The Government today released its much-discussed green paper on the design features of its newly branded “Carbon Pollution Reduction Scheme” for commencement in 2010.  This follows Professor Garnaut’s release of his draft report on the scheme earlier this month, and the Government’s commitment to unveil the key features of the scheme by the end of this year.  It proposes the introduction of a broad-based cap and trade scheme with the following features:

Broad coverage: petrol in, reforestation opt-in

Broad coverage to include stationary energy, transport, industrial processes, fugitive emissions, waste and forestry, with agriculture likely to be incorporated by 2015.  The points of liability primarily fall on large facilities and upstream fuel suppliers.  The proposed threshold for direct obligations is 25,000 t CO2-e or more a year, which will capture approximately 1,000 Australian companies.  The impact of the inclusion of the transport sector, a highly sensitive issue, has been softened by a transitional measure of fuel tax cuts on a cent for cent basis, to be reviewed three years after the scheme starts.  There was also a question mark around forestry: the Government has dealt with this by proposing that reforestation be included on a voluntary “opt-in” basis while deforestation is not.

Protection for coal-fired power stations and emissions intensive industries

In a move inconsistent with Garnaut, the Government proposes one-off limited direct assistance to coal-fired power stations.

As expected, Emission Intensive Trade Exposed industries (those that compete internationally against countries without comparable constraints) of 1,500 t CO2-r/$ revenue will be largely shielded from the scheme.  Approximately 30% of carbon pollution permits will be allocated to these industries, based on the level of emissions intensity: companies with an intensity above 2,000 t CO2-e / $ million revenue will receive 90% of the industry’s average per unit of output, while companies with intensities between 1,500-2000 t CO2-e / $ million revenue will receive 60% of the industry’s average.

Other transitional assistance

The Government intends to auction around 70% of permits initially, with the revenue used to compensate households, trade-exposed industries and motorists.

The Government will also establish a Climate Change Action Fund which will provide funding for activities including new low emissions processes, industrial energy efficiency projects with long payback periods and dissemination of best and innovative practice among small to medium sized businesses. 

Offset credits

Kyoto offsets will be recognized in the scheme, possibly with a cap on their use. 

The Government favors a “safety valve” or price cap, which, although intended to be higher than the carbon price, may cause problems for linkages with other schemes.  It is inconsistent with the EU ETS, which contains a “make-good” provision.

The green paper outlines the Government’s “current thinking”, and is not a final statement of political intent.  Submissions can be made in writing by September 10, 2008.  However, as noted by Greg Gailey, the president of the Australian Business Council, “the devil remains in the detail”.  The paper also omits key details on the specific emissions trajectories, which is currently being modeled by Treasury in collaboration with Garnaut, and is intended to be released in October.  However, it does give further guidance on the shape of the scheme, and makes the investment environment a little more certain for those with substantial energy intensive operations in Australia, or looking to develop and export clean technologies.

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