Australia: Release Of Draft Report Of The Garnaut Climate Change Review

Last Updated: 16 July 2008
Article by Jennifer Mee

The much anticipated draft report of the Garnaut Climate Change Review (Review), released on 4 July 2008, concludes that Australia needs to pursue mitigation of greenhouse gas emissions through the introduction of a 'cap and trade' Emissions Trading Scheme (ETS) as a matter of urgency.


A model ETS was the subject of a specific Discussion Paper released by the Review earlier this year. Part of that discussion was considering the benefit of including a transition period for the ETS, during which time the price of carbon permits would be fixed. It appears that there is little change to the key design features of the ETS since the Discussion Paper.

A substantial part of the Report is devoted to the reasons for action and the costs of inaction, rather than on the details of the proposed design and operation of the ETS. In light of that focus, it is important to appreciate what the draft Report does not do. In particular, the draft Report does not provide concrete recommendations on specific targets and trajectories for emissions reduction, and hence allows clear predictions on carbon prices. These matters will be elaborated on in a supplementary draft Report which has not yet been released, after the completion of modelling with the Commonwealth Treasury. However, the Review provides its audience with a strong indication that the final Report will recommend an ETS that contains the key features set out below.

Emissions limit

An overall national emissions limit would consist of not one but several paths or 'trajectories'. Each trajectory would be expressed as a series of annual emissions targets, the first trajectory (up until 2012) will be be based on Australia's Kyoto commitments. Each increasingly ambitious trajectory would require greater annual levels of reduction in emissions (and thus the impact of each would be increasingly severe). The emergence of firm global mitigation efforts should be the 'triggers' for movement under the Australian ETS to a more ambitious trajectory. Government should give 5 years' notice of movement to another trajectory.

The supplementary draft Report will address budgets, trajectories and point-in-time targets for the ETS in further detail.


The Review considers the Scheme's coverage (of both greenhouse gases and industry sectors) should be as broad as possible. It recommends the ETS should cover emission of the 6 greenhouse gases defined by the Kyoto Protocol and that the stationary energy, industrial processes, fugitive emissions and transport sectors should be included from the outset.

The Review believes the waste and forestry sectors should be included as soon as practicable, while the inclusion of agriculture should be subject to progress on measurement and administration.


Given the broad coverage of the scheme (and the well-accepted principle that offsets should not be created in covered sectors due to double counting), the Review envisages that domestic offsets will not play a large part in the ETS. While supporting the use of offsets from forestry, for the agriculture and waste sectors the Review suggests investigating other policies to encourage mitigation as an alternative to offsets.

In discussing 'additionality' tests for offsets, in particular regulatory additionality, the Review comments that 'such tests are arbitrary, and potentially a source of distortion, with the potential to undermine the credibility and scarcity principles of the scheme'.

The Review suggests a limit on the use of international offsets as a fixed proportion of Australian permits.

Point of obligation

Point of obligation refers to the point in the supply chain at which monitoring and reporting of emissions is conducted for the purposes of the ETS. For a number of sectors, including stationary energy, the Review prefers the source of emissions as the point of obligation.

However, the Review recognises that an 'upstream' or 'downstream' point of obligation may be preferable where transaction costs are lower, accuracy of emissions measurement higher, or coverage greater. One example is the transport sector where an upstream point of obligation might be the most efficient way in which to capture a large number of small emitters.

The Review also considers the possibility of allowing large energy users to opt in to the scheme (which would require the generator to net out that energy use).

Issuing permits

The Review strongly favours issue of permits by way of auction at regular intervals (weekly, monthly, quarterly or any other basis that suited market participants) over free allocation. Auction is favoured because of its simplicity, credibility and the ease with which it might facilitate integration of the Australian ETS with international carbon trading markets as they emerge.

The Review found that allocating permits for free 'would be highly complex, generate high transaction costs, and require value-based judgments'. However, the Review concedes that free permits may be issued as part of assistance measures to trade-exposed, emissions-intensive industries, in lieu of cash payments (see further below).

Price controls and transitional arrangements

The Review considers that, as a transitional arrangement until the end of 2012, it may be desirable (although not necessarily preferable) to set a fixed price for permits on commencement of the ETS, so as to ease the pain of adjustment and provide certainty in the early stages of the ETS's operation, but otherwise no price controls should apply.

Penalty and make-good

The Review proposes that a financial penalty would apply for non-compliance, which would need to be set high enough to discourage non-compliance and avoid it becoming merely a price cap. Make-good provisions would apply in addition, to ensure the integrity of the scheme.

Banking and borrowing

The Review proposes to allow unlimited banking of permits, and borrowing of permits for a period of up to 5 years.

International links

The Review notes risks in linking the Australian ETS with countries that have a flawed domestic emissions mitigation system, but considers that international permit markets could be linked on a case by case basis, after they were certified by an independent government regulatory authority as being of a suitable standard.

Treatment of trade exposed, emissions intensive industries

The Review recognises that if suitable arrangements are not made to provide assistance to trade exposed, emissions intensive industries (TEEIIs) then, in the extreme result, those industries might relocate to a country with lesser constraints on emissions. This would provide the worst of both worlds: a loss to Australia of economic activity and no reductions in the emissions made by those industries.

No straightforward solution to this dilemma exists. The Review suggests that 'pursuit of global and sectoral agreements to achieve comparable treatment of emissions in important competitors' should be pursued as a priority and, where such agreements have not been reached post 2012, assistance should be given to account for the disparity between the TEEIIs' obligations under an Australian ETS and that of countries where their competitors operate.

Such assistance could take the form of cash or free permits. Rigorous materiality thresholds are proposed, and it is suggested that only a limited number of industries might clearly satisfy the criteria.

Compensation to existing generators

By contrast, however, the Review does not support compensation for existing coal-fired generators or other existing high emitters. The Review states that 'providing assistance to address the failure of our global competitors to act on limiting their carbon emissions is not the same as compensating domestic firms for the government's decision to implement a domestic emissions trading scheme', and 'there is no basis for compensation arising from the loss of profits or reductions in asset values following the introduction of the domestic emissions trading scheme'.

Use of permit revenue

The Review strongly favours returning all revenue garnered by the ETS to households or businesses according to a range of competing priorities including:

  • payments to trade-exposed, emissions-intensive firms
  • support for investment in research, development and commercialisation of low-emissions technologies
  • cash reserves to purchase international permits/offsets to reconcile domestic emissions with international commitments.

The Review is optimistic that a significant amount of revenue from the ETS will be used for research and development of commercially viable mitigation strategies for existing fossil fuel based energy generation facilities.

Next steps

The Supplementary Draft Report is due for release in late August 2008, and the Final Report is due by 30 September 2008.

The Australian Government's Green Paper on scheme design is due in July 2008. Exposure draft legislation is due to be publicly released in December 2008, with the scheme to commence in 2010.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions