Green Paper vs Garnaut - A comparison Brendan Bateman
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Green Paper vs Garnaut - A comparison Brendan Bateman
Green Paper Garnaut Model
Coverage All six greenhouse gases under the Kyoto Protocol will be subject to the Scheme. All six greenhouse gases under the Kyoto Protocol to be covered.
Sectors covered by the Scheme will be: stationary energy; transport (including liquid Initially cover emissions from all sectors of the Australian economy, other than forestry,
fuels); fugitive emissions; industrial processes; and waste. waste and agriculture.
The forestry sector will also be included from Scheme commencement but on a voluntary Petrol (liquid fuels) and transport to be covered.
opt-in basis and only those activities that are recognised in Australia’s Kyoto Protocol
Waste and forestry should be included on the earliest possible timetable. Full inclusion
accounts will be eligible for inclusion. This is intended to minimise impediments to
of agriculture and forestry will require measurement and monitoring systems for
linkages to schemes such as the EU-ETS.
greenhouse gases to be developed.
Agriculture will be excluded initially with a final decision to be made in 2013 depending
A sector should be included unless the costs of measurement and verification
on the progress made in overcoming the practical difficulties of emissions estimation and
are prohibitive.
reporting from agricultural activities. A Provisional inclusion date is set at 2015.
Deforestation will not be included given the limited opportunities for significant further
deforestation to occur in Australia. Other initiatives will be pursued to achieve abatement
in non-covered sectors such as through mandatory emissions standards.
Carbon transferred to carbon capture and storage facilities will be netted out of the
originating entity’s gross emissions
Proposes to cover all sources and sectors specified via a combination of direct
obligations on facilities with large emissions, and obligations on upstream fuel suppliers.
In respect of direct emissions, generally a threshold of 25,000 tonnes of CO2-e will apply.
Different thresholds may be required for the waste sector and for synthetic greenhouse
gas emissions.
Overall, it is expected that the Scheme will cover 75% of Australia’s emissions and
impose obligations on approximately 1,000 entities.
www.claytonutz.comGreen Paper Garnaut Model
Structure Scheme will be based on “cap and trade” with cap to be determined. Permits will be
issued equivalent to the cap (subject to netting out emissions from non-covered sectors).
The AETS should be a cap and trade scheme, under which the aggregate emissions from
the covered sectors are capped. Permits for emissions will be issued by the Government
up to the quantity of the cap. Liable parties will be required to surrender permits to the
Liable entities will be required to acquit permits equivalent to emissions calculated on a
Government equivalent to the quantity of emissions attributable to their operation.
financial year basis. Acquittal is to take place within six weeks of lodgement of emissions
data report in accordance with the National Greenhouse and Energy Reporting System
(NGERS). Those reports must be lodged no later than 31 October in any reporting year.
Permits (Australian Emission Units) will be personal property and fully transferable.
They will have no expiry date thereby permitting unlimited “banking” of permits. A permit
will be a financial product for the purposes of the Corporations Act 2001.
Regulator Independent Scheme regulator established as an incorporated body subject to the
Financial Management and Accountability Act 1997. Regulator to have a commission
An Independent Carbon Bank operating on a similar basis to the Reserve Bank.
structure with a number of statutory office holders appointed by Minister. This structure
will be similar to the ACCC rather than the Reserve Bank.
Commencement 2010. As soon as possible. A decision to delay would be a decision against the need
for the scheme.
The Scheme is estimated to place obligations on around 1,000 liable firms covering the
bulk of national emissions. This represents less than 1% of all registered businesses in
Australia. With most liable parties already participating under NGERS, 2010 is considered
to be administratively feasible.
Liability points In general, entities with operational control over covered facilities or activities will be
liable for the emission obligations of those facilities/activities. Concepts of “operational
In most sectors, the point of liability will be directly imposed on the operator of
the emitting facility. In the liquid fuels and gases sectors, liability in respect of the
control” and “controlling corporations” under the NGERS will be adopted. combustion of the fuel or gas will be imposed at an upstream point.
Obligation for transport emissions will be applied at upstream fuel suppliers subject to
certain exclusions (eg. international transport).
Large emitters (125,000 tonnes of CO2-e or more) will be required to have their annual
emissions reports assured by an independent third party prior to submission.
