions Intensive Trade Exposed Industries is also not yet settled. Whilst this might be frustrating from a business perspective, it can be seen as a politically effective means of building consensus around matters that can be agreed upon before tackling the tougher issues.
The further matters yet to be agreed are to be developed and considered consistently with the MPCCC principles, namely environmental effectiveness, economic efficiency, budget neutrality, competitiveness of Australian industries, energy security, investment certainty, fairness, flexibility, administrative simplicity, clear accountabilities and supporting Australia's international objectives and obligations.
Minister Combet indicated that these details will be explored during “the next 4 to 5 months in particular”.
Whilst the framework released today has been agreed by Government and Greens members of the MPCCC, the other members of the MPCC, Independents Tony Windsor and Robert Oakeshott, have only “agreed that the proposal should be released for community consultation”. Tony Windsor made it clear that it is still a negotiation which will be partly dependent upon what is happening internationally (viewed in the light of the reports still to come from Professor Ross Garnaut and the Productivity Commission). He has accordingly reserved his right to make a determination as to his support for the scheme when the details become more apparent, saying “I do not necessarily support any scheme”.
Two matters in this proposal are of particular commercial relevance at this stage: the proposed arrangements for deferral of the transition to a flexible carbon price upon review, and the arrangements surrounding the treatment of international emissions units. As to the first, the ability to defer the introduction of a flexible price, coupled with the presently general character of the scheme, does little to shed light on the exact nature of future carbon liabilities for business. In particular, if the flexible price arrangements were to be deferred, it would also be necessary to determine what changes should be made to the level of the fixed price and/or escalation rate. However, the announcement does show that there is a clear impetus from government to establish a price on carbon in the Australian economy and that investment decisions made now will need to factor in a carbon price in the economy from 1 July 2012.
Regarding the treatment of international emissions units within the scheme, the initial and fixed price phase will not allow the use of international emissions units. Although the proposal does not make it clear whether domestic emissions reduction units (produced under the Carbon Farming Initiative) will be available for compliance in the initial fixed price phase, it is likely that they will be able to be used. This is likely to make Kyoto compliant domestic emissions reduction units an attractive short term investment option. Although there is uncertainty surrounding the commencement of the flexible price period and the rules surrounding the use of international units, early investment in such units may be attractive as a longer term hedge against a higher domestic carbon price.