Tax via trading scheme
We anticipate that the carbon pricing mechanism will sit within a trading scheme¹ ("Scheme") and we understand draft legislation will be released 31 July 2011. The Scheme will oblige liable entities to buy and surrender permits equal to their direct emissions of carbon dioxide equivalents (CO2-e). Failure to surrender sufficient permits will result in a penalty. For the first three years the permit prices will be fixed after which permits will be auctioned. It is called a "tax" because during the fixed price permit period the obligation on liable entities to purchase fixed price permits falls within the legal definition of a "tax".
1 July 2012
A$23 for 2012/2013 financial year and increasing in real terms by 2.5% in each of the following two years. From 1 July 2015 the permits will be auctioned. For at least the first three years of market prices there will be with a "floor" of A$15 (increasing by 4% pa) and a ceiling of A$20 above an "international price" (increasing by 5% pa) (to be reviewed in 2017). The permit price under the Scheme is expected to track the international price but could trade above the international price because only 50% of internationally recognised permits will be eligible for surrender under the Scheme.
The Scheme covers 60% of Australia's emissions, excludes agriculture and transport fuels and will impose an obligation on around 500 entities who operate facilities which emit carbon dioxide equivalent in excess of 25,0000 tonnes per year and certain waste facilities emitting more than 10,000 tonnes per year. Transport fuels may² however be indirectly covered by a reduction in fuel tax concessions initially on "off road" heavy vehicles other than agriculture, fishing and forestry (estimated to raise A$1.9 billion over the first four years). Domestic aviation fuel excise will be increased to "account" for a carbon price. The treatment of fuel will be reconsidered in 2014.
The permits are likely to be uncertificated and recorded in a registry. One permit being equal to one tonne of CO2-e. The permits will be classified as financial products and liable entities may need a financial services licence for certain kinds of forward trading.
Permit acquisition during fixed price period
Fixed price permits will be sold by the Scheme administrator (the Clean Energy Regulator) to liable entities and automatically surrendered on purchase by bookkeeping entries. In addition, liable entities can purchase and surrender up to 5% of their permit requirements from Carbon Farming Initiative credits (see below). International permits cannot be used to acquit liability during the fixed price period. Up to 75% of permits must be acquired and surrendered during each year of the fixed price period with the balance being surrendered by the following 1 February.
Permit acquisition during market price period
The Clean Energy Regulator will periodically auction permits for a current year and on a forward basis. The permits will be fully bankable and up to 5% of a following year's vintage can be surrendered for a current year. Until 2020 internationally recognised permits may be used to acquit up to 50% of an entity's liability. In addition an unlimited quantity of Kyoto compliant Carbon Farming Initiative credits can be used to acquit liability. The permits must be surrendered on 1 February following a financial year.
Cap on emissions
There is no cap on emissions in the three year fixed price period. The number of permits is unlimited. A cap will be set by 31 May 2014 for the five years starting 2015/2016. The Climate Change Authority (an independent statutory body) will report to Government by 28th February 2014 on the suitable level of emission reduction targets in line with international considerations and announced Australian Government targets. The current Australian Government targets are a 5% reduction in emissions from 2000 levels by 2020 and an 80% reduction in emissions from 2000 levels by 2050. Parliament will determine the caps and in the absence of parliamentary agreement, the first cap will reflect the required emissions to achieve a 5% reduction in emissions from 2000 levels by 2020.
Carbon Farming Initiative
Entities achieving abatement of CO2-e under the Carbon Farming Initiative will be allocated CFI credits. CFI Credits which are "Kyoto compliant" under the Carbon Farming Initiative can be sold to liable entities for surrender under the Scheme, these credits can be banked for future use and exported.
