As part of its commitment to implement its Carbon Pollution Reduction Scheme by 2010, the Australian Government released its long-awaited Australia’s Low Pollution Future Report, which presents Treasury’s key modeling assumptions on the costs and opportunities of climate change action.  The report focuses on mitigation of climate change costs and stresses significant cost savings will occur if carbon capture and storage (CCS) technology is commercially developed in Australia, and international trading of permits is actively encouraged.

The report’s frame of reference is two possible reduction target scenarios, based on whether a global climate change agreement is reached.  The first assumes a global agreement from 2013, with reduction targets of 10% and 25% below 2000 levels by 2020.  The second assumes the more likely scenario, whereby developed countries are subject to reduction obligations from 2010 and developing nations join progressively, with reduction targets of 5% and 15% below 2000 levels by 2020.  The more likely staggered approach assumes an expanded Renewable Energy Target of 45,000 GWh per year by 2020, while the former approach assumes all current renewable schemes terminate at the commencement of the Carbon Pollution Reduction Scheme.

The report highlights the importance of CCS commercialization in Australia, as it models mitigation costs 23% higher in 2050 if it is not available.  However, unlike the earlier modeling paper the Treasury released on October 3, 2008, the report recognizes there are widely divergent views across industry and government as to when CCS will be commercialized and assumes a deployment period from 2026 to 2033, with a carbon price of AUD$45 to AUD$80 per ton of CO2-e.  After this time, it is expected renewable technologies will compete with CCS and its importance will decline.  This is aligned with the Government’s recent commitment to devote AUD$100 million per annum to speed up CCS technology and the creation of the National Low Emissions Coal Initiative.

Similarly, the report emphasizes international trade will play an important part in cutting Australia’s climate change costs.  The more optimistic scenario outlined above assumes there are no constraints on international trade, while under the more realistic approach, there are restrictions until 2020 (when they are removed).  In all cases, it is emphasized that Australia will almost certainly be a net purchaser of permits, given its ability to cut carbon, which comes at a much greater cost than to other nations, largely because of Australia’s reliance on coal and other fossil fuels for domestic energy requirements and export.

This report is one of the final pieces underpinning Australia’s Carbon Pollution Reduction Scheme, the final design of which the government has promised to hand down by the end of the year.  Until then, the Government will consider public responses to the report.  The focus on accelerated development of CCS technologies and the desire for an unrestricted carbon market are important messages for the international investment community.    

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