The Australian Government announced on Thursday, 24 February 2011 a two-stage plan for a carbon price mechanism attaching a fixed carbon price to carbon pollution, increasing annually, for the first 3 to 5 years then moving to an emissions trading scheme. The Fixed Carbon Price was announced to commence on 1 July 2012, subject to the ability of the Federal Government being able to negotiate an agreement with the majority in both houses of parliament to pass the legislation this year.

Details of the proposal

The proposed legislative framework for the Carbon Price mechanism is to include the following key elements: 

Start date  

The mechanism is anticipated to commence as early as 1 July 2012, subject to the legislation being passed this year.  

Length of fixed price period  

The carbon price mechanism will involve a fixed price on carbon emission pollution for the first 3 to 5 years, the carbon price increasing annually.  

Transition arrangements  

At the end of the fixed price period, the scheme will likely convert to a flexible price on cap-and-trade emissions trading scheme.  

At least 12 months before the end of the fixed price phase, the Government will 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 are likely to 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  
  • the implications for investment certainty in clean technologies, energy efficiency and carbon markets. 

The initial fixed price

While the fixed price of carbon under the proposed 2012 scheme has yet to be determined, analysts have said a price of $25 a tonne would be the minimum needed to influence a shift away from coal as a baseload energy source.  

Coverage

The carbon price mechanism is anticipated to initially cover the following emissions sources:  

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

Likelihood of implementation

Before sufficient consensus exists for the passage of Federal Government’s climate change legislation, which seems a long way off from being drafted, more information will be required of the Government on key details, including the size of the initial fixed price of carbon and the magnitude of compensation measures to be able to assess the impact of the scheme on the business community.

What this means for you?

Under the proposed scheme, businesses in the energy, transport, industrial processes, mining and waste management sectors will be required to purchase permits at a fixed price from the government for each tonne of pollution they produce. It will therefore be important to review and design your contractual arrangements to ensure emissions are best managed and carbon costs are effectively accounted for.

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

Conclusion

One thing is certain Industry transitional assistance is likely to be a significant sticking point for the Government in establishing a workable legislative framework for the Carbon Price. It is also reasonably certain any bill will receive strong opposition in parliament.