Introduction
The introduction of a Carbon Pollution Reduction Scheme (CPRS) in Australia is now imminent. A Green Paper, which is a detailed policy position paper regarding the design and implementation of the CPRS, was issued by the Australian Government in July 2008 (Green Paper). A White Paper, including an exposure draft of the CPRS legislative package, is due to be released in December 2008. The expectation is that legislation will be introduced into Parliament by March 2009, the CPRS will commence in 2010 and the scheme regulator (Regulator) will be established in the third quarter of 2009.
Scheme governance will be a critically important element of the CPRS legislative package. The status, structure, functions and powers of the body that is tasked with administration and regulatory oversight of the CPRS will affect the scheme's efficiency, stability and, ultimately, its credibility. Therefore, particular care will need to be exercised in crafting the role of the Regulator.
The details of the CPRS regulatory framework will not be known until the White Paper is released. Nevertheless, this paper discusses possible elements of the Regulator's profile on the basis of comments made in the Green Paper and by analysing the roles played by regulators in the context of analogous regulatory schemes. The paper discusses pressing issues that the Regulator is likely to confront and identifies potential solutions to those issues, based upon the authors' experience.
The role of a regulator
Generally speaking, regulation exists in cases of market failure and when regulation delivers benefits that outweigh the costs of regulation. We rely upon regulators to scrutinise the regulatory framework so that these benefits are realised.
A regulator will typically have the following core functions:
- Gatekeeper: the regulator will ensure that those covered by the regulatory framework are duly identified, qualified and registered.
- Overseer: the regulator will monitor the behaviour of those covered by the regulatory framework to determine whether the principles and rules underpinning the framework are being complied with.
- Enforcer: when non-compliance is detected, the regulator will take action to address the non-compliance.
- Educator: the regulator will provide guidance about the way in which regulatory obligations will be applied through transparent administration and outreach activities.
- Policy monitor: the regulator will be well-placed to monitor the success or otherwise of the regulatory framework and, therefore, will be able to identify areas where rule amendments or new rules are required.
The above core functions will be common to regulators in a variety of different sectors. Nevertheless, the role of a regulator must be tailored to meet the needs of the particular regulatory context within which the regulator operates.
Profile of the CPRS Regulator
The CPRS is a 'cap and trade' scheme. In other words, a cap on the total amount of greenhouse gas emissions will be established through the issuance of a set number of permits. There is no limit on emissions from individual entities. However, under the scheme, significant emitters of greenhouse gases must acquire a permit for every tonne of gas emitted in a particular year. Entities that are obliged to acquire permits will be able to trade them, which will thereby place a price on emissions. Each year, the liable entity would be required to surrender a permit for every tonne of emissions produced in that year.
The regulatory design of the CPRS and, particularly, the scheme governance arrangements, must inspire confidence in those affected by the scheme. Ideally, the arrangements should:
- result in a transparent, fair, certain and predictable environment for regulated entities
- be efficient so that there is no unnecessary duplication of effort and functions are allocated to the most appropriate and best equipped body
- provide a sufficient degree of flexibility to allow for modification and/or development of the scheme, if necessary
The remainder of this paper discusses possible elements of the Regulator's profile with a view to determining whether the above objectives can be met.
Status and structure
New, specialised body
The Green Paper makes it clear that a new, special-purpose regulatory body will be established to administer the CPRS.1 Establishing a specialised agency as the Regulator under the CPRS will provide the opportunity to ensure that the structure, functions, powers and recruitment of staff members of the Regulator address the unique features of the scheme.
Accountability
The Green Paper highlights the need for the Regulator to be properly accountable and for its processes and decisions to be transparent. The paper states that the Regulator would be accountable to the responsible minister and subject to ministerial directions.
It also states that the Regulator should be required to report on its operations each financial year to the responsible minister, for presentation to Parliament.2
The Green Paper further indicates that the Regulator will be established as an incorporated body that is subject to the Financial Management and Accountability Act 1997.3 The main implications of the Regulator's status as a prescribed body under that Act will be that:
- the rigorous framework for the collection, management and expenditure of public money provided for by that Act, including transparency and accountability obligations, will apply to the Regulator.
