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A Price on Carbon: Australia’s Opposition Propose Baseline Credit and Penalty Scheme

August 20, 2010

While the efforts of the Labor Government to introduce an Emissions Trading Scheme (known as the Carbon Pollution Reduction Scheme) is clearly understood, much less is understood about the now documented intention of the Coalition to establish a price on carbon should they be elected to Government this weekend.

As it currently stands however, the policy will be bureacratic, provide continued uncertainty to participants as well as the broader market, and not be in line with international expectations (even disregarding the unambitious absolute national emissions reduction target).  It will also not assure an outcome:  while fund size ($) is specified, there is no stipulation of a carbon price – and therefore how much emissions abatement can be achieved through the policy.

The policy paper states that: 

Australia needs a scheme that will provide the incentive for firms to reduce their carbon emissions and, at the same time, minimise the costs to industry and the Australian economy.

The Coalition proposes a form of ‘baseline and credit’ emissions abatement scheme through an annual $1.2bn government tender, which would start in mid-2011.

A national price for carbon is set through investment directly into carbon abatement, while also introducing financial penalties for underperformance of baselines. 

It seems like a relatively simple concept but it is more likely to be a pigs ear in practice, given the quantum of cash involved to be distributed by Government, the required very high level of understanding of individual companies and production processes involved (ref: problems with ascertaining CPRS carve-outs for Emissions Intensive Trade-Exposed Industries (EITEs)), qualitative decisions relating to co-benefits, qualitative decisions relating to business-as-usual, and the competitive nature (and likely very slow turn-around time) of a Government tender structure.

Here are some take-outs.  However, with the election this weekend, and the outcome uncertain, we have not spent too much time going into detail.

– Not result in Price Increases to consumers.

Absence of a forward curve for carbon and continued uncertainty in both short- and long-term is just what infrastructure developers can’t contend with, and will continue to stall investment.  As a consequence, electricity prices will increase. This is now clearly reported in the media, and is extensively documented/explained in relation to the Coalition, and the Coalition carbon fund does not solve this problem.

While it is not corporate cash being spent on emissions abatement, the fund implies a cost to consumers – by way of general taxation.  Government expenditure is not free: it has to come from somewhere.  The consumer is paying for the emissions not through increased product prices, but through their tax bills.

– Less complexity, less bureacracy is promised. 

However, an ‘expert panel’ would need to be established, as well as significant transaction costs (read: bureaucracy) to determine ‘business as usual’ and individual company baselines. 

Whereas under a conventional emissions trading scheme absolute emissions are ‘easy’ to determine from NGERs accounts, the Coalition policy implies an additional level of analysis to determine a qualitative characteristic of ‘business as usual’ so that a baseline can be established – for each and every company

In addition to beating a baseline based on historical average (of what? absolute emissions? emissions relative to output? emissions relative to inputs?) it is clear under point 5 (below) that any proposed reduction must not take place under business as usual to be eligible for credit.  This is known as testing for ‘additionality’ – an additional, often arbitrary and very complex (and much-critiqued) element of baseline-and-credit schemes the world over (including the Clean Development Mechanism of the Kyoto Protocol).

Complex and bureacratic? or just bureaucratic? or just complex? Your pick….

Baseline uncertainty means uncertainty for companies as to whether they mean realistically achieve investment from the fund as out-performance is not clear and, on the flip-side, whether they might be penalised for under-performance.

– 100% of investment into Australian abatement.

A similar outcome can be achieved through a conventional ETS, through restricting imports of international carbon credits.  Three outcomes are likely however: 

1) No liquidity: no inter-company, or international trading and one buyer in the market means no liquidity and a ‘black box’ uncertain approach to achieving a given market price in order to guide investment options;

2) Australia under a Coalition Government would face a higher cost of compliance to meet a target.  Through restrictions on scope (co-benefits required, no international trading) cheapest abatement options may not be accessible

3) Through negating options to include international carbon within Australia, a Coalition Australian Government would not be contributing adequately to international mechanisms for burden-sharing enshrined in the UNFCCC and Kyoto to which Australia is a ratified entity with both real (reduced non-OECD abatement) and negative soft (reduced international good-will) implications.

The Coalition proposes to establish a carbon fund.  The detail of this fund follows below (sourced from the Liberal party website).

 

An Emissions Reduction Fund

A Coalition Government will establish an Emissions Reduction Fund to directly support CO2 emissions reduction activities by business and industry.

