The Copenhagen Accord called on Annex I countries to make their climate change pledges, and on Annex II countries to identify their nationally appropriate mitigation actions by 31 January 2010.

In this edition of the Asia Pacific climate change policy series we examine the regulatory framework and climate change investment opportunities in Australia.

Key points on Australia:

  • has committed to an unconditional reduction of its emissions by five per cent below 2000 levels by 2020
  • recent moves to progress the implementation of a carbon price in Australia: the options include an ETS, a carbon tax or some form of hybrid pricing mechanism
  • significant federal legislation dealing with climate change, renewable energy and the voluntary carbon market
  • is a resource rich country and the energy mix is heavily dependant on domestic coal and gas: the legislated goal is to achieve one fifth of energy production from renewable sources
  • key renewable energy industries will be wind, solar, geothermal and hydro-generation
  • investment opportunities likely to be principally in large-scale renewable energy generation
  • coal will continue to play a significant role in Australia’s energy and trading future and significant investment will continue to flow into projects and technologies in carbon capture and storage, coal seam gas and other cleaner fossil fuel technologies
  • investment opportunities will also arise out of developing policy frameworks, such as a mandatory mechanism to price carbon and any energy efficiency policies developed in the wake of the Prime Minister’s Task Force on Energy Efficiency report.

Copenhagen Accord commitments

On 27 January 2010, in a formal submission addressed to the Executive Secretary of the UNFCCC, Australia reiterated its association with the Copenhagen Accord and made it clear that it will do no more and no less than the rest of the world. The submission included quantified emission reduction targets ranging from five, up to 15 or 25 per cent below 2000 levels by 2020.

Australia will reduce its greenhouse gas emissions by 25 per cent on 2000 levels by 2020 if the world agrees to an ambitious global deal capable of stabilising levels of greenhouse gases in the atmosphere at 450 ppm CO2 equivalent or lower. Australia has committed to an unconditional reduction of its emissions by five per cent below 2000 levels by 2020, which it will increase to 15 per cent if there is a global agreement which falls short of securing atmospheric stabilisation at 450 ppm CO2 equivalent and under which major developing economies commit to substantially restrain emissions and advanced economies take on commitments comparable to Australia’s.

At present however Australia’s commitment is to reduce emissions by five per cent below 2000 levels by 2020.

Regulatory framework

In 2009 and the early part of 2010 Australia attempted to introduce an emissions trading scheme, similar in design to the European Union Emissions Trading Scheme (EUETS), called the Carbon Pollution Reduction Scheme (CPRS). Due to lack of bipartisan support in parliament and the lack of progress on reaching a global agreement at Copenhagen, the CPRS was deferred in April 2010 until at least 2013. However, pricing carbon has now come back onto the political agenda in the wake of the election in August 2010 that saw the formation of a minority government comprised of the Labor and Greens parties alongside three independent members.

The new government immediately set up the Multi-Party Climate Change Committee (the committee). The terms of reference of the committee state that it is to “consult, negotiate, and report to the Cabinet, through the Minister for Climate Change and Energy Efficiency, on agreed options for the implementation of a carbon price in Australia”. The options on the table include an ETS, a carbon tax or some form of hybrid pricing mechanism. This pricing mechanism will come into existence alongside a number of existing schemes and funding opportunities designed to promote energy efficiency and the use of clean and renewable energy sources, whilst providing supportive measures for businesses and households.

There have also been significant developments in policy in relation to Australia’s voluntary carbon market. On 1 July 2010 the Greenhouse Friendly™ Scheme was replaced by the National Carbon Offset Standard (NCOS) as the mechanism regulating Australia’s voluntary market. NCOS is designed to ensure that the environmental (carbon neutral) claims of organisations and products are verified and robust. At present the emissions offsets available under the scheme are limited to offsets generated overseas (CERs, ERUs, RMUs, VERs and VCUs) as the methodologies for the generation of domestic offsets have not yet been approved. It is expected that domestic offsetting methodologies will principally focus on the agriculture and forestry sectors through a program that formed part of the government’s election campaign commitments (called “Carbon Farming Initiative”) that is yet to be implemented in legislation, which is discussed further below.