- the Regulator will be funded through budget appropriations and, as appropriate, through cost recovery for administrative functions, in accordance with the Government's Cost Recovery Guidelines.
The requirements of the Financial Management and Accountability Act 1997 are likely to be particularly relevant for the Regulator's role with respect to auctions of carbon pollution permits (permits), in respect of which significant amounts of revenue are likely to be generated.
The Green Paper also states that the Regulator's decisions would be subject to appropriate review processes, including judicial review pursuant to the Administrative Decisions (Judicial Review) Act 1977 and merits review by the Administrative Appeals Tribunal.4 In practice, this would mean that the Regulator's decisions could be re-considered to determine whether they were made consistently with the law.
Subjecting the Regulator to accountability and transparency obligations with respect to the handling and dealing with its revenue and rendering the Regulator's decisions subject to judicial review will help to build and sustain confidence in the CPRS.
Independence
The Green Paper states that the Regulator will be an independent body. The Green Paper stresses that independence is essential to protect the Regulator from external pressure. Nevertheless, the Green Paper goes on to state that independence does not mean complete autonomy. Rather, the Regulator would have operational independence to implement and apply the rules without intrusion from the Government but would still be required to respond to the policy goals established by the Government.5
Effective independence means independence from pressures that might undermine the purpose of regulation. There are a range of forces that might have this effect, such as:
- Political: pressure from lobbyists and other stakeholder groups to act in a particular way or take particular decisions
- Economic: limited availability of resources, which hampers a regulator's ability to properly execute its functions
- Legal: risk of the legal regime being changed, with the effect of undermining the regime
It will not always be clear how to strike the right balance to ensure a sufficient degree of operational independence while maintaining the requisite degree of governmental oversight. At a minimum, identification of the forces that could undermine independence will be necessary. It will also be necessary to identify areas of such significance that governmental oversight might be necessary.
Notably, in New Zealand, a government department (namely, the Ministry of Economic Development) administers and enforces the NZ Emissions Trading Scheme. This suggests that complete independence of the Regulator from government may not necessarily be indispensable for the CPRS's success in Australia.
Structure
The Green Paper indicates that the Regulator would have a commission structure with a number of statutory office-holders appointed by the responsible minister.6 According to the Green Paper, this is desirable to ensure that the Regulator is able to draw on a range of skills and experience.7
Scope of functions
The Green Paper identifies a range of roles to be performed under the CPRS in order to ensure the well-functioning of the scheme. Broadly speaking, these roles can be divided into three main categories:
- administrative: day-to-day management
- regulatory: controlling or directing entities on the basis of established rules
- policy-setting: establishing principles to guide the development of legislation or decisionmaking
The Green Paper acknowledges that there is no single formula for good governance that dictates how best to allocate the various responsibilities under the CPRS.8 Nevertheless, the paper states that, at a general level, elected representatives (that is, Parliament and the Government, acting through the responsible minister) would be given responsibility for policy decisions with significant and far-reaching implications whereas an independent regulator would be responsible for decisions that are essentially administrative in nature or that involve individual cases.9
Administrative functions
The view was expressed in the Final Report of the Garnaut Climate Change Review (Garnaut Final Report) that the administrative nature of a number of CPRS governance functions lend themselves to administration by a body that is independent from the government.10 This view appears to have been endorsed in the Green Paper.11
Vesting administrative functions in an independent body
The following reasons have been put forward in support of the view that administrative functions should be vested in the Regulator rather than the Government:
- If the Government, rather than an independent body, was responsible for administrative functions that have a significant impact upon entities (for example, deciding the details of auction procedure), it could be subjected to pressure from interest groups. An independent body would be more likely to be immune from such pressure.
- Some administrative functions may entail the regular handling of large amounts of money (for example, payments to trade-exposed, emissions-intensive industries). It may not be practical nor appropriate for the Government to execute these functions.
- Certain administrative matters require assessment on a case-by-case basis (such as eligibility for assistance under the CPRS). Whereas the Government would normally consider and address issues at a general policy level, it would be more efficient for a separate administrative body that is properly equipped to deal with specific cases that need to be individually assessed.