Assistance to emissions intensive trade exposed (EITE) industry – A$9.2 billion
- 94.5% free permits will be allocated to the EITE industries with emissions intensity equal to or above 2,000 t CO2-e /$m revenue or 6,000t CO2-e/$m value added (steel manufacturing, aluminium smelting, lime, cement clinker)
- 66% free permits will be allocated to EITE industries whose emissions are between 1,000t CO2-e /$m and 1,999 t CO2-e/$m revenue or between 3,000t CO2-e/$m and 5,999t CO2-e/$m value added (plastics, chemical manufacturing, pulp and paper, LNG)
- a supplementary allocation will be made to LNG projects to ensure they receive 50% free permits for the entire LNG production process,
for direct emissions for the first five years of the Scheme with three years' notice of any modifications after that period. The EITE industries will also receive assistance for indirect emissions from electricity, steam and natural gas at the rate of one permit per MWh. The number of free permits will reduce by 1.3% pa. The level of assistance will be reviewed by the Productivity Commission in 2014, 2016 and 2018.
Assistance to coal generation
Coal generation whose emissions are above 1t CO2-e MWh will receive a percentage of free permits and cash payments for the emissions above 1t CO2-e MWh up to 1.3t CO2-e MWh (at a cost of A$5.5 billion over six years). This will generally assist brown coal only. In addition the Energy Security Fund will fund the closure of up to 2000MW of brown coal generation by 2020. Loans for refinancing debt where finance is not available on commercial terms may also be available from the Fund.
Assistance to coal mining
A$1.3 billion is allocated over six years for existing coal mines with gaseous content above 0.1t CO2-e per tonne of salable coal (baseline) capped at 80% of fugitive emissions above the baseline. In addition there is a new mining technology fund for low emission mining. This is estimated to increase coal prices by A$1.40 - A$1.80 per tonne.
Assistance to steel manufacturing
In addition to receiving free permits under the EITE Industry assistance A$300 million is available in grants for upgrading technology to reduce emissions in the manufacturing process and the entity seeking funding must contribute an equal amount.
Assistance to small business
The instant asset write-off threshold for businesses with a turnover of less than A$2 million will be increased from A$5,000 to A$6,000.
Assistance to households
Four million of the lowest income households are to receive 120% of the anticipated consumer price rise of A$9.90 pw, six million lower income households (below A$80,000) to receive up to 100% of the expected consumer price rise, and the remaining three million households to receive negligible compensation.
Australian Renewable Energy Agency
An independent statutory body will be created to oversee renewable programs with A$3.2 billion existing funding drawn from the 10 existing programs. Future funding can be allocated from permit sales.
Clean Energy Finance Corporation
An independent corporation will be established with A$10 billion for funding renewable and low emission projects.
Other funding/grant programs
A variety of other programs are available to assist a variety of industries including food, foundries and manufacturing, on a 1:3 dollar basis, for energy efficient capital equipment and low emission technologies (A$1 billion) and a biodiversity fund for the land sector.
Revenue and expenditure
Over the first four yearspermit sales are anticipated to raise A$27.3 billion with assistance measures costing A$31.2 billion leaving a funding shortfall of A$3.9 billion. After the first four years the Scheme is anticipated to be broadly revenue neutral.
Cost of the Scheme
Initially A$6-7 billion pa with a 0.7% CPI increase in 2012/2013 and a reduction in GPD of 0.1%.
Climate Change Authority
Its key roles are to review and provide recommendations on:
- the Renewable Energy Target in the second half of 2012 and every two years after that
- caps and trajectories for the first five years of the Scheme by 28 February 2014 and extended by one year after that to maintain five years of caps
- the Carbon Farming Initiative by 31 December 2014 and every three years after that
- the integrity of international units and review of the 50% limitation on using international permits by 31st December 2016
- the need and level of a floor and ceiling on the market price by 2017.
Action for business
Liable entities may now wish to revitalise their "carbon readiness programs" including; consideration of liability, emission/energy savings opportunities, review of contract chains, consideration of the need for a financial services licence and a carbon trading team. Non liable entities should also review their contract supply chains as electricity and gas retailers will be seeking to pass through the increases in costs which are estimated as 10% for electricity and 9% for gas.
¹ The details released on Sunday confirm that the carbon price mechanism will sit within a trading scheme after the first three years but are coy as to the initial three year period. However, given the draft Bills for the 2010 Carbon Pollution Reduction Scheme adequately catered for a fixed price permit period we suspect the same architecture will be adopted here.
² This aspect was not approved by all members of the multi party climate change committee.
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