The CPRS Emissions Target – It’s 5% With Emissions Trading From 1 July 2010

Earlier today the Federal Government released its White Paper on the Carbon Pollution Reduction Scheme (CPRS). The CPRS is the Government's primary policy tool to reduce Australia's greenhouse gas emissions, with the emissions trading scheme that seeks to impose emissions caps on certain sectors of the Australian economy intended to commence operation on 1 July 2010. The design and implementation of an emissions trading scheme will have far reaching implications for all Australians – some of the business implications include the increased costs associated with putting a price on carbon, risks and opportunities that are likely to arise for high carbon intensive goods and services, and the potential for increased costs associated with mitigation and adaption to climate change.

Key elements of the White Paper

• A minimum (unconditional) commitment to reduce emissions by 5 per cent below 2000 levels by 2020 irrespective of actions by other nations. In the event that global agreement is reached where all major economies commit to substantially restrain emissions and all developed countries take on comparable reductions to that of Australia, this commitment will be increased to 15 per cent below 2000 levels.
• The introduction of an emissions trading scheme on 1 July 2010, irrespective of the current economic market turmoil. The Government says that this turmoil has not reduced the risks and threats or the benefits of action on climate change.
• A likely carbon price of $25 per tonne and a price cap for five years of $40 per tonne at the commencement of the CPRS, rising at five per cent real per annum.

Emissions-Intensive Trade-Exposed (EITE) and strongly affected industries

The Government has made a number of changes to its policy on assisting EITEs including:

• extension of assistance to a lower level of emissions intensity to at least 1,000 t CO₂-e per million dollars of revenue. Previously, the level of assistance was 90 per cent for activities that had at least 2,000 t CO₂-e per million dollars of revenue, and 60 per cent for activities that had at least 1,500 t CO₂-e per million dollars of revenue;
• additional route for determining eligibility for assistance with a choice of using a revenue or a value-added based measure of emissions intensity. Previously the assessment of eligibility was only on the basis of the ratio of emissions-to-revenue of an activity;
• additional activities that are likely to be eligible for EITE assistance may include activities in the pulp and paper manufacturing sector, the iron and steel sector and the plastics and chemical manufacturing sector;
• expansion of the emissions and costs for which assistance is provided to include emissions from the use of steam, as well as extraction and production of natural gas and its derivatives such as methane and ethane when used as a feedstock. Previously, the only assistance was for an activity's direct emissions and for the indirect emissions associated with its use of electricity;
• longer time series of data being four and a half years from 1 July 2004 to 31 December 2008 for the EITE activity eligibility assessment calculation. Previously this period was just two years;
• rate of assistance provided to EITE entities to decline to keep the share of permits provided to EITE industries broadly stable over time set at 1.3 per cent which is broadly in line with the rate of reduction in the national trajectory for the 5 per cent below 2000 levels. Therefore, it is likely that the share of permits provided to EITE industries will increase over the first 10 years of the CPRS. The application of the carbon productivity contribution to EITE industries partly reflects the expectation that these industries, like other areas within the economy, will reduce the emissions intensity of their operations. Historically, EITE industries have achieved reductions in their emissions intensity—this trend is likely to continue. In the event of global agreement, five years' notice would be given to withdraw assistance;
• an 'electricity allocation factor' to determine how many tonnes of emissions would be included in the allocation baseline for every megawatt hour of electricity consumed set at 1t CO₂-e per megawatt-hour.

In relation to Strongly Affected Industries (SAI), the White Paper has confirmed that the only industry which satisfies the characteristics of a strongly affected industry which will receive direct assistance through the Electricity Sector Adjustment Scheme (ESAS) is coal-fired electricity generation.

The assistance will be available to coal-fired generators that have an emissions intensity above 0.86 tonnes of CO₂-e per megawatt hour generated that were in operation, or committed to be constructed, on 3 June 2007. The Government will provide a fixed administrative allocation of permits (delivering around $3.9 billion of assistance in nominal terms, or $3.5 billion in real 2008-09 dollars, which equates to approximately 130 million permits over the first 5 years of the CPRS) to generators over five years. Assistance provided to individual generators will be weighted by their historical energy output and their emissions intensity and be provided in the form of administratively allocated permits.

Further, in contrast to the Green Paper, the White Paper:

• provides guidance about which complementary measures would continue to be supported under the CPRS in recognition of the fact that such measures are not expected to be adequately addressed by the CPRS (for example, research and development failures);
• proposes to reduce the risk of carbon market manipulation by giving the Australian Securities and Investments Commission the necessary legal power to investigate and prosecute market manipulation in the carbon market by designating permits and Kyoto units as financial products under the Corporations Act 2001;
• states that no restrictions will apply to the use of eligible Kyoto units by mandatory participants in the CPRS for compliance purposes (however, no export of permits will be allowed, and if this is varied, would only be allowed with five years' notice);
• identifies elements of the National Greenhouse and Energy Reporting Act 2007 that will be strengthened to facilitate the introduction of emissions trading, including extending the reporting obligations to Commonwealth and State entities and unincorporated joint ventures.

What's still to come?

• In December 2008, draft legislation is planned to be released for public comment for the design of the expanded national Renewable Energy Target requiring 20 per cent of Australia's electricity to be sourced from renewable generators by 2020.
• In late February 2009, an exposure draft of the proposed legislation to underpin the CPRS.
• In the first half of 2009, detailed program guidelines and the eligibility criteria for assistance under each of the four streams of the Climate Change Action Fund will be released, namely Information; Investment; Structural Adjustment Provision; Coal Sector Adjustment.

We will provide a more detailed update on the White Paper shortly.

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.