The Green Paper identifies the following administrative functions as being more appropriately undertaken by the Regulator rather than the Government:12
- deciding the details of the auction procedure and arranging auctions
- maintaining and operating a national registry of eligible compliance permits
- publishing information related to the scheme
- exchanging information with specified agencies, bodies or statutory office holders to enable or assist them to perform their functions
These functions are addressed in more detail below.
Issuing, allocating and auctioning of permits
The CPRS aims to drive the establishment of a market for greenhouse gas emissions, known as the carbon market (carbon market), which will effectively establish a price on emissions. It is within the context of the carbon market that buyers and sellers of permits will interact and agree on the financial arrangements according to which sales and purchases of such permits will take place.13
A necessary precursor to the development of the carbon market is the issuance of permits. The Green Paper indicates that the Regulator will be responsible for the issuance and allocation of permits, including handling auction proceedings.14 The relevant minister would direct the Regulator during the early phases of the scheme, but the Regulator would assume all auction operational and policy responsibilities as the scheme becomes more established.15
The way in which permits are allocated and auctioned will affect the credibility of the CPRS. Further, the timing, frequency and manner in which these activities are undertaken by the Regulator will have an impact upon the liquidity and, ultimately, the performance of the carbon market. Therefore, careful attention must be paid to the design and administration of these elements of the CPRS.
Registry
The Green Paper indicates that the Regulator will be responsible for maintaining a national registry to track the issuance, holding and transfer of permits (Registry). The functions and key features of the Registry will be set out in the Act establishing the CPRS.16
It is important to note that the Registry will not serve as a trading platform. In fact, the rules establishing the CPRS will not regulate the carbon market for the trade of permits. Rather, permit trade will occur directly between companies or via a broker, bank or other intermediary. It is also possible that organised carbon markets will eventually develop for the trade of permits.
In contrast, the Registry will be an electronic system, which merely records and tracks the ownership, surrender and cancellation of permits. Access to the Registry will be via an online interface, which will enable entities to:
- open an account to participate in the CPRS
- receive permits purchased at primary auctions or via free allocation
- register permits and Kyoto units17 acquired on the secondary market
- surrender permits where there is an obligations to do so under the scheme
- voluntarily surrender permits18
In designing and establishing the Registry, it will be important to ensure that it can evolve and expand in keeping with the evolution of the CPRS. This has been an issue for the EU Emissions Trading Scheme (EU ETS), which is the world's largest emissions trading scheme. The number of countries and installations covered by the EU ETS has progressively grown. Currently, it covers around 10,500 installations across the 27 Member States of the European Union plus Iceland, Liechtenstein and Norway.
Another technical issue the EU ETS has recently had to contend with is the physical interlinkage between the UN's international carbon credit registry and the EU ETS Registry. A link between the two registries has been trialled and is due to be operational by December 2008. This will allow carbon credits issued under the Kyoto Protocol's Clean Development Mechanism19 to be transferred directly to the registries of EU Member States.
Publication of emissions information
The Green Paper indicates that the Registry will be the source of information for a number of reports that will provide an indication of how well the CPRS is functioning. More specifically, the Green Paper suggests that the Registry will be structured so as to generate the following reports:20
- Aggregate information about the volume of emissions, total number of permits issued, banking and borrowing. Such reports would be published annually.
- Compliance reports. These reports will indicate which entities have surrendered the correct number of permits and which have a shortfall or have surrendered an excess of permits.
- Kyoto reports. Under the Kyoto Protocol, Australia is required to report annually on Kyoto unit and Kyoto account information.21
The Green Paper does not state a position on whether the following information should be published by the Regulator:22
- quantities and prices of permits auctioned by the Regulator
- quantities of free permits received by each entity and/or by industry sector
- extent and nature of non-compliance with the scheme
Publication of the above information can only help enhance transparency. However, ultimately, a judgement needs to be made concerning whether the benefits of publication of such information are outweighed by the negative commercial (and, potentially, social) impact suffered by entities who are implicated by the published information.
This balancing act was an issue in the design and establishment of the Australian National Gas Bulletin Board (Bulletin Board). The Bulletin Board is a single electronic communications system covering all major gas production fields, major demand centres and natural gas transmission pipeline systems, including the interconnected systems of South Australia, Victoria, Tasmania, NSW, the ACT and Queensland.
