CPRS progresses

 

25 November 2009


Yesterday the Australian Government presented a final proposal for the design of an Australian Carbon Pollution Reduction Scheme (CPRS) which appears likely to be passed by the Senate.1

The events which lead to this were remarkable:

  • There was a long partyroom discussion yesterday, at which it appears that many Liberal Party members did not support accepting the government’s proposal and passing the CPRS legislation. These included the Coalition’s original climate change spokesman Andrew Robb. Ultimately, Mr Turnbull asserted his leadership and declared the Coalition  would support the legislation in the Senate.
  • Today, a leadership spill challenge resulted, at which Mr Turnbull retained his leadership, making it likely that the CPRS legislation will be passed through the Senate this week.

If the CPRS is passed as proposed, it will commence in full from 1 July 2011, with forestry permits able to be earned from 1 July 2010. It will be the most significant Australian economic reform since the GST and will have significant implications for Australian business.

Below is a table which summarises:

  • the Coalition’s requested amendments
  • the final government proposals, now agreed to by the Coalition, and
  • the arising implications.

In summary:

  • The government has offered increased compensation to Emissions-Intensive Trade-Exposed (EITE) industries, but not to the level requested by the Coalition or some industry groups such as the Minerals Council of Australia. LNG will receive special treatment ensuring it will be given compensation cover for 50 per cent of its emissions. Food processing will also have access to $150 million of dedicated assistance.
  • The government has indefinitely exempted agriculture from the CPRS. This means that a large part of Australian emissions are not covered by the CPRS. But it also removes a large part of the opposition to the CPRS. Agriculture interests have been vocal opponents of the proposed CPRS.
  • The government has opened the way for significant agricultural and other offsets to be recognised.
  • There will be substantially increased financial support for the coal mining sector. 
  • There will also be increased support for the coal-fired power sector, significantly increasing the amount of free emissions units which will be given to coal-fired power stations and doubling the time over which they will receive them. The government has proposed other mechanisms targeted to address loan default and energy supply risks.
  • There will be substantially increased support for mining and manufacturing sectors affected by electricity price rises. 
  • There will be measures to recognise voluntary action and energy efficiency.

The next steps will take place in the Senate. The government wants the CPRS (as amended) passed by the Senate by the end of its 2009 sittings on Thursday 26 November 2009.

Eagerly awaited will be the release of the Bills to give effect to this apparent agreement. Keenly observed will be the conduct of the Coalition during the debate of those Bills and the degree to which the majority in the party room holds sway when the voting in the Senate occurs. Also, a number of issues will only be made clear, and may well be keenly debated further, when regulations are introduced next year.

Final CPRS design

 Issue Coalition requested amendment Final government proposal agreed to by Coalition  Implications
Emissions-Intensive, Trade-Exposed (EITE) assistance
  • Both highly and moderately EITE activities to receive assistance at:
    • 94.5% to 2014/15; &
    • 90% from 2015/16 on.
  • Reduce eligibility threshold to:
    • 850t CO2e/$m revenue; or
    • 2,550tCO2e/$m value add.
  • The 2 levels of assistance will be retained with the ‘global recession buffer’ permanently retained, as:

Assistance level Revenue threshold
(t CO2e/$m)
 Value add threshold
(t CO2e/$m)
 94.5%  2,000   6,000
 66%  1,000  3,000

