Australia: Deal Or No Deal? - Opposition Agrees To Government's CPRS Offer

Key Points:
The Government has offered the Opposition key amendments to its CPRS package on a take it or leave it basis - and at the moment, it looks like they're taking it.

The Federal Government released yesterday the package of amendments to the Carbon Pollution Reduction Scheme (CPRS) which have been agreed between Senator Penny Wong and the Opposition's climate change negotiator, Ian McFarlane. The CPRS deal has been approved by the Opposition although there is conjecture about the circumstances in which this approval was achieved, whether this will remain the Opposition's position with the threat of a leadership spill, and even if it does, whether enough Opposition Senators will support passage of the CPRS legislation in the vote expected before the end of the week.

Key elements of the package of amendments include:

• Emissions Intensive Trade Exposed (EITE) Industries - the global recession buffer will be permanently incorporated into the assistance rates of 66 percent and 94.5 percent. The 1.3 percent per annum decay rate, however, remains.
• Coal sector - The level of transitional assistance provided to the coal sector has doubled to $1.5 billion over 5 years.
• Electricity sector - The amount of assistance under the Electricity Sector Adjustment Scheme (ESAS) has more than doubled from $3.3 billion to $7.3 billion, and over 10 years instead of five years.
• Agriculture - As announced last weekend, agricultural emissions will be excluded from the CPRS and offsets for agricultural emissions abatement will be permitted.
• Electricity prices - an assistance program worth $1.1 billion will be provided to assist medium and large manufacturing and mining businesses with CPRS-related increases in electricity prices during the early years of the Scheme.

Further details of the components of the deal are set out below:

Emissions Intensive Trade Exposed Industries

As noted above, the Government's global recession buffer will be integrated into base assistance rates and will not be removed after five years. Other amendments include:

• capping allocations to 100 percent of an EITE entity's direct and indirect electricity and steam emission costs to reduce the likelihood of windfall gains;
• ensuring the same rate of EITE assistance is applied where an output from an eligible EITE activity is produced using either primary materials or recovered/recycled materials as inputs;
• an automatic statutory review of EITE policy as soon as practicable after Australia signs any new multilateral agreement on climate change; and
• in respect of LNG production, each eligible producer will receive free permits at a fixed rate of permits per tonne of LNG produced. However, an additional supplementary allocation of permits will be provided for LNG projects to ensure that all projects receive an effective assistance rate at or above 50 percent in relation to their LNG production. This will be an ongoing measure, not a fixed term transitional assistance program. In addition, assistance will be based on emissions associated with the entire LNG production process, from well head to shipping.

While the food processing sector is not classified as an EITE industry as demanded by the Opposition, the Government has agreed to provide $150 million of assistance over five years to it as part of the Climate Change Action Fund (CCAF). This money is intended to fund emission reduction measures within the primary food processing industry with initial priority given to diary processing, meat processing and malt production facilities. The food processing industry will also benefit from the Transitional Electricity Cost Assistance Program (see below).

Agriculture and offsets

The CPRS Bills will be amended to explicitly exclude agricultural emissions from the Scheme. However, the Government will work with industry to introduce voluntary emissions reporting trials in 2011 to allow the sector to better understand and manage its emissions. Further, the Government will introduce amendments to provide for crediting of abatement from agricultural emissions and other sectors not covered by the CPRS (for example, legacy waste and closed landfill facilities).

CPRS permits will be provided for abatement from the sources that are counted towards Australia's international commitments subject to development of appropriate robust methodologies. Those areas include livestock, burning of savannahs, rice cultivation, avoided deforestation, legacy waste and emissions from closed landfill facilities. The Government will use the National Carbon Offset Standard to promote voluntary market offsets. Approval of projects and crediting of abatement will occur from commencement of the CPRS on 1 July 2011.

Coal sector

The $1.5 billion of assistance to the coal sector will be spread over five years and comprise two components:

• a $1.23 billion Coal Sector Adjustment Scheme (CSAS) to provide transitional assistance to the most emissions intensive coal mines in the form of permits; and
• a $270 million Coal Sector Abatement Fund established within the CCAF to provide grant funding for coal sector abatement projects and capital grants with a priority for electricity generation from waste coal mine gas.