A primary objective of the Bulletin Board is to facilitate trade in gas and capacity over the relevant pipeline systems through the provision of system and market information on the Bulletin Board.
The information available on the Bulletin Board is limited. It relates primarily to available capacity for gas production facilities and pipelines. The Bulletin Board does not contain information about the volume or prices at which gas is being traded. Nevertheless, the Bulletin Board still provides useful information to the broader market about the timing of outages or maintenance at production facilities or on pipelines. In such cases, the Bulletin Board would show updated daily demands, actual or expected changes in the supply capacity to the demand centres and potentially, in the event of significant outages or system incidents, a flag indicating likely interruption of customer supplies.
Assessment of emissions data
The Green Paper states that the Regulator should be responsible for the assessment of emissions data to determine each liable entity's obligation to surrender permits.23
The Regulator's ability to properly discharge this function will be critical to stakeholders' confidence in the CPRS. Failure to accurately assess emissions data may mean that liable entities are required to acquire and surrender more or less permits than otherwise would have been the case had the assessment been more accurate.
The Green Paper acknowledges that obtaining accurate emissions estimates may be difficult (with respect to emissions from landfill sites, for example) due to the limited availability of more accurate measurement techniques.24 If a measurement technique gives rise to questionable results, this could render the Regulator's decisions subject to review and could, in turn, undermine confidence in the scheme.
In addition, allocating this function to the Regulator is likely to be onerous in practical terms. Some entities that are liable to acquire and surrender permits under the CPRS will also be required to seek independent third party assurance of their emissions reports, which will form the basis upon which their liability will be calculated. Specifically, entities with emissions greater than 125,000 of carbon dioxide equivalent a year or more will be required to seek third party assurance of their emissions report. With respect to the remaining covered liable entities, the Regulator has the option of accepting the emissions reports submitted by these entities or conducting audits to ensure that the reports are accurate.
The resource and cost burdens associated with conducting audits of all entities that are not required to seek independent third party assurance of their emissions reports could prove to be overwhelming for the Regulator. However, failure to verify such reports could call the integrity of the scheme into question.
An option could be for the Regulator to conduct random audits of liable entities. The threat of audit could suffice to encourage all covered liable entities to engage in self-assurance with respect to their emissions reports. The Regulator would need to undertake an internal riskassessment to ensure that the random audits are well-targeted – that is, the entities that are considered to be at greatest risk of submitting inaccurate emissions reports are the first to be targeted and/or are more regularly targeted.25
Prudential supervision
The Green Paper states that limited short-term borrowing of permits by liable entities would be allowed under the CPRS and would be administered by the Regulator.26 In essence, the borrowing of permits would allow entities to use permits from the future ahead of their scheduled release to meet current obligations. The borrower must eventually re-pay the amount of permits that have been borrowed and, in the meantime, would need to provide security against default.
The Regulator would be required to undertake prudential monitoring of the level of lending of permits by liable entities. This will entail establishing and applying criteria for creditworthiness. It will also entail monitoring the amount of permits borrowed by entities to ensure that the amount of lending does not become so significant as to raise questions about the entity's ability to repay its debt and also questions about the current or future stability of the regime. The Regulator would also be required to stipulate the period for the permit loan and have mechanisms in place to monitor when repayment is due.
These monitoring mechanisms would be similar to those established by the operator of the national electricity market – National Electricity Market Management Company (NEMMCO). NEMMCO has established mechanisms to monitor three types of risk that arise in the context of the national electricity market:
- market risk, which relates to the financial exposure that can result from adverse fluctuations in the spot price of electricity
- settlement risk, being the risk of non-payment for the purchase and sale of electricity on the sport market
- credit risk, which relates to the change in credit status of a market participant that could lead to that participant being unable to fulfil its payment obligations
Prudential supervision by NEMMCO begins at the time a party registers as a market participant. Parties must demonstrate at that time that their trading activities will not compromise the integrity of the broader market. They must also demonstrate that they have a sound understanding of their legal obligations and prove that they have adequate financial backing to participate in the market.
