Following Australia’s recent ratification of the Kyoto Protocol, the Federal Government intends to unveil its emissions trading scheme (ETS) by the end of this year, for commencement in 2010.  The key publications released to guide the development of the scheme, include the 2006 National Emissions Trading Taskforce’s report, the 2007 Prime Minister’s Task Group proposals, and the newly released Garnaut Review.

Professor Garnaut, an Australian National University economist asked by the Rudd Government last year to research the likely economic effects of an ETS, released his draft report on July 4, with the final report scheduled for release on September 30.  Garnaut’s report outlines the following key issues:

• Start date: Garnaut supports an unconstrained and direct movement to a full ETS in 2010, but recognizes a two year transitional period based on Kyoto targets with a low fixed carbon price as a viable alternative. Specific trajectories will be outlined in Garnaut’s final report.
• Broad coverage: Broad coverage to include stationary energy, industrial processes, fugitive emissions, transport and waste, with agriculture and forestry to be incorporated as soon as practicable. Government support for fuel coverage has been called into doubt after the recent spike in oil prices.
• Full auctioning: Full competitive auctioning of permits with revenues to support research, development and the commercialization of low-emissions technologies, households and business, and some assistance to trade exposed emissions intensive industries (TEEI), such as metals.
• Compensation: No compensation for the power sector, but 30% of revenues to support TEEIs. In contrast, the Trading Taskforce Report and Prime Minister’s Report proposed some free allocation for electricity generators and insulation of trade exposed emissions intensive industries from the scheme.
• Low emissions technology: Garnaut recommends that 20% of revenues fund the research, development, and commercialization of low emissions technologies including carbon capture and storage, geothermal and solar. Australia should take a key international role in developing and exporting these technologies to developing countries, committing $3 billion annually. He also recommends phasing out the mandatory renewable energy target once the scheme is fully operational.
• Oversight: The creation of a Reserve Bank style “Independent Carbon Bank,” with both banking (i.e. storing permits for future trading or use) and borrowing allowed.
• Price cap: No price cap - parties with a permit shortfall would need to pay a penalty and make good the shortfall at a later date.

While the Federal Government has hinted that the Garnaut Review will be influential on the design of the final scheme, it has also left open the possibility of introducing new elements in its July green paper and a later white paper.  However, Garnaut’s report can be considered the most aggressive of the proposed options so far.  As such, parties affected by the scheme are now in a better position to plan for the future based on an assessment of the least favorable features to date.

Those likely to be affected include U.S. parties with substantial energy intensive operations in Australia, or those looking to develop and export clean technologies (for example, technologies under the CDM and JI mechanisms of the Kyoto Protocol).  In addition, if the Australian ETS is integrated with international trading programs as intended, there are potential arbitraging opportunities for those looking to capitalize on any price differential between Australia and the rest of the world.

For further information about this topic, please contact Akin Gump.