Current federal legislation dealing with climate change includes:

  • National Greenhouse and Energy Reporting Act 2007
  • Energy Efficiency Opportunities Act 2006
  • Renewable Energy (Electricity) Act 2000
  • Building Efficiency Disclosure Act 2010.

Each of these legislative instruments is supported by corresponding regulations.

The National Greenhouse and Energy Reporting System (NGERS) commenced on 1 July 2008 under the National Greenhouse and Energy Reporting Act 2007 and supporting regulations. Under NGERS, corporations that trigger various thresholds are required to report on greenhouse gas emissions, energy use and energy production. For the 2009/10 financial year the relevant reporting thresholds are 25,000 tonnes of CO2 equivalent emissions or 100 terajoules of energy production or use for a facility, or, 87,500 tonnes of CO2 equivalent emissions or 350 terajoules of energy production or use for a corporate group.

The Energy Efficiency Opportunities Act 2006 creates the Energy Efficiency Opportunities (EEO) program which mandates that large energy using businesses (corporations that use more than 0.5 petajoules (PJ) of energy per year) identify, evaluate and report publicly on cost effective energy savings opportunities. Energy sources covered under the EEO program are the same as those covered under NGERS, meaning that the two schemes are complementary in that together they are designed to result in the reporting, assessment and reduction of energy use.

The Renewable Energy Target (RET) scheme has been legislated under the Renewable Energy (Electricity) Act 2000 and the Renewable Energy (Electricity) (Charge) Act 2000 and related regulations. The RET is designed to achieve 20 per cent production of renewable energy by 2020. This will represent 45,000GWh of renewable energy usage. The RET applies nationally to all wholesale acquisitions of electricity on grids. It ensures that major buyers of electricity contribute proportionally to increasing the amount of electricity generated from renewable energy sources. This is done through the creation of renewable energy certificates (RECs) when renewable energy is generated and by obliging wholesale power purchasers to surrender RECs at the end of each year in proportion to their contribution to the renewable energy target.

In June 2010 the RET scheme was amended in order to remedy a number of shortcomings in the existing scheme, including that small-scale renewable energy generation was flooding the market with RECs and reducing the incentive for large-scale renewable energy generation. The amending Act, which comes into operation on 1 January 2011, separates the RET scheme into two parts:

  • the Large-scale Renewable Energy Target (LRET)
  • the Small-scale Renewable Energy Scheme (SRES).

This involves the creation of separate small-scale and large-scale obligations for liable entities and two new categories of renewable energy certificates; large-scale generation certificates (LGCs) and small-scale technology certificates (STCs).

On 1 July 2010 the substantive provisions of the Building Energy Efficiency Disclosure Act 2010 came into effect with disclosure obligations beginning on 1 November 2010, bringing into operation the government's Commercial Building Disclosure (CBD) program. The CBD program applies to building owners that are selling or leasing office space with a net lettable area of 2,000 square metres or more and tenants who are subleasing part of their tenancy with a net lettable area of 2,000 square metres or more. The principal obligation is to disclose a Building Energy Efficiency Certificate (BEEC) as early as possible before the "disclosure affected building or area of a building" is sold, let or sub-let; including when such a dealing with the property is advertised, at the commencement of negotiations, or upon request. A BEEC must contain an energy efficiency rating, an assessment of the energy efficiency of the lighting, and further energy efficiency guidance. Each year the BEEC must be renewed. Penalties for non-compliance under the CBD program can reach AU$110,000.

The Clean Energy Initiative (CEI) is overseen by the Department of Resources, Energy and Tourism and has three components:

  • the Carbon Capture and Storage Flagships Program
  • the Solar Flagships Program
  • the Australian Centre for Renewable Energy.

It is designed to complement an ETS and the RET by supporting the research, development and demonstration of low-emission energy technologies, including industrial scale carbon capture and storage and solar energy. The CEI is supported by some AU$5.1 billion in public funding, and utilises private sector partnerships to mobilise significantly more capital.