Certifying offsets
Offset credits are rewards for reductions in emissions measured against an assumed baseline. The Green Paper notes that offset credits could potentially be created by those sectors not covered by the CPRS.27 This would create incentives to reduce emissions in those sectors and would also lower carbon costs within the scheme.
Nevertheless, the Government is not proposing to allow for offsets from emission sources that cannot currently be included in the scheme. Rather, this would be considered in 2013, when the Government proposes to take final decisions on the coverage of emissions from the agriculture sector.28
The inclusion of offsets within the CPRS could pose considerable legal and practical challenges for the Regulator. In the context of the introduction of a cap and trade system in California, which is still being developed, offsets have become one of the most contentious design elements. Concerns have been expressed about the state's ability to develop standards to ensure that offsets will deliver an additional environmental benefit that is equivalent to emissions reduction at a facility that is directly regulated under the cap and trade system.
The Green Paper notes that offsets involve relatively high compliance costs, particularly for the Regulator, who will be obliged to monitor, verify and approve each offset project to ensure that abatement meets the required standards.29 The Regulator will need to prepare itself for these challenges prior to the allowance of offsets under the CPRS.
Regulatory functions
The Green Paper states that, in addition to purely administrative functions, the Regulator should also be assigned responsibility for roles requiring decisions about individual cases, including monitoring, facilitating and enforcing compliance with the CPRS.30 The Green Paper indicates that the Regulator would be given a range of compliance, investigative and enforcement powers and a broad range of mechanisms to respond proportionately to noncompliance under the CPRS.31 Specific compliance and enforcement provisions, including penalties, are currently be finalised.32
Combining administrative and regulatory functions
A governance model which vests responsibility for both administrative and regulatory functions in the same body has been adopted in NSW in the context of the Greenhouse Gas Reduction Scheme (GGAS), which was established in 2003. GGAS seeks to reduce greenhouse gas emissions associated with the production and use of electricity by establishing an annual state-wide greenhouse gas benchmark for the electricity sector. Individual participants who buy or sell electricity in NSW are required to meet their allocation of the mandatory greenhouse gas benchmark based on their share of NSW electricity demand. Benchmark participants achieve this by surrendering abatement certificates created from emission reduction activities, which effectively offsets a portion of the greenhouse gas emissions associated with their electricity purchases.
The Independent Pricing and Regulatory Tribunal of NSW (IPART) is responsible for the administration of GGAS. In this capacity, IPART has two separate functions – scheme administrator and compliance regulator. As scheme administrator, IPART manages applications for accreditation of Abatement Certificate Providers (ACPs), which are bodies that carry out abatement activities. In addition, the scheme administrator maintains an online registry, which contains information about ACPs and the ownership and status of abatement certificates. With respect to IPART's role as compliance regulator, IPART monitors compliance of benchmark participants with their obligation to surrender greenhouse gas abatement certificates. Penalties may be imposed on a benchmark participant by IPART if a participant fails to meet this obligation.
GGAS commenced operation in the ACT in 2005 and mirrors the greenhouse gas reduction scheme established in NSW in 2003. However, unlike in NSW, the role of scheme administrator and compliance regulator is not undertaken by the same body in the ACT.
Rather, the role of scheme administrator is performed by IPART whereas responsibility for compliance monitoring and enforcement rests with ACT's Independent Competition and Regulatory Commission.
A separation of function between, on the one hand, the administrator or operator of a regulated scheme and, on the other hand, the regulator also exists in the context of the national electricity market. In that context, NEMMCO is responsible for the operation and administration of the wholesale electricity market. The Australian Energy Regulator (AER) is responsible for overseeing the operation of the wholesale electricity market, including monitoring compliance and taking enforcement action, where necessary.
Under the rules which establish the national electricity market, NEMMCO bears important obligations to, among other things, ensure that the power system is stable and that there is security of electricity supply. The potential consequences if these obligations were breached by NEMMCO would potentially be significant, including loss of supply (that is, a blackout). Therefore, it is prudent that the AER, as a body that is separate and independent from NEMMCO, has the ability to monitor and ensure compliance with NEMMCO's obligations in the same fashion that it monitors compliance with obligations borne by other participants, such as electricity generators and retailers.
