Like the just-released Dingell-Boucher climate change bill in US and the EU’s proposed directive, the design for an Australian emissions trading scheme reflects a strong concern for protection of trade-exposed industries from countries with less stringent emissions reduction requirements.  The core concern is the possibility that companies may relocate their operations to countries not subject to an emissions trading scheme, which Professor Garnaut, an eminent economist and advisor to the Rudd Government on the likely economic effects of an ETS, describes as a “truly dreadful problem.”

In Australia, this protectionist element has been a platform of both the previous Coalition party and incumbent Labor Government in their scheme designs.  In its July 2008 Green Paper, the Government, as expected, proposed assistance to the newly branded Emission Intensive Trade Exposed (“EITE”) industries of 1,500 tCO2-e/$ million revenue, which was a higher threshold than previous proposals.  It is intended that approximately 30% of the carbon pollution permits will be allocated to EITE industries, using a sliding scale: the largest polluters, with an emissions intensity above 2,000 tCO2-e/$ million revenue, will initially pay only 10% of their total emissions, while companies producing between 1,500-2,000 tCO2-e/$ million revenue would pay for 40% of emissions.

Controversially, however, Professor Garnaut does not support full assistance for EITEs, and instead makes a different proposal in the absence of international agreement.  The thrust of this proposal is that for every unit of production, eligible firms receive a credit against their permit obligations equivalent to the expected uplift in world product prices that would eventuate if Australia’s trading competitors had similar policies.  The benefits of this approach are two-fold: first, it allows “learning by doing,” encouraging firms to operate and produce at levels that would be sustainable if an international agreement was in place, but they do not bear the full cost until such an agreement exists.  Secondly, it encourages firms to invest in low-emissions technology, and reduces the likelihood of rent-seeking in the future.  His approach has already met with opposition, however, with criticisms that it would require substantial modeling of world prices and EITE products that “do not exist and will never exist” according to Australian Industry Greenhouse Network chief Michael Hitchens.

The Government has promised to release a White Paper, in conjunction with draft legislation by year end.  In the meantime, it has released a discussion paper and called for comments on assessing emissions intensity using a value added metric, as it relates to EITE eligibility.

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