Prime Minister Kevin Rudd has flip-flopped on one of the key promises of his 2007 election today, announcing that the government’s carbon pollution reduction scheme (”CPRS”) will be delayed until the expiry of the Kyoto Protocol at the end of 2012.  The CPRS was due to start mid-next year, and the delay represents a significant and controversial retreat from what Prime Minister Rudd had once called “the great moral and economic challenge of our time” even previously threatening to dissolve parliament and call an election to resolve the issue.  He yesterday blamed the decision on the opposition’s failure to support the measure and the slow progress of climate change developments at the global level.

The Senate (where the ruling Labor party does not have a majority) has already rejected the proposed CPRS twice last year - in August and December, just prior to the UN climate change meeting in Copenhagen.  The announcement follows a report released last week by Melbourne think tank the Grattan Institute “Restructuring the Australian Economy to Emit Less Carbon,” which concluded that $22 billion in “free” permits, to be given to the dirtiest polluters under the proposed legislation over the next decade, are a waste of taxpayers money.

The opposition Liberal-led coalition supports the emissions reduction target and renewable energy targets, but opposes any emissions trading scheme or a carbon tax.  It instead proposes a suite of measures such as carbon sequestration and forestry.  The Greens, who also opposed the scheme, support a carbon levy to price carbon.

While Prime Minister Rudd today stressed that the federal government’s commitment to climate change reduction remains unchanged, it clearly has been removed from the agenda at least for the near-term.  Similarly, the future of cap and trade in the U.S. seems doubtful: this week Senator Lindsey Graham (R-SC) withdrew his support for the major Senate climate bill he has been working on for months with Senators John Kerry (D-MA) and Joseph I. Lieberman (I-CT), which they were scheduled to announce on Monday morning. 

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The Australian Government announced yesterday a AUD$4.5 billion Clean Energy Initiative as part of its commitment to ensure 20% of Australia’s electricity comes from renewable sources by 2020.  (All dollars figures referenced in this post are Australian Dollars.)  Under the plan (which includes $1 billion in existing funds), the Government is proposing to spend:

1. $465 million to establish Renewables Australia to support leading-edge technology research and capacity building;
2. $2.4 billion in low emissions coal technologies, including new funding of $2 billion in industrial-scale Carbon Capture and Storage (CCS) projects under the CCS Flagships program.  This program will support the demonstration of industrial-scale projects in Australia, potentially including a carbon dioxide storage hub;
3. $1.6 million in solar technologies, including $1.365 billion in a Solar Flagships Program to help position Australia as a world leader in this technology.  This program will aim to create an additional 1,000 MW of solar generation capacity, which is triple the size of the largest project of its kind currently operating anywhere in the world; and
4. $14.9 million over three years, added to the Government’s Clean Energy Trade and Investment Strategy, to attract productive investment into Australia’s clean energy sector and assist Australian clean energy companies to access international markets through export and investment.

The Government’s announcement follows upon the “Carbon Capture and Storage Initiatives in Australia” event at the Australian Embassy in Washington, DC.  Speakers James McGregor, Energy Systems Manager, CSIRO; Mark Taylor, Senior Associate, New Energy Finance and a representative from the newly-created Global Carbon Capture and Storage Institute (GCCSI), an Australian organization developed to accelerate the deployment of CCS technology globally, discussed CCS projects both in Australia and worldwide.

The Australian experience with CCS research and development is particularly pertinent to the United States because both countries depend heavily on coal-fired generation of electricity. Eighty percent of Australia’s energy comes from coal-fired power stations, accounting for one-third of Australia’s GHG emissions.  While there are 238 CCS projects, excluding lab-scale initiatives, at various stages in twenty-seven countries, both Australia and the United States are likely to require successful CCS technologies to attain the GHG emissions reduction targets contemplated.

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As part of its commitment to implement its Carbon Pollution Reduction Scheme (CPRS) by next July, the Australian Government yesterday released its eagerly awaited draft emissions trading legislation in a package of six bills.  The exposure draft remains largely unchanged from the details provided in the Government’s controversial White Paper released last December.  Importantly, much of the detail is yet to be covered in regulations. 