The proposal to allocate responsibility for both administrative and regulatory functions to the Regulator in the context of the CPRS raises a number of important issues for the design of the scheme's governance arrangements, including:
- whether the integrity of the CPRS would be undermined if both these functions are allocated to the Regulator
- whether recourse will be available to liable entities if the Regulator, in its capacity as scheme administrator, breaches its administrative obligations
- whether the synergies between these functions are significant enough to warrant vesting both in the Regulator
- if both functions are to be vested in the Regulator, whether the Regulator possesses the skills that are needed to ensure that both functions can be successfully executed
Monitoring
Under the CPRS, the Regulator will be vested with authority to monitor the core obligations imposed under the scheme, including the obligation on liable entities to acquire and surrender the relevant number of permits.
Consideration will need to be given to the types of monitoring mechanisms that might be needed, including the infrastructure and skill set that are required for monitoring staff.
The following monitoring mechanisms have been adopted in the context of Japan's Voluntary Emissions Trading Scheme, which was established in 2005:
- dedicated staff who are responsible exclusively for monitoring
- quality control mechanisms to assess and verify submitted data
- external verification of data
Notably, the Green Paper does not suggest that the Regulator will have an oversight role regarding the carbon market, where permits will be traded. To the extent that the sale and purchase of permits occur in the context of established exchanges, the regulator(s) in charge of those exchanges will be responsible for monitoring and ensuring the probity of those transactions. It remains to be seen whether this oversight will be sufficient to avoid market manipulation for the acquisition and surrender of permits in the context of the CPRS.
Compliance and enforcement
Regulator's powers
There are a number of powers the Regulator might need to ensure that it can assess compliance with obligations imposed under the CPRS, some of which have been referred to in the Green Paper. These include:
- powers relating to obtaining information, inspection of documents and facilities, and entry into premises with consent or with a warrant.
- power to conduct assurance audits for emissions reports submitted under the scheme.33 Notably, powers are already available under the National Greenhouse and Energy Reporting Act 2007 to require an external audit of the emissions report of a liable entity.34
- power to determine the liable entity in cases where multiple entities exercise a degree of operational control over a covered facility.35
- the ability to exchange information with relevant Australian Government, departments and agencies, state and territory governments and international regulators. For example, the Regulator may need to exchange information with the Australian Securities and Investments Commission if it finds evidence of artificial transactions in permits or derivative instruments based on them, which may be a means to manipulate the price of emissions.36 This would defeat one of the primary purposes of the CPRS.
Remedies
The Green Paper also identifies the remedies that might be available to the Regulator in the event of non-compliance with CPRS obligations. These remedies include:
- administrative penalties – for example, if liable entities surrender too few permits to balance their emissions.
- civil and criminal penalties in more serious cases.37
Compliance and enforcement strategy
The Green Paper anticipates that the Regulator will establish a compliance and enforcement strategy once the legislative regime is in place. The Green Paper stresses that liable entities are expected to comply voluntarily with legislation if they are provided with the relevant information and assistance. Therefore, the Regulator's initial focus of compliance activities is likely to be education and outreach.38
Nevertheless, it is probable that an emphasis on voluntary compliance alone will not be sufficient, particularly in the long-term. If liable entities can reasonably assume that enforcement action will not be taken for breaches of their obligations under the CPRS, the incentive to comply with those obligations will be diminished. The Regulator will need to strive to foster co-operative spirit amongst entities covered by the CPRS while at the same time maintaining a real threat that enforcement action will be taken when warranted.
Policy-setting
The Green Paper takes the view that some of the governance functions related to the CPRS are, by their nature, the prerogative of government, including decisions about setting the emissions limits and providing assistance to those whose incomes are reduced by the introduction of the scheme.39 Nevertheless, comments made in the Green Paper suggest that the Regulator may also have a role to play in setting policy under the CPRS.
Auction policy
The Green Paper makes it clear that, following establishment of the CPRS, the Regulator will have a role in setting auction policy. In particular, the Green Paper states that the relevant minister would direct the Regulator in the early phases of the scheme but that the Regulator would later assume all auction policy responsibilities.40 The Green Paper states that the Regulator would remain subject to ministerial direction on auction policy and would be required to keep the relevant minister informed of its auction strategy.41
The rationale for vesting the design of auction policy in the Regulator is that the Regulator is considered to be best placed to manage auction policy design given its role in administering auctions, which would position it to respond to the evolving needs of the carbon market.42 However, the Regulator's role in designing auction policy may call into question its ability to independently administer auctions. This will be particularly the case if, for example, the Regulator is directly or indirectly involved in the free allocation of permits or determination of the allocation of revenue generated from auctions.