Through the Fund, the Coalition will call for tenders for projects that will:

1. reduce CO2 emissions;

2. deliver additional practical environmental benefits;

3. not result in price increases to consumers;

4. protect Australian jobs; and

5. not otherwise proceed without Fund assistance.

In order to achieve a five per cent reduction in CO2 emissions by 2020, the Fund will support direct action to hold our national CO2 emissions to a target of approximately 525 million tonnes of CO2 equivalent per annum by 2020. This will match Labor’s five per cent emissions reductions target.

By directly supporting action to reduce emissions to this target level, the Fund will ensure that every dollar of expenditure goes towards actually reducing CO2 emissions rather than a complex churn of money and new bureaucratic activity.

Size of Fund

The Fund will commence operation in 2011-12 with an initial allocation of $300 million, increasing to $500 million in 2012-13, $750 million in 2013-14 and $1 billion by 2014-15.

It is envisaged that the Fund will invest an annual average of around $1.2 billion in direct CO2 emissions reduction activities through to 2020.

This is a significant investment in direct action that will deliver the CO2 emissions reductions needed to achieve our commitment of a five per cent reduction by 2020.

Operation of Fund

The Emissions Reduction Fund will use the existing National Greenhouse and Energy Reporting Scheme (NGERS) to determine proposed emissions reductions beyond overall base levels already determined for individual firms.

Businesses that reduce their emissions below their individual baseline (‘historic average’) will be able to offer this CO2 abatement for sale to the government. This will provide businesses with a direct financial incentive to take direct action to reduce their CO2 emissions below their baseline levels.

Small businesses and other entities not covered by NGERS will be able to participate on an ‘opt-in’ basis.

Unlike Labor’s emissions trading scheme, businesses will not be penalised for continuing to operate at ‘business as usual’ levels.

Businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty. The value of penalties will be on a sliding scale at levels commensurate with the size of the business and the extent to which they exceed their ‘business as usual’ levels.

The value of the penalties will be set in consultation with industry.

Provision will be made to ensure penalties will not apply to new entrants or business expansion at ‘best practice.’

Given the trend toward lower emissions-intensive activity, and the economic growth projections that have been built into ‘business as usual’ emissions estimates, this is only expected to apply in exceptional circumstances. The Coalition will engage in community consultation regarding the design of the Fund.

Less Complexity, Less Bureaucracy

Because it is based on NGERS, the Emissions Reduction Fund will be far simpler to implement than Labor’s great big new tax on everything.

And as it will not be imposing liabilities but instead providing incentives, it will not require a lengthy and complex development process.

The Coalition would therefore propose to have such a scheme in place by 1 July 2011 and it will proceed until at least 2020, subject to review in 2015.

Direct Action in Australia, not Overseas

Labor’s emissions trading scheme relies on extensive purchase of overseas CO2 emissions abatement to meet the 5 per cent emissions reduction target. This delivers no local environmental benefit in Australia.

In contrast, the Coalition’s approach ensures that all abatement activity supported by the Emissions Reduction Fund to achieve the 5 per cent emissions reduction target will occur in Australia – delivering environmental benefits here rather than overseas.

Facilitating Short and Long Term Direct Action

We recognise that many industries face substantial capital expenditure costs in reducing their CO2 emissions.

Our Emissions Reduction Fund will provide the capacity for short and long term industry action, allowing firms to better manage their transition to lower CO2 emissions.

By providing incentives, rather than imposing massive balance sheet liabilities, the capital will be available for businesses to conduct emissions reduction activities without the need for a massive injection of compensation raised through a great big new tax on everything.

A Flexible Approach to Changing Global Developments

Unlike Labor’s emissions trading scheme, the Emissions Reduction Fund will give Australia maximum possible flexibility to adapt to changes in global developments.

Fund arrangements can be changed to meet the obligations of any global agreements to which Australia may become a signatory, or amended to reflect the approaches taken by our major trading partners and big global emitters. The Coalition remains committed to its previously announced target range.

Implementation

A Coalition Government will establish an expert body to assess tenders and make recommendations on activities to be supported by the Emissions Reduction Fund.

 To ensure the Fund supports a broad range of direct action initiatives, measures considered for support by the Fund will be assessed against similar proposals from similar sectors. Assessment of projects will also take into account any additional significant public policy benefits.

 Further detail on the development and operation of the Fund will be determined following an extensive consultation process involving industry, environmental groups and the wider community.

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