Australia: Sustainability and Climate Change Update: The Carbon Pollution Reduction Scheme

Last Updated: 8 December 2009
Article by Maddocks Sustainability & Climate Change Team

The status of the Carbon Pollution Reduction Scheme

After much speculation and political wrangling, the proposed Carbon Pollution Reduction Scheme (CPRS ) has been rejected by the Senate for a second time.

The latest set-back followed an extraordinary series of events, which culminated in the replacement of the former Opposition Leader, Malcolm Turnbull, who had supported the revised CPRS, with a climate change sceptic and staunch opponent of the CPRS, Tony Abbott.

The new Opposition Leader has ruled out supporting any form of emissions trading scheme, unless it forms part of a global system, including involvement of the United States. He has emphasised the need to consider nuclear power as an alternative to an emissions trading scheme or carbon tax.

The Government now has the right to dissolve both houses of parliament. Nevertheless, the Government has vowed to re-introduce the CPRS, including revisions that had been negotiated with and agreed to by the Liberal Party, into Parliament for its first session for 2010 in February.

Key elements of revised CPRS

The proposed CPRS establishes a 'cap and trade' scheme. This scheme involves the imposition of a cap on Australia's greenhouse gas emissions. The cap is established through the issuance of a set number of Australian Emission Units (AEU s). Under the scheme, significant emitters of greenhouse gases must acquire and surrender an AEU permit for every tonne of gas emitted in a particular year.

Pre-existing elements of the Scheme

The amendments made to the CPRS following negotiation with the Opposition do not alter the overall architecture nor operation of the CPRS. Specifically, the following main elements of the scheme remain in place:

  • Start date: If passed, the CPRS will commence on 1 July 2011.
  • Emissions targets: The scheme will include a minimum, unconditional commitment to reduce emissions by 5% by 2020 based on 2000 levels. Adoption of a higher target of 25% is conditional upon a global climate change agreement being struck. The Liberal Party affirmed its bipartisan support for these targets following assumption of leadership by Tony Abbott.
  • Scope and coverage:
    • The CPRS covers all greenhouse gases included under the Kyoto Protocol, which represent around 75% of Australia's emissions.
    • The sectors covered under the scheme are: stationary energy (largely from elect r ici t y generat ion) , t ranspor t (combustion of fuels for road and rail transport), oil and gas fugitive emissions, industrial processes, waste and synthetic greenhouse gas emissions.
  • Main obligations of liable entities:
    • In general terms, entities will be liable under the CPRS if emissions from facilities over which they have operational control trigger the relevant threshold.
    • Liable entities must report the emissions for which they are responsible under the National Greenhouse and Energy Reporting Scheme (NGERS ), which will be linked to the CPRS.
    • Entities are free to emit at whatever level they choose. However, they must acquire and surrender an eligible emissions unit for each tonne of emissions for which they are responsible.
  • Eligible Emissions Units:
    • Liable entities may surrender Eligible Emissions Units, which include AEUs and international units. Most AEUs will be available at auction. Liable entities may surrender an unlimited number of international units, which are generated under the Kyoto Protocol.
    • AEUs are tradable. The price of units will be determined by supply and demand on the carbon market.
    • However, a fixed price of $10 for AEUs will apply between 1 July 2011 and 30 June 2012. Thereafter, liable entities will need to purchase permits at the prevailing market price.
  • Assistance:
    • The Climate Change Action Fund will provide assistance to businesses, community organisations, workers, regions and communities, helping to smooth the transition to a low-pollution economy. The Climate Change Action Fund, to which $2.75 billion has been committed, will operate over seven years from 2009-10 to 2015-16.
    • A package of direct cash assistance and tax offsets will be provided to assist low and middle income households to adjust to the impacts of the CPRS from 2011–2012.
  • Offsets:
    • Reforestation is covered under the CPRS on a voluntary basis. Entities can opt into the scheme and obtain free units for recognized reforestation activities. These free units may then be on-sold to entities that are liable under the CPRS.
    • Even though the CPRS is not scheduled to commence until 1 July 2011, in order to encourage carbon pollution reduction before the scheme starts, reforestation will be eligible to voluntarily generate permits for carbon stored from 1 July 2010.