At the heart of the scheme is the Government’s commitment to reduce greenhouse gas emissions by at least 5% from 2000 levels by 2020, with the potential for a 15% cut if a global agreement is reached.  Problematically, however, the center-left Labor Government does not have a majority in the Senate and faces increasing resistance to the scheme from both the Greens and the conservative opposition, the Liberal Party.  The Opposition wants delays and more compensation for big business given the current economic environment; while the Greens want deeper cuts of around 25% by 2020.  The Opposition and the Greens have collaborated to establish a two-month Senate inquiry, saying they will not support the scheme without significant changes.  The position advanced by the Opposition is seemingly supported by Lawrence Summers, head of President Obama’s National Economic Council, who has been reported as suggesting that a recession is no time to introduce emissions trading by arguing that “expenditures for climate change will be far easier to make in economies where per-capita income is growing.”

Key Features of the Scheme

• The Carbon Pollution Reduction Scheme Bill 2008 (the Bill) will establish a national cap and trade scheme under which the quantity of GHG’s for which liable entities are responsible will be monitored, reported and audited and at the end of each year, each liable entity must surrender an Australian Emissions Unit (AEU) for every ton of GHG’s that they are responsible for in that year.
• The penalty for failure to surrender sufficient AEU’s will be specified in regulations, but may not exceed 110% of the benchmark average auction price, with penalties for late payment and a make good provision.
• The scheme cap will be set by regulation and thus may be adjusted by the government.
• Entities subject to the cap include operators of facilities with annual direct GHG emissions greater than 25Kt of CO2-e.
• AEU’s may be issued: at auction; by free allocation to eligible emissions intensive, trade-exposed entities and coal-fired electricity generators; for a fixed charge of $40 for the first five years, which will rise in real terms by 5% a year (the so called “safety valve”); or for abatement in non-covered sectors such as reforestation or destruction of synthetic GHG’s.
• The Bill allows for the import of an unlimited number of CER’s (but not other types of Kyoto units) and provides for the possibility of linkages with other systems or countries.
• Importantly, the Bill classifies AEUs as personal property that are fully transferable and does not prevent the creation of equitable interests or taking of security over AEUs. Understanding and classifying the specific rights attaching to emissions allowances is becoming of increasing significance as the world grapples to streamline the interlocking and expanding web of global carbon schemes.
• A National Registry of Emissions Units will be established to record and track the creation, transfer and surrender or cancellation of AEU’s and Kyoto units.
• Executive officers of corporations will be subject to civil penalties if they are aware that the corporation will contravene the law, are in a position to influence the corporation’s conduct, and fail to take reasonable steps to prevent it.
• Of particular importance to the energy, resources and infrastructure sectors is the absence of any discussion on contractual cost pass through. The Government has left this issue to determination by the private sector in respect of existing contracts or contracts straddling the commencement of the scheme which is a major legal and commercial issue for companies where the price review or change-in-law clauses are not explicit.

The Government plans to enact the legislation by June this year, to allow one year for implementation, and is seeking written submissions to the Bill, due April 14, 2009.  The CPRS promises to be the most broad ranging scheme worldwide to date, covering approximately 75% of total national GHG’s and involving 1,000 firms and auctioning the bulk of its permits.  In contrast, the EU ETS covers 40% of industrial emissions and has, at least in the past, given out most of its allowances for free.  Whether the Government is able to stick to its original timetable and implement the scheme will depend largely on the cooperation of the Opposition and the Greens which to date has not been forthcoming.

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 As part of its commitment to implement its Carbon Pollution Reduction Scheme (CPRS) by 2010, the Australian government yesterday released its eagerly awaited White Paper on the national emissions trading scheme.  The key platform of the paper is the government’s commitment to reduce greenhouse gas emissions by at least 5% from 2000 levels by 2020, with the potential for a 15% cut if a global agreement is reached.  The government also restated its commitment to a long-term cut of 60% from 2000 levels by 2050, with the ultimate goal of stabilizing greenhouse gas concentrations at 450 parts per million.

Coverage and liability

The CPRS is the broadest emissions trading scheme outside of the EU ETS and is scheduled to start on July 1, 2010.  It comprises an extremely broad-based cap-and-trade scheme, which will cover at least three-quarters of Australia’s emissions, including stationary energy, transport, fugitive emissions, industrial processes, waste and forestry and all six Kyoto Protocol gases.  Excluded from the scheme are agriculture (until at least 2015), deforestation (with future possibilities for inclusion) and biofuels and biomass combustion for energy.  In general terms, liability is placed on large emitters (those who annually emit 25,000tCo2-e or more) for their own direct emissions, and obligations on upstream fuel suppliers for emissions resulting from the combustion of fuel. 