A recent report released by the Prime Minister’s Task Force on Energy Efficiency recommends a national energy efficiency target of a 30 per cent increase in efficiency between 2010 and 2020, to be achieved through a range of measures including increasing standards and transitioning to a national energy efficiency scheme to replace the existing state schemes. Many of the recommendations of the report involve the building, defining and coordination of the institutions that will deal with energy efficiency, and ensuring that policies are integrated and long term. If this report is translated into action by the government, it is likely that there will be increased commercial opportunities in energy efficiency, depending on the extent of the use of incentive mechanisms.

The Government has recently announced measures to implement a number of its pre-election commitments, including the introduction of the Carbon Farming Initiative (CFI) and the Cleaner Future for Power Stations measures. The CFI is designed to give farmers, forest growers and landholders access to domestic voluntary and international carbon markets, through a mechanism to credit carbon abatement activities in the land sector. The CFI will cover both Kyoto compliant abatement activities (which may generate carbon credits for international compliance markets) and non-Kyoto compliant abatement activities (which may generate carbon credits for international and domestic voluntary carbon markets). Legislation implementing the CFI, although not yet developed, is expected to come into force from 1 July 2011.

The Cleaner Future for Power Stations will bring into effect a raft of measures regulating new and existing power generators, including:

  • creating best practice emissions standards for new coal-fired power stations
  • requiring all new coal-fired power stations to be Carbon Capture and Storage Ready (CCS-Ready)
  • an expansion of the government’s EEO program to cover all existing generators, including coal-fired power stations, and
  • mandatory publication of NGER data for new and existing coal-fired power stations.

Investment opportunities

As a resource rich country, Australia’s energy mix is heavily dependent on domestic coal and gas. The legislated goal to achieve one fifth of energy production from renewable sources assumes that there will be significant growth in the renewable energy market, despite a recent downturn. However, it is likely that opportunities will arise principally in large-scale renewables generation as the RET scheme splits into two components at the federal level and as states wind back their feed-in-tariffs for small-scale generation. Key renewable energy industries will be wind, solar, geothermal and hydro-generation.

It is clear however that coal will continue to play a significant role in Australia’s energy and trading future. As such, significant investment will continue to flow into projects and technologies in carbon capture and storage, coal seam gas and other cleaner fossil fuel technologies.

There are also a number of investment opportunities on the horizon that will arise out of developing policy frameworks, such as a mandatory mechanism to price carbon and any energy efficiency policies developed in the wake of the Prime Minister’s Task Force on Energy Efficiency report. The exact form of pricing mechanism (in particular the industry specific obligations) will determine where the most significant investment opportunities will be found. In the meantime, short term investment opportunities are likely to arise in the “low hanging fruit” emission reductions to be found in energy efficiency projects and in forestry and agriculture projects designed to offset emissions.

Our experience

Our team in Australia has significant experience advising on international, regional and domestic climate law and policy, GHG emissions and energy reporting obligations, emissions trading schemes, GHG abatement and offsetting projects and the carbon aspects of major corporate transactions and contractual arrangements. In particular, our experience includes:

  • advising the UK Institutional Investors Group on Climate Change (who represent investors with a collective £5 trillion under management) in relation to their policy positions taken to the EU Commission and EU Member States concerning carbon markets, renewable energy, energy infrastructure and energy efficiency
  • advising business, representative associations and public bodies in relation to various aspects of the proposed CPRS, including assisting in the drafting of submissions to government that resulted in material changes to the design of the CPRS
  • advising on major renewable energy and low-carbon infrastructure projects across Australia, including wind farm, waste methane, hydro and biomass/’bagasse projects
  • acted for AGL in relation to the Macarthur wind farm, the largest of its kind in Australia
  • advising both public and private bodies in relation to carbon capture and storage projects, including advising the Department of Resources, Energy and Tourism in relation to the funding agreements for the CCS and Solar Flagships Program
  • advising both international and domestic clients on emissions reducing projects, including a number of forestry projects, in relation to CDM and voluntary market transactions.