In respect of agriculture, the point of liability is most likely to be “off-farm” at some other
point in the supply chain such as fertiliser suppliers.
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Allocation Progressively move to 100% auctioning subject to provision of transitional assistance for
trade exposed emission intensive industries and “strongly affected” industries (primarily,
100% auctioning. No free allocation of permits.
Auctioning could be periodic (weekly, monthly or quarterly). The report does not
coal-fired electricity generators).
recommend a period, but notes that liquidity is likely to be provided by secondary and
Initial cap on free permits allocated to TEEIIs set at 30%, or 20% if agriculture is derivative markets developing quickly.
excluded. Amount allocated to strongly affected industries, if any, to be determined.
It is recommended by the report that permits be made available to the market as soon as
Auctions to be held quarterly in each financial year with at least one auction held at possible after the full details of the scheme are announced, to support a forward market
the end of the financial year prior to surrender date in respect of permits dated for the and price discovery.
relevant financial year.
First auction to occur as early as possible in 2010 prior to Scheme commencement.
Four years of permit vintages will be auctioned adopting an ascending clock
method for current vintage auctions and simultaneously ascending clock auctions for
multiple vintages.
Compensation All money raised through the Scheme will be used to help households and businesses
adjust to the Scheme and invest in clean energy options.
The money raised by the Government (the Draft Report does not contemplate what this
would be, but at current EU carbon prices would be in the range of A$10 billion per
annum) should be fully redistributed by the Government, with about:
Households
Increases in assistance through tax and payment system for low-income households, and • 5 0% to low income households in the form of tax relief and social security
all households with other assistance to address impact on living standards. adjustments with some allocations designed to award energy efficiency,
In addition to general assistance to households, the Government has made a specific • 2 0% to research, development and commercialisation of new low emission
commitment to a “cent for cent” reduction in fuel excise to offset the initial price impact technology, and
on fuel associated with the introduction of the Scheme. The offset will be adjusted • 3 0% to trade-exposed emission-intensive industry as payments or a general
periodically with a review at the end of three years. efficiency-raising reduction on business taxation. Garnaut has indicated that almost
Trade exposed emission intensive industries all Australian industry may argue that it is trade-exposed to some degree so strict
“materiality thresholds” need to apply. If a fixed price is used for the initial phase (see
Assistance through free allocation of permits at the beginning of each compliance period
below) Garnaut argues that this may obviate the need for compensation and give
in respect of direct and indirect electricity emissions associated with the process or
enough breathing room to allow sectoral agreements to be put in place.
activity that is emissions-intensive and trade-exposed. Allocation determined by measure
of emissions per unit of revenue. No compensation is to be paid to those existing emitters that will be adversely affected
by the requirement to purchase emissions permits, notwithstanding that the plant may
All industries which do not have a physical barrier to trade will be eligible for assistance
already be permitted to operate under existing state-based environmental licences.
subject to an emissions intensity threshold of 1,500 tonnes of CO2-e per million dollars
of revenue. Assistance equivalent to 90% of emissions from subject activities available
where emission intensity is greater than 2,000 tonnes CO2-e per million dollars of
revenue, and 60% between 1,500 and 2,000 tonnes CO2-e.
Cont’d over page.
www.claytonutz.comGreen Paper Garnaut Model
Compensation A notional cap on free permits set at 30% of all permits (20% if agriculture is excluded).
If this cap is exceeded, then the parameters of assistance will be reviewed.
cont’d Assistance rate will be reduced over time.
Strongly affected industries
Coal-fired electricity generators are likely to be strongly affected by the Scheme.
To minimise risk to the investment environment, a minimum amount of “once and for all”
direct assistance to existing coal-fired electricity generators is proposed. Assets must
have been in existence at 3 June 2007 with separate pools for brown coal and black coal
generators. Amount of assistance will be determined before Scheme commencement but
is conditional on a review process to avoid windfall gains. Assistance could include the
provision of free permits although the Government has a disposition to deliver assistance
through a new mechanism called the Electricity Sector Adjustment Scheme.
Cap The level of the Scheme’s cap is yet to be determined. The cap and interim targets
will be released at the same time as the White Paper on the Scheme (expected at the
The availability of emissions permits should be confined to the proposed domestic
emissions target. The trajectory until 2012 would be based on Australia’s Kyoto cap (after
end of 2008). deducting emissions associated with uncovered sectors), but beyond that period there
may be different trajectories (or an overall budget cap for emissions).