Setting emissions targets and scheme caps and gateways
The Green Paper indicates that Parliament will be responsible for setting the medium and long-term national emissions reduction targets. The Paper also indicates that the Government, through the responsible minister, with parliamentary oversight, would be responsible for setting the emissions trajectory, including scheme caps and gateways.43
Given that the Regulator will play an important role in managing the acquisition and surrender of permits, it is likely that it will be able to provide the Government with forecast of supply and demand for emissions permits, which could then be used in the setting of emissions targets, scheme caps and gateways.
Industry assistance
The Green Paper states that Parliament and the Government, acting through the responsible minister, will determine the principles and criteria for assistance for emissions-intensive, tradeexposed industries and strongly affected industries.
The Green Paper explains that the provision of industry assistance will have implications for the distribution of the economic burden of emissions reduction and would, therefore, be best assigned to elected representatives.44
The Green Paper does, however, go on to stipulate a role for the Regulator in the context of the provision of assistance to industry under the CPRS. In particular, the Green Paper indicates that the Regulator will be responsible for deciding whether particular entities are eligible for industry assistance. The Green Paper states that the justification for allocating this role to the Regulator is that the potentially significant financial implications of these decisions mean that it would be more appropriate for an independent regulator to make decisions based on principles and criteria set out in legislation.45
According to the Green Paper, the Regulator would have the requisite level of operational independence to determine whether assistance should be provided on a case-by-case basis.46 However, in making these determinations, the Regulator would need to follow the principles and criteria prescribed in the relevant rules.
There is a lot at stake for entities requesting assistance and, accordingly, they are likely to exert considerable pressure to ensure that this assistance is forthcoming. It will be a major challenge for the Regulator to maintain complete independence in the face of such pressure.
Emissions measurement methodologies
The Green Paper states that the Government, through the relevant minister and with parliamentary oversight, will be responsible for deciding which methods should be allowed for measuring and reporting emissions.47
Nevertheless, the Green Paper implies that the Regulator will also play a role in assessing the appropriateness of emissions measurement methodologies for particular liable entities.
In particular, the Green Paper states that the Regulator may have some discretion to allow entities to shift to lower level methodologies if it can be established that such a shift would not result in any loss of precision in the reported emissions data.48 This raises the question as to whether the Regulator will have the technical skills to make determinations regarding the relative merits and applicability of different measurement methodologies.
Managing inter-linkages
With other regulators
The Green Paper considers the Regulator's relationship with other regulators that have roles related to climate change – in particular, the Greenhouse and Energy Data Officer and the Office of the Renewable Energy Regulator.49
- The Greenhouse and Energy Data Officer is responsible for regulatory functions under the National Greenhouse and Energy Reporting Act 2007 and, in that capacity, it will collect emissions data for emissions trading and for other purposes.
- The Renewable Energy Regulator is responsible for the regulatory functions under the Renewable Energy (Electricity) Act 2000, which is designed to implement Australia's renewable energy target.
The Green Paper states that there may be administrative and efficiency gains associated with consolidating all three regulators into a single regulatory agency. The Green Paper notes that, if such an approach were followed, care would need to be taken to ensure that the functions of the Greenhouse and Energy Data Officer and the Renewable Energy Regulator that do not relate to emissions trading are adequately protected and are not compromised.50 If, however, such an approach is not adopted, the Regulator will play an important role in ensuring consistency and coherence between the regulatory regimes administered respectively by itself, the Greenhouse and Energy Data Officer and the Renewable Energy Regulator.
The Government is currently assessing the potential for consolidating the three regulators into one statutory agency, including the associated costs, benefits and implementation issues.
With other schemes
The Green Paper states that the Government should be responsible for determining strategic and policy parameters for linking the CPRS with other emissions permit markets. Nevertheless, the Green Paper notes the role of the Regulator in this context, which could pose additional challenges.