Revised elements of the Scheme

In summary, the main revisions made to the CPRS following negotiation between the Government and the Opposition are as follows:

  • Emissions Intensive Trade Exposed (EITE) Industries:
    • Under the original CPRS, EITEs were entitled to:

      • 90% free permits for entities with at least 2000 tonnes CO2-e/ $million revenue
      • 60% free permits for entities with between 1000 and 1999 tonnes CO2-e/ $million revenue or 3000 and 5999 tonnes CO2-e/ $million value added
    • The Government has agreed to increase compensation to EITEs, but not to the level requested by the Opposition. Specifically, the Global Recession Buffer will be permanently incorporated to raise assistance levels to 94.5% and 66% respectively. These rates of assistance will decline at a rate of 1.3% per year.
  • Coal-fired generation:
    • The original CPRS provided for a fixed allocation of free permits in equal instalments over 5 years amounting to around $3.4 billion to the most emissionsintensive coal-fired generators under the Electricity Sector Adjustment Scheme (ESAS ).
    • The Government has agreed to almost double support for coal-fired generators to around $7.3 billion, which will be distributed over 10 years in the form of free permits.
  • Agriculture:
    • Formerly, inclusion of agricultural emissions in the CPRS was to be considered in 2013, with the possibility of coverage under the scheme from 2015 at the earliest.
    • The Government has agreed to indefinitely exempt agriculture from coverage under the CPRS.
  • Additional assistance:
    • Mining and manufacturing sectors: The Government ha s agreed t o significantly increase support for mining and manufacturing sectors affected by electricity price rises through an assistance program worth $1.1 billion.
    • Coal producers: More over , the Government has also committed $1.23 billion worth of free AEUs to be provided to gassy coal mines over 5 years.
    • Food processing industry: The Government refused to classify the food processing sector as an EITE industry. However, it agreed to provide $150 million of assistance over five years to the industry under the Climate Change Action Fund to fund emission reduction measures, with dairy processing, meat processing and malt production facilities to have priority.
  • Offsets:
    • Offsets will be available from sectors not covered by the CPRS that are counted towards Australia's international climate change obligations.
      • E.g. in the agricultural sector such as from livestock and rice cultivation and from legacy landfill emissions and closed landfill facilities.
    • Offsets must comply with cer tain criteria reflected in the National Carbon Offset Standard. The criteria include 'additionality', which means that the offset must be beyond what is required by regulation and what would be undertaken as business-as-usual.
  • Voluntary action:
    • The Government has agreed to allow voluntary action, including emissions savings from the use of Green Power, to be taken into account when setting scheme caps. This will mean that Australia may achieve emissions reductions beyond the 2020 targets.
  • Energy Efficiency White Certificate Scheme:
    • The Government has committed to the introduction of a national Energy Efficiency White Certificate Scheme to encourage households and businesses to adopt energy efficiency measures.

The future of the CPRS

The fate of the CPRS could well be tied to the outcome of the United Nations' Copenhagen Climate Conference (COP15), which will take place on 7-18 December.

The aim of the conference is to identify the steps to be taken by developed and developing nations to address the effects of climate change after 2012, when the Kyoto Protocol will expire. The Kyoto Protocol, which was adopted in December 1997, set firm targets to reduce emissions, but only for a limited number of developed countries.

Originally, it was expected that COP15 would result in a global emission reduction target and key strategies needed to achieve this target. However, rifts between developed and developing countries about who rightly bears responsibility for climate change coupled with failure of some major emitters to make firm emission reduction commitments have somewhat dampened expectations. The hope now is for a politically binding deal that will provide the framework for a more formal agreement to be considered late in 2010.