Scheme caps will be set and announced for a minimum period of five years in advance
at any one time, extended annually to provide a minimum five year period of certainty. The conditions for movement between trajectories should be established in advance, and
Scheme caps will not be adjusted with the Government to make up any shortfall resulting the movement between trajectories occur on five years notice after the trigger
from internationally agreed targets. condition is met. There should be five years of firm caps, and then indicative caps
stretching out to 2050.
In addition to the five year Scheme caps, there will be ten year “gateways” to provide
guidance on future Scheme caps. The trajectories, or caps, are anticipated to tighten over time.
Hoarding Unlimited banking of permits will be permitted with no surrender date for permits.
Limited short term borrowing of following year permits to enable a liable entity to
“Hoarding” (also known as “banking” or “saving”, where permits are bought in one year
and used in another year) and “lending” (also known as “borrowing”, where permits are
and lending discharge up to a certain percentage of current year obligations (less than 5%). used in years ahead of their intended trajectory year), should be permitted.
Initial phase The Scheme will have a price cap for the period 2010-11 to 2014-15. The price cap is to
be set high enough above the expected permit price to ensure very low probability of use.
The Draft Report’s preference is for an unconstrained carbon price. Permits available
up to Australia’s Kyoto target at fixed prices in the first two years (2010-2012) would
Cap to be reviewed at the first review point. however be a second-best option. It is not clear what would occur if the emissions
permits required in this period exceeded the Kyoto target – would the secondary market
price rise above the fixed issue price, to some higher “cash penalty” price?
www.claytonutz.comGreen Paper Garnaut Model
Penalties Unclear what penalties will be imposed. It is contemplated that an administrative penalty
could be imposed but this effectively acts as a price cap, which is a design element of
Proposes a financial penalty as well as a “make-good” obligation which requires a
non-complying entity to acquire and surrender permits from future years. Make good
the Scheme anyway, at least for the first phase. A make good is not contemplated obligations maintain the environmental integrity of the AETS by ensuring that actual
in the Green Paper and would appear inconsistent with a price cap. With unlimited emissions do not exceed the overall scheme cap.
banking, this may create a risk that liable entities will purchase auctioned permits up to
the cap price.
Offsets Domestic offsets Offsets should be available in non-covered sectors, and fungible with emission permits.
Recognition of forestry and land-use related offsets may however present problems for
Given the breadth of the proposed sectoral coverage, there is limited scope for offsets to
be created from non-covered sectors. Even though no final decision will be made linkages with the EU scheme.
on the inclusion of agriculture until 2013, it is proposed that domestic offsets from The Draft Report recognises the “inherent flaws in the design of offsets” such as
agriculture will not be included in the Scheme prior to any decision. The Government the CERs from CDM projects. It recommends provision be made for acceptance of
will consider the scope for offsets from emissions sources that cannot be included in the international offsets, but with restrictions on the source and quantity of such offsets
Scheme in 2013. being accepted into the AETS (as a maximum fixed proportion of Australian permits).
International offsets
Liable entities will be able to meet their obligations under the Scheme using eligible
Kyoto units (CERs, ERUs and RMUs), limited to a maximum percentage of each entity’s
obligation. In relation to CERs, an exception will be made so as to exclude temporary and
long term CERs from forestry based projects.
The Government will make a decision in 2013 whether to allow the export of ERUs
generated from joint implementation projects in Australia, in the context of decisions on
domestic offsets. Australia will not host JI projects before the start of the Scheme.
Price ceilings The Scheme will have a price cap for the first five year period (2010/11-2014/15).
The price cap will be set above the estimated market price for permits. Cap to be
The Draft Report concludes that the disadvantages of price ceilings on permit prices
outweigh their benefits. With the possible exception of an initial 2010-2012 transitional
reviewed at the first review point period, prices should not be fixed or capped.
Lending will be limited to short term borrowing (within a single five year phase) in respect Lending (by the Government from future periods) and banking (by participants from earlier
of no more than 5% of the liable entity’s acquittal obligations. periods) should assist in dealing with liquidity issues.
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