EXECUTIVE SUMMARY

As a party to the Kyoto Protocol Australia is obliged to limit greenhouse gas emissions to no more than 108 per cent of 1990 levels during the Kyoto commitment period (2008 to 2012). Australia is currently on-track to meet this target. Post-2012 targets for developed countries are being negotiated internationally, and negotiations are scheduled to conclude at a meeting in Copenhagen in December 2009. These negotiations will have a strong impact on any domestic policies to reduce greenhouse gas emissions.

The Commonwealth Government has adopted a long-term greenhouse gas emission reduction target of 60 per cent below 2000 levels by 2050, and is considering the scale and timing of the emission reductions Australia should pursue towards this goal. The Government has stated that it will introduce a carbon emission trading scheme in 2010 as the primary mechanism to achieve its emission reduction targets. This is to be known as the Carbon Pollution Reduction Scheme, proposals for which were outlined in a Green Paper in July 2008. A White Paper is due to be published by the end of 2008.

A ‘cap and trade’ greenhouse gas emissions trading scheme has the following elements:

greenhouse gas emissions are capped at some level in each period;
permits to emit greenhouse gases are issued for each period;
there is a penalty for non-compliance which underpins a value for emissions;
participants can trade emission permits among themselves.

It is proposed that the Scheme would include the six gases covered by the Kyoto Protocol, from facilities which emit more than 25,000 tonnes of greenhouse gases (CO₂ equivalent). Five of the seven sectors of the Australian economy are to be included in the scheme from 2010: stationary energy; transport; fugitive emissions; industrial processes; and waste. Together, these represent 77 percent of Australia’s greenhouse gas emissions.

The limit on emissions, the cap, is the central feature of a cap and trade scheme. The level of the cap is critical because if it is set too high, and low permit prices result, there will be little incentive to reduce emissions. Conversely, setting the cap too low could impose excessive costs on industry. At the time of writing no firm decisions had been taken as to the scheme caps, and the Government has announced that it will confirm a medium-term target for Australian emission reductions up to 2020 in the White Paper.

The Government proposes that an emissions permit would be called an Australian Emissions Unit. One permit would correspond to one tonne of CO2-e of greenhouse gas emissions. A permit would be personal property and would confer rights on its owner, the main right being to surrender it to meet scheme obligations or to transfer it. Permits could not be cancelled by Government without compensation.

The Government has two choices for the allocation of permits: it could allocate them for free; or it could auction them. The choice of allocation has a strong influence on the impact of the scheme. The Government has proposed that a maximum of 80% of permits could be auctioned at the beginning of the scheme. Over time, the Government intends to move towards 100% auctioning of permits.
The Government intends to implement emissions trading through Commonwealth legislation. States and Territory Governments will be involved through ongoing consultation in the Council of Australian Governments.

The Government is designing the Carbon Pollution Reduction Scheme so that it can be linked to other international schemes. Linking involves importing units from other schemes and / or exporting units from Australia. Linking has strong implications not only on the operation of the scheme, but also on the domestic price of carbon and the overall cost of the scheme. The Government’s preferred position is for relaxing restrictions on linking with credible schemes and mechanisms as the Australian scheme matures.

The introduction of an emissions trading scheme would impose a cost on Australian businesses that businesses in other countries without emissions trading will not have to bear. The concern is that it could cause some businesses to relocate their operations elsewhere, especially those who operate in markets where commodities are traded internationally and whose production gives rise to large amounts of emissions, the Emissions Intensive Trade Exposed industries. To help these industries the Government proposes to allocate free permits to cover 90% of the emissions of certain activities.

The introduction of emissions trading will affect emissions intensive industries in Australia, whether they are trade exposed or not. If businesses cannot pass on the cost of emissions because other domestic competitors have lower emission levels then this could reduce their profitability. The Government has committed to addressing the impact of emissions trading on “strongly affected industries” – particularly coal fired power generators.

The relative prices of goods and services will change as a result of the introduction of emissions trading. Emissions intensive products are likely to become more expensive as the “carbon price” is incorporated into their pricing. As an example, a permit price of $20 would result in an increase of 16% in the retail price of electricity and 9% in the retail price of gas. The Government has made a commitment to help households adjust to the scheme, including increasing benefits and other measures through the tax system.

Worldwide, there are a variety of emission trading schemes in operation. The largest of these is the European Union Emissions Trading Scheme. An overview of these schemes is presented, followed by more detailed case studies of the European, New Zealand and Canadian schemes.

From 2000 to 2006 Australia’s emissions increased by 4%. A target proposed by the Garnaut Review would require Australia to cut its emissions by 80% by 2050 on 2000 levels. It is clear that to achieve this level of cuts will require a paradigm shift in policy. The Government’s proposals for emissions trading under a Carbon Pollution Reduction Scheme are intended to create that new paradigm.