Emissions Trading In Australia
With National's decision to withdraw support of the current Climate Change (Emissions Trading and Renewable Preference) Bill, the spotlight has turned to Australia's plans for a trading regime and the desirability of ensuring consistency of whatever emerges there with the local scheme.
Australia's ratification of the Kyoto Protocol may have been fashionably late, but it has nonetheless been active in developing its thinking about climate change mitigation strategies. Most notable in its consideration has been the Garnaut Climate Change Review. Commissioned last year by the Commonwealth, State and territorial governments, Professor Garnaut and secretariat examined the impacts, challenges and opportunities of climate change for Australia. Before this, a National Emissions Trading Taskforce carried out comprehensive ETS design work and consultation. The Federal Government also had its own Task Group on Emissions Trading.
In February (before new Prime Minister Rudd's ratification of the Kyoto Protocol) Professor Garnaut released an interim report, advocating that Australia promote strong global action on climate change and be prepared to match the commitments of other developed nations. He also recommended that Australia adopt 2020 and 2050 targets for emissions reductions. Initial perspectives on the design of an emissions trading scheme to come into effect in 2010 were also outlined.
In an Australian Financial Review article entitled "Measuring the Immeasurable" (26 May 2008), Professor Garnaut commented that his Review traverses the most difficult policy territory that he has encountered in a lifetime of work on domestic and international public policy. Most challenging has been the assessment of the economic implications arising in any climate change mitigation plans. Garnaut observed that climate change policy should not be based on a comparison of mitigation costs with the costs of climate change, but rather with the costs of climate change that can be avoided by mitigation. In his draft and final report, it is expected that there will be great deal of financial modelling factoring in the various costs of mitigation and avoided climate change. As Garnaut describes it, this is pioneering work that has not been done before (and certainly was not done in New Zealand).
In March, a discussion document with detailed proposals for an ETS design was released for consultation. Garnaut received over 4000 submissions (although 3000 of these were form letters). A more comprehensive draft report is due to be publicly released on 4 July, incorporating feedback received via submissions, and final report is due on 30 September.
Although the Review's final report and recommendations will undoubtedly inform to the eventual ETS model, the Federal Government has signalled that not all of the recommendations, some of which have been foreshadowed in February's interim report, will be adopted.
The key proposals and observations to emerge from the Review thus far are as follows:
ETS design
Similar to New Zealand, the proposition is that the Australian ETS will include all of the six greenhouse gases. The scheme will cover stationary energy, transport (including domestic aviation and marine), industrial processing, and waste. Interestingly, the agriculture and forestry sectors will only be included (possibly progressively) as emissions measurement and monitoring issues are resolved. This is in marked contrast to New Zealand's plans where forestry is the first cab off the rank this year (despite measurement issues), and agriculture will come into the scheme in 2013 regardless of whether methane issues are resolved by then.
Flexibility
The Garnaut Review proposes that the scheme allows for unlimited banking of permits and borrowing of permits. An independent Carbon Bank is proposed to be established which will be authorised to lend permits in prescribed situations.
Another flexibility mechanism proposed is the full international linking with other ETS systems, including New Zealand and the European Union.
Professor Garnaut does not favour a price cap. His view is that the other flexibility mechanisms above provide enough of a safety valve, and it would be difficult to link the Australian ETS with other international schemes which do not have a cap.
Allocation of permits
The planned currency of the Australian ETS will be permits (to emit carbon) - as opposed to emissions units such as the New Zealand Unit to be introduced in the NZ ETS. Permits are also used in the European Union.
In another marked contrast to New Zealand's plans, the Garnaut discussion paper favours the auctioning of permits over the free allocation of permits to competition-at-risk participants. In fact, the Review is opposed to the idea of allocating free permits due to the complexities of establishing the baseline emissions profile against which a business' allocation of free permits is determined, the difficulty of collecting the necessary emissions data, the susceptibility of the allocation process to political pressure, the non-transparent value of the compensation, and the need to avoid penalising early movers.
Offsets
The Review favours the use of offsets via the Clean Development Mechanism (CDM), but in a more limited sense than that of New Zealand's plans. It is proposed that the import of CDM units could be limited to those generated in the least developed countries that are unlikely to adopt emissions reduction targets in the future.
Monitoring and enforcement
The Review proposes the creation of an independent "Carbon Bank" as a new statutory authority to administer and enforce the ETS. Whether or not the Federal Government will be inclined to adopt such an independent model is moot, and is a likely point of lobbying by potential ETS participants in the future.
No thermal generation ban
Australia's energy profile is of course quite different to New Zealand's. The Federal Government has stated that it may look at introducing a renewable energy target of 20 percent by 2020 (compared to New Zealand Government's plans to achieve 90 percent, from the current 70, percent, by 2025). The Review has commented on the New Zealand proposal, stating that renewable schemes (such as wind and hydro generation) encourage the use of more expensive technologies that may displace lower cost non-renewable (and relatively low emissions) technologies, and may negatively affect the carbon price.
Other climate change measures
In parallel with the Garnaut Review, a new National Greenhouse and Energy Reporting System (NGERS) has been developed and introduced via the National Greenhouse and Energy Reporting Act 2007 (Cth). Under this new framework, greenhouse gas emitters are required to monitor and report on their emissions (as well as energy consumption and production), starting later this year. This reporting framework will be an important component of the new ETS.
Still more work to do…
The Australian Productivity Commission, which is the Government's independent research and advisory body on a range of economic, social and environmental issues, recently released its submission to the Garnaut Review titled "What Role for Policies to Supplement an Emissions Trading Scheme?".
The Productivity Commission was asked to look at the supplementary measures that may be required in conjunction with the new ETS. Specifically, the Commission looked at whether policy measures to reduce emissions that were devised in the absence of a market price for carbon would still serve a useful purpose. The Commission found that the current Mandatory Renewable Energy Target (which is currently marked for significant expansion and is a significant climate change policy instrument) would not work well with the ETS plans and, in fact, would most likely lead to higher electricity prices and may provide a signal that lobbying for government support for certain technologies over others could be successful. For other policy measures, however, the Commission found that these could have a positive role to play so long as they are well designed.
Another point that the Commission reviewed was the possible scope and coverage of policy action, either within the ETS or by other means. In relation to the agriculture and forestry sectors, it found that while it appears feasible to include forestry and some elements of agriculture in the ETS, it is unclear whether this is the best option. The possibility for forestry offset schemes is also considered as a possibility. Australia's forestry statistics are quite different to New Zealand's climate change profile, with deforestation declining by 76 percent since 1990 (compared to New Zealand's rapidly increasing figures in recent years).
So what does this all mean for New Zealand?
The fact that Australia is planning to introduce a similar ETS is, on balance, a positive for New Zealand. However, as noted, there are likely to be some key differences in the respective schemes if the Garnaut Review's proposals are adopted and New Zealand stays on its present course.
Given the vastly different emissions profile of our two countries, and the different considerations for the various business sectors and economies, these differences may make it difficult in practice for the two ETS regimes to be integrated. The extent of the possible problem will not be clear until the final Garnaut report is released and the Australian Federal Government announces which of the recommendations it will adopt.
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