Australia: News Alert - Incentives For Early Greenhouse Abatement

Last Updated: 7 October 2007
Article by Duncan McGregor

The Department of the Prime Minister and Cabinet is seeking feedback from businesses on greenhouse abatement incentives, that are intended to be introduced, prior to the commencement of the Australian Government's proposed emissions trading scheme in 2011.

In a discussion paper released on 24 September, the Department is calling on Australian business to provide comment, by 1 December, on the approaches and issues surrounding incentives to pursue abatement during the period leading up to the start of emissions trading.

If you would like an in-depth briefing on the Government's discussion paper and the impact on your business, please contact Duncan McGregor on (02) 9921 4502.

The scope of the paper provides significant guidance to the likely structure of the proposed emissions trading scheme. It also gives companies the opportunity to start addressing the strategic and commercial decisions, which need to be resolved in relation to any early greenhouse abatement action. This is particularly the case for early abatement action and early offset projects.

It remains difficult to determine the value of these projects in circumstances where the carbon price (i.e. the price of emissions permits), and the allocation methodology for emissions permits is unclear.

The paper provides some clarity on definitions, with a view to establish common terms for business and government to use when discussing emissions trading including:

  • Abatements - a project or activity which removes greenhouse gases (GHG) from the atmosphere or reduces emissions of these gases below what they would otherwise have been.
  • Business-as-usual abatements – an abatement that occurs in the normal course of business, including in response to government regulations. (e.g. a decision to close an unprofitable facility may reduce a firm’s emissions but those actions would have occurred within a normal business operating framework.)
  • Additional abatement - activities that deliver a reduction in the amount of GHG in the atmosphere that is beyond, or additional to, ‘business-as-usual’ abatements (e.g. investments in carbon sink forests).
  • Covered sectors - all sectors and activities other than agricultural production, forestry and land use (which are referred to as ‘uncovered’ activities). Covered sectors are sectors that are intended for inclusion in an emissions trading scheme from the commencement of trading. 'Uncovered activities' will not be included, but abatement of emissions from these activities will be eligible to generate offsets.
  • Offset credits – these represent abatement and can be used to counterbalance emissions that are covered by the emissions trading scheme.
  • Early action credits – these are credits which are issued in respect of abatement occurring between now and 2011 from activities in covered sectors.
  • Emissions permits- an emissions permit will represent the right to emit greenhouse gases, measured in terms of tonnes of carbon dioxide equivalent (CO2e). The Government will establish a cap for the emissions trading scheme, in terms of the net amount (in tonnes) of CO2e that can be released into the atmosphere, and then distribute (by auction and/or free allocation) the same number of emissions permits.
  • Voluntary carbon market – it appears that this market will consist of the voluntary purchase of credits by companies and others. The discussion paper indicates that the purchased credits will normally be offset credits, purchased to partially or completely offset carbon emissions. By contrast, participants in the emissions trading scheme will be legally obliged to acquit permits or offset credits to cover their emissions consumption. The discussion paper suggests that voluntary carbon market participants will not (at least usually), purchase emissions permits, although details are still unclear.

The paper also covers a range of topics from early action and registration to administrative arrangements for early abatement. These topics are outlined below.

Early action and registration

  • There are currently no proposed restrictions on the types of activities that can earn early action credits prior to 2011 for use in the emissions trading scheme, provided they were established after 3 June 2007 (when the Government announced it would introduce emissions trading), represent abatement that is additional to ‘business-as-usual’, has actually occurred, and is permanent, measurable, and verifiable.
  • Early action credits can be generated from eligible projects for abatement after 3 June 2007 until the scheme commences in 2011. It is also proposed that offset credits for use in the emissions trading scheme can be generated from eligible projects for abatement after 3 June 2007.
  • Participants in the voluntary market would have access to early action credits and offset credits for use in the emissions trading scheme.
  • A national register will be developed to track early action credits and offset credits that could be recognised under the emissions trading scheme.

Transition of early credits into the trading scheme

  • The scheme regulator will be able to exchange early action credits for emissions permits dated for use in the first year of the scheme and there are no limits on the number of early action credits that would be recognised.
  • Early abatement will be taken into consideration when setting the emissions caps in the initial phase of the scheme.

Free permit allocation

  • An up-front, once only allocation of free permits will be provided to firms suffering a disproportionate (that is, significantly larger than average) loss of asset value as a result of the introduction of an aggregate constraint on Australia’s emissions.
  • Trade exposed, emissions intensive firms will also be subject to transitional arrangements whereby they receive free permits while their international competitors do not face a comparable carbon constraint, unlike in Australia.

Assets eligible for compensation and assets 'in existence'

  • Only assets in existence, as at 3 June 2007, would be eligible for consideration under the Government’s proposed compensation arrangements. This allows investors to factor in potential carbon prices when considering new investments between now and the commencement of the scheme.
    • As a matter of principle, assets that may be taken to be ‘in existence’ at the cut-off date, would currently be productive assets or assets that companies have irreversibly committed to acquiring or constructing. The NEMMCO test of a 'committed project' would apply
    • For new assets, the Government will develop eligibility criteria to determine whether the construction of, or the commitment to the construction of an asset, had become unavoidable as at 3 June 2007.
    • These compensation principles would apply to all industries that may be eligible for consideration under the Government’s proposed compensation arrangements.

    Standards for abatement recognised by the scheme

  • To meet internationally recognised standards for environmental integrity, offsets should represent abatement that is additional, has actually occurred, and is permanent, measurable, and verifiable.
    • This will ensure an emissions trading scheme can link with other schemes, building towards a workable global emissions trading scheme and providing access to lowest cost abatement opportunities.

    Collection of verified emissions data

  • To allocate permits, verified emissions data will be used from the first mandatory reporting period (FY 08/09), under the National Greenhouse and Energy Reporting System (NGERS).
    • Currently many firms are collecting information for environmental approval processes or greenhouse or energy use programs, such as data required under the Energy Efficiency Opportunities Act 2006 (Cth).

    Administrative arrangements

  • The Australian Government’s Greenhouse Friendly program will provide the initial administrative mechanism for approving offsets and early action credits for use in the emissions trading scheme.
    • The existing Greenhouse Friendly protocol for new forest offsets will be used to assess eligibility following any Government's decision, but will be reviewed in 2008.
    • There will also be streamlined protocols developed for eligible early action and offset projects.

    Other issues

  • Australian firms contemplating investing in international offsets, including Certified Emission Reductions units generated under the Kyoto Protocol Clean Development Mechanism projects, should be aware that no decisions have been made regarding the categories or vintages of international offsets, that may in future be recognised by the Australian emissions trading scheme.
  • Key issues for stakeholder consideration

  • How do you best determine the financial benefit of an early action or offset project, prior to the introduction of an emissions trading scheme, in circumstances where the carbon price (i.e. the price of emissions permits), and the allocation methodology for emissions permits, remains unknown?
    • The applicability and workability of the definition of an asset 'in existence' at the cut-off date?
    • Should the National Electricity Market definitions and criteria for the electricity generation sector be used to define 'in existence'?
    • Is the recommended abatement standard achievable and robust?
    • Are there any other relevant sources of data outside the National Greenhouse and Energy Reporting System that can be used to ensure permits are allocated effectively?
    • Which early action and offset projects should be a priority?

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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