Auctioning

At least a quarter of the allowances will be given away to compensate vulnerable industries, with the remainder to be auctioned.  Banking will be unlimited while borrowing will be limited to 5%.  The allowances will be treated as personal property and assignable, and will also be classified as financial products with Australian Securities Investment Commission oversight.

International linking

The government has indicated it expects an initial permit price of A$25 per tonne.  However, to protect against price hikes, it has introduced a price cap (initially A$40 per tonne, then indexed annually at 5%) and unlike the EU ETS, there will be no make-good provision.  There will also be transitional cuts to fuel excise to lessen the burden on consumers.  The existence of a price cap could have important implications for linking with other schemes.  Possibly to counter this and avoid overseas players shoring up Australian allowances, there will be a transitional ban on the export of Australian permits.  However, the CPRS allows unlimited linking of Kyoto credits but will not allow Joint Implementation projects to be hosted in Australia’s covered sectors.

Compensation

The emissions intensive trade exposed industries (e.g. steel, cement, primary aluminum, pulp and paper, chemical and refinery industries, including LNG) will be protected under the scheme, based on the level of emissions intensity.  Lesser assistance will be provided to coal-fired power stations.

Renewable technologies

The government reiterated the importance of CCS.  Like the EU ETS, the CPRS will treat CCS as “net emissions” (i.e. the emissions will not form part of the originating entity’s emissions), and the CCS facility will be responsible for any leakage.  The government also reaffirmed its commitment to its existing suite of renewable technologies such as the Renewable Energy Target of 20% by 2020.

The government plans to publish draft legislation in February 2009, with an aim to pass the legislation later in 2009.  It also plans to establish an interim carbon regulator in early 2009, and a national permit registry early the following year.  How the scheme framework will grow and adapt as it moves through Parliament will provide important lessons for the US, given the similarities between the US and Australian economies, as it grapples with the concept of introducing its own emissions trading scheme.  In addition, and despite the price cap, the emergence of Australia as a likely net importer of credits creates important opportunities for international trade. 

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While the United States grapples with its design of a regulatory framework for carbon capture and storage (CCS) under its existing Safe Drinking Water Act authority, Australia has forged ahead to develop national legislation to support aggressive CCS development.  Australia, a heavily-coal dependent nation, last week passed the Offshore Petroleum Amendment (Greenhouse Gas Storage) Act 2008 (Act) which establishes a national regime for the capture and burial of carbon emissions under Australian sea beds.  The Act will commence on a day to be proclaimed by the Governor-General, which is a legal pre-requisite in the Australian law-making process.  This presents a unique opportunity for the US to garner important lessons as Australia experiences the inevitable teething problems in implementing its regime.

As the CCS provisions constitute an amendment to Australia’s key oil and gas legislation, the Offshore Petroleum Act 2006, there are three key features of that regime which must be understood.  Firstly, the Crown (i.e. the Federal Government) owns virtually all land containing minerals and petroleum and grants rights to miners to explore for and produce the resource (this contrasts with the ownership regime in the US, where most mineral land is privately held).  Secondly, the oil and gas regulation reflects Australia’s federal system.  The Offshore Petroleum Act at the Commonwealth level applies beyond State coastal waters (which are nominally within 3 nautical miles of the coast).  Although this is Commonwealth legislation, it is administered by joint authority of the Commonwealth and State.  Mirror legislation in each State applies to State coastal waters, with the aim that the same rules apply, regardless of jurisdiction.  Separate State petroleum legislation applies in each state to the onshore area and islands.  Finally, it is worth mentioning that health, safety and environmental issues relating to the oil and gas industry are dealt with under regulations made under the Act, and therefore CCS operators will also inherit that existing system.

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 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.

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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.

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The Australian Securities Exchange (ASX), Australia’s primary stock exchange which was formed when the Australian Stock Exchange and Sydney Futures Exchange merged in late 2006, has today announced a plan to start trading carbon futures in the third quarter of 2009. The futures contracts for renewable energy credits, natural gas, and coal would complement the ASX’s existing electricity futures market.It is expected that futures contracts for renewables will be offered by the end of the year, while contracts for gas in Victoria, electricity in New Zealand, and power station coal exports from Newcastle in New South Wales will commence in March or April 2009.

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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.

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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:

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