The Regulator would need to certify individual permit markets as being of a suitable standard for linking. This would involve assessment by the Regulator of compatibility of the market proposed to be linked with the CPRS. Both markets would need to have:
- compatible market rules (for example, on the unit of emissions, and possibly on borrowing and banking)
- adequate monitoring and enforcement mechanisms
- mutually acceptable levels of mitigation ambition51
Concluding remarks
This paper has highlighted the probable mix of administrative, regulatory and policy-oriented roles the Regulator is likely to play in the context of the CPRS. It has also identified some of the powers the Regulator will need to perform these roles. Finally, the paper has identified some of the legal and practical difficulties the Regulator may encounter.
To a large extent, the credibility and well-functioning of the CPRS will depend upon the Regulator – it is unlikely that a regulator whose functions, powers and resources are limited will be able to meet the considerable challenges that the scheme presents. This, in turn, will depend upon how well the Regulator's roles are defined in the Act establishing the CPRS, and also how the Regulator's obligations are applied in practice. The issuance of the White Paper in December 2008 will help to provide greater clarity about the profile of the CPRS Regulator.
Footnotes
1. Green Paper, p 446.
2. Green Paper, p 448.
3. Green Paper, p 54.
4. Green Paper, p 448.
5. Green Paper, p 447.
6. Green Paper, p 54.
7. Green Paper, p 449.
8. Green Paper, pp 434-435.
9. Green Paper, p 53.
10. Garnaut Final Report, p 351.
11. Green Paper, p 446.
12. Green Paper, p 446.
13. The carbon market may involve trades through the Over the Counter (OTC) market, which is a bilateral market for the purchase and sale of permits. Organised exchanges may also develop for the trade of permits following the establishment of the CPRS.
14. Green Paper, Table 13.1, p 441.
15. Green Paper, p 258.
16. Green Paper, Table 13.1, p 442.
17. Kyoto units are units related to the reduction of emissions that are recognised and tradeable under the Kyoto Protocol.
18. Green Paper, p 493.
19. The Clean Development Mechanism allows countries with an emission reduction commitment under the Kyoto Protocol to implement an emission reduction project in developing countries. These projects earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets and can be traded.
20. Green Paper, p 495.
21. As a party to the United Nations Framework Convention on Climate Change, which is supplemented by the Kyoto Protocol, Australia must submit national reports on, among other things, information on emissions and removal of greenhouse gases and demonstration of compliance with the Protocol's binding emissions targets.
22. Green Paper, p 145.
23. Green Paper, Table 13.1, p 441.
24. Green Paper, p 106.
25. The Green Paper specifically states that the Regulator would have powers to conduct assurance audits using a risk-based approach for all emissions reports submitted under the scheme: Green Paper, p 210. This would entail consideration of the probability and impact of the submission of inaccurate emissions reports by particular entities.
26. Green Paper, p 158.
27. Green Paper, p 19.
28. Green Paper, p 19.
29. Green Paper, p 137.
30. Green Paper, p 446.
31. Green Paper, p 43.
32. Green Paper, p 43.
33. Green Paper, p 42. The Green Paper indicates that the Regulator will have the power to review an annual emissions report for up to four years after its submission, except in the case of fraud, in which case the period would be unlimited.
34. The National Greenhouse and Energy Reporting Act 2007 (NGERA) introduces a national reporting framework for the reporting of greenhouse gas emissions, energy use and energy production. Under the NGERA, covered entities must report their emissions in relation to 'facilities' over which they have operational control.
35. Green Paper, p 196.
36. Green Paper, p 216.
37. Green Paper, pp 215-216.
38. Green Paper, p 215.
39. Green Paper, p 437.
40. Green Paper, p 46.
41. Green Paper, p 258.
42. Green Paper, p 258.
43. Green Paper, Table 13.1, p 440.
44. Green Paper, Table 13.1, p 440.
45. Green Paper, Table 13.1, p 441.
46. Green Paper, p 53.
47. Green Paper, Table 13.1, p 441.
48. Green Paper, p 205.
49. Green Paper, pp 449-450.
50. Green Paper, p 450.
51. Green Paper, pp 250-251.
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