An Independent Expert Review will examine the impact of the CPRS on the coal mining sector in the first scheduled review in 2014. The CSAS will provide free permits to those coal mines that have a fugitive emissions intensity above 0.1 tonnes of CO₂e per tonne of saleable coal; eligible mines will be those where coal mining operations were carried out for some or all of the two years from 1 July 2007 to 30 June 2009.

The pool of permits set aside to provide assistance for mines will be equal to 9.72 million permits per year for five years, equal to around 60 percent of the fugitive emissions from gassy mines during 2008/2009. Assistance will be linked to production and capped at base period production levels.

Electricity generators

The quantum of assistance on the ESAS will increase by approximately 75 percent from 130 million to 228 million permits. The ESAS will also be extended from five to 10 years. Generators will be required to comply with the "power system reliability test" over this period to continue to receive assistance. This is intended to support energy security by preventing the exit of a generator from the energy market where this would be likely to breach power system reliability standards.

The Government will also introduce a Low Emissions Transition Incentive by amending the power system reliability test further to allow generators to receive credit for their own investments in replacement capacity, providing incentives for ESAS recipients to invest in new low emissions replacement generation capacity while continuing to receive ESAS payments. Eligible investment will be required to have an emissions intensity less than current best practice coal fired generating capacity in Australia.

The Government also intends to delay the windfall gains test that applies to ESAS assistance so that it only applies during the last three years of the 10 years assistance period rather than the last two of the original five. The test also only applies to half of the generator's allocation in the last three year period.

Deferred payments

Initially flagged in the White Paper but little progressed is the issue of deferred payments for auctions of Australian Emissions Unit. The Government proposes to implement a deferred payment mechanism as a transitional measure to address the working capital costs of participants in the auction processes. The deferred payment will apply to the advance auction of future vintages of emissions units sold between 1 January 2011 and 31 December 2013 only, and will be available to all bidders. Operating more like a "lay-buy" scheme, a 10% deposit will be required at auction to secure the right to obtain the permits, with the permits not being delivered until full payment is made. Further consultation about the detail of the arrangements is foreshadowed.

Electricity prices

The Government intends to establish a Transitional Electricity Cost Assistance Program to reduce the impact of the CPRS on electricity prices paid by medium and large enterprises. The transitional fund will apply after the fixed price transitional year (2011-2012) and will be capped at $1.1 billion distributed over two years. The targeted recipients of assistance will be corporations in the manufacturing and mining sectors, both existing and new, with facilities consuming electricity above a minimum threshold of 300 megawatt hours per year. Assistance is not available to facilities that are eligible for permits under EITE, coal or ESAS programs.

Complementary measures

The Government also proposes to take further steps to encourage voluntary action by taking voluntary abatement activity into account in setting targets. This will include recognition of emissions savings from the use of GreenPower and the establishment of a mechanism to encourage energy efficiency, possibly in the form of a "white certificate" scheme.

Liability issues unresolved

The Government has also flagged its intention to deal with the vexed issue of operational subsidiary liability and joint venture liability. Under the present scheme design, there are significant problems caused for carbon price pass through under existing contracts because the point of liability is imposed on the controlling corporation of the entity which has operational control of a facility. This can create circumstances where minority interests have no liability. The Government, however, has not proposed a solution. Rather, it continues to acknowledge that the matter raises complex technical and legal issues since any proposal to move the point of liability will have an effect on a range of parties. The Government has repeated its previous intention to consult broadly with stakeholders on any proposed amendments to address the issue to avoid unintended consequences whilst at the same time maintaining the integrity of the CPRS. If the CPRS legislation passes, then there will be very little time to resolve some of these complex issues prior to scheme commencement in July 2011.

Summary

While indications from the Opposition are that the terms of that the deal offered by the Government are more than they had expected, when compared against the original key amendments flagged by the Opposition on 18 October 2009 as critical to obtaining its support, it has in fact enjoyed mixed success. A report card on the Opposition's demands based on the deal put forward by the Government is set out in the table below:

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