Back in Australia, the Opposition has clearly stated that it will not support the CPRS, unless it forms part of a global system to address climate change of the kind contemplated by COP15. Time will tell whether COP15 is able to deliver both globally as well as domestically.

What will Copenhagen deliver?

As we write this Update, the 192 member countries of the UN Framework Convention on Climate Change (UNF CC) are meeting in Copenhagen for the 15th Conference of the Parties. About 70 heads of state, including President Barack Obama and Prime Minster Rudd, will attend the last part of the conference.

Although it will not be possible to produce a binding treaty at Copenhagen, there is cause for optimism that there will be a reasonable political outcome that will set the world on the path to tackling dangerous climate change. However, there is still a significant gap between commitments made and what expert scientists say is needed to have a reasonable chance of limiting global temperature rise to 2 degrees celsius.

Why is there cause for optimism?

In the last six months, there has been greater recognition in both developed and major developing nations of the need to set shortterm targets to significantly reduce greenhouse emissions.

At the Major Economies Forum in Italy in July 2009, leaders of the major economies recognised the scientific consensus that it is necessary to limit global temperature rise to no more than 2 degrees celsius. In order to achieve this, greenhouse gases need to be stabilised at no more than 450 ppm of CO2 equivalents.

European Union countries have long led the way with a commitment to 20 – 30% cuts from 1990 levels by 2020. Japan has announced a commitment to 25% cuts from 1990 levels and, most significantly, President Obama has indicated support for a 17% cut from 2005 levels. Australia has announced cuts in the range 5 – 25% from 2000 levels depending on international agreement. Taken together, it appears that aggregate emissions reductions from the developed world by 2020 will be in the range 13 – 18% (World Resources Institute December 2009).

Large developing countries have announced proposed emissions reductions that are more significant than many had expected. China has led the way with a proposal to cut its emissions intensity (that is, emissions as a proportion of GDP) by 40 – 45% compared to 2005 by 2020. This is in addition to ambitious renewable energy and energy efficiency targets. Indonesia, Brazil and Mexico have also announced significant emission reduction targets. For example, Indonesia announced 26% – 41% intensity cut by 2020. India, which had previously refrained from making specific climate commitments, has recently announced a proposed 20 – 25% emissions intensity reduction by 2020.

What is the gap?

The UN's Intergovernmental Panel on Climate Change advised that, in order to achieve a 450 ppm CO2 outcome, developed nations would need to reduce emissions in aggregate by 25 – 40 % by 2020. The current commitments fall well short of this.

Analysis by Project Catalyst, an initiative of the ClimateWorks Foundation, indicates that business as usual CO2 emissions at 2020 would be around 58 Gigatonnes (billion tonnes). In order to meet a 450 ppm CO2 pathway, the emission level in 2020 would need to be reduced to 44 Gt. Accordingly, we need to come up with global emission savings of 14 Gt by 2020.

Project Catalyst has found that approximately 5 Gt of this abatement can be met at reasonable cost in the developed world. However, the majority – approximately 9 Gt – will need to be found in the developing world. This will require significant international financial support partly through international carbon markets and partly through public finance.

Project Catalyst has found that current commitments will deliver reductions of around 8 Gt, leaving a gap of 6 Gt in 2020. These commitments have the world on a track to 550 ppm CO2 and dangerous temperature increases of 3 degrees celsius or more.

However, if Copenhagen results in an agreement that facilitates long-term cooperation on climate change, it will be a good start to avoiding this outcome. In order to close the gap, it will be necessary to agree:

  • The final legal form of the climate agreement and the different forms of commitment for developed, large developing and small developing countries
  • Common measuring and verification Standards
  • Climate finance mechanisms, including a fast start-up fund and global carbon market to facilitate substantial abatement in developing countries
  • A time frame for early review of the adequacy of country actions (potentially in 2015) and then the scaling-up of commitments to avoid dangerous climate change.

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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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