  • No reduction in eligibility thresholds.
  • Annual decline rate (‘Carbon Productivity Contribution’) of 1.3%pa retained.
  • The bulk of Coalition requests not met. Overall EITE assistance increased, but not by the levels requested.
  • LNG and food processing are the primary beneficiaries due to their targeted additional support.
  • LNG will now receive a greater level of assistance than any other ‘moderately emissions-intensive’ activities. However, LNG will still only receive 50% compensation for its LNG activities and no compensation for its non-LNG or domestic production.
  • Food processing will have access to the specified funding. However, accessing the CCAF is not as certain as EITE assistance would be CCAF details remain sketchy.
  • The additional food processing assistance is not new funding, but a reallocation of  CCAF money, meaning less will be available to others.
  • The Minerals Council of Australia remains publicly critical of the levels of EITE assistance.
  • The CPRS as proposed will impose a significant additional cost burden on Australian industry. Astute businesses will need to consider their full efficiency, mitigation and cost-pass through options.
  • Expand the ‘activity’ definitions to include sequential or parallel processes.
  • Not broadly accepted.
  • All LNG projects only will receive an effective assistance rate at or above 50% of the entire LNG production process, including extraction and transportation emissions (thereby expanding its activity definition). 
  • Include primary food processing as an EITE.
  • Food processing instead given access to a 5 year $150 million stream of assistance under the Climate Change Action Fund (CCAF), but not EITE assistance.
  • Quantify and legislate the criteria for withdrawing EITE assistance at when 80% of relevant international competitors are subject comparable emissions constraints.
  • Clarification given around statutory reviews for EITE withdrawal, but no commitment to a quantitative requirement.
Agriculture
  • Explicitly exclude agricultural emissions.
  • A range of agricultural carbon offsets equivalent to those available under international agreements or in comparable jurisdictions such as the US and EU.
  • Agricultural emissions excluded from the CPRS, as previously announced.
  • An increased willingness for the inclusion of agricultural offsets and an outlined process for their recognition, subject to international acceptability.
  • The government will continue to advocate recognition of these offsets in international accounting rules.
  • Agriculture will benefit from its exclusion and the certainty that brings. It will also benefit from:
    • potential offsets; and
    • the additional food processing industry assistance.
  • Agriculture, will however still bear CPRS related price increases which are passed through to them, including on electricity, fertiliser and fuel inputs (though CPRS fuel tax credits will apply for the CPRS’ first 3 years).
  • These outcomes must represent a close to best case scenario for agriculture. This removes a large part of the opposition to the CPRS, as agriculture interests have been vocal opponents.
  • Commitment to increased funding for biosequestration.
  • Additional R&D investment of $50 million into the development of on-farm testing of emissions reduction options.
  • Establish a $40 million Green Carbon Fund to build the resilience of natural ecosystems that are under threat from climate change
Coal mining fugitive emissions
  • Exclude coal mine fugitive emissions.
  • A mechanism to abate fugitive emissions through regulation.
  • Consequently remove the coal industry compensation proposed under the Climate Change Abatement Fund (CCAF).
  • Doubled the level of compensation for ‘gassy’ coal mines under the Climate Change Action Fund (CCAF) from $750 million to $1.5 billion, but does not fully exclude coal mine emissions from the CPRS as requested. Of this amount:
  • $1.23 billion is for the Coal Mining Transitional Assistance Fund, available to eligible mines as Australian Emissions Units (AEUs). The mine eligibility threshold is 0.1t CO2e/t saleable coal and must have operated during 1 July 2007 to 30 June 2009; &
  • $270 million is for a Coal Mining Abatement Fund competitive grant funding over 5 years for abatement activities, provided on a 3:1 private:government funding ratio.
  • The CCAF will be used rather than the EITE program, due to the large variation in emissions intensity between mines.
  • The current Council of Australian Government’s (COAG) Renewable Energy Target (RET) review process will consider whether new waste coal mine gas projects should be eligible.
  • The coal mining industry will be covered by the CPRS and increased compensation will be available, albeit that the industry has previously indicated this may not be sufficient.  
  • The CPRS as proposed should still impose a significant additional cost on the industry. The likely operation of the CCAF compensation will need to be carefully considered in domestic coal supply contacts.
Coal fired power generators/ Electricity Sector Adjustment Scheme (ESAS)
  • Extend the provision of free AEUs to coal-fired generators under the ESAS from 5 to 15 years, to increase the total AEUs provided from 130 to 390 million.
  • Ensure free AEUs are distributed to generators in proportion to the loss of value estimated due to the CPRS.
  • ESAS period extended from 5 to 10 years, not 15 as requested.
  • This increases the total available AEUs from 130 to 228.7 million only, a 75% rather than 3 fold increase.
  • Generators must comply with the ‘power system reliability test’ over this period to receive assistance, designed to ensure security of power supply.
  • Further new measures are:
    • a Low Emissions Transition Incentive – Generators can still receive ESAS assistance if they invest in new low emissions replacement generation capacity;
    • the ‘windfall gains test’ will be lessened to give generators greater certainty over their allocations; &
    • an Energy Security Assurance Mechanism, aimed at addressing any remaining low probability systemic risks to electricity market security. Assistance could be in the form of loan guarantees or indemnities, provided in very limited worst case scenarios.
  • The coal fired power industry, particularly in recent days, has been very vocal in opposition to the CPRS, noting the risk of loan defaults and supply risks.
  • The government’s proposals are targeted to avert these risks.
  • Infrastructure Partnerships Australia has today supported these amendments, see this page.
  • Allow more flexible (deferred) payment arrangements for permit purchases to address working capital challenges for power generators.
  • Deferred payment arrangements allowed for AEUs bought at government auction.
  • These will only apply to the advanced auction of future vintage AEUs between 1 January 2011 and 31 December 2013. A 10% deposit at auction is required and permits will only be received once the final payment is made.
  • Set national emissions caps and gateways 10 years in advance, rather than 5 years.
  • No comment from the government suggests this is not accepted.
Electricity prices
  • Introduce an intensity-based cap-and-trade model for power generators.
  • The Coalition’s focus was on electricity price rises for the SME sector.
  • Introduced a new Transitional Electricity Cost Assistance Program of $1.1 billion to assist medium and large manufacturing and mining businesses with CPRS-related increases in electricity prices.
  • The fund will apply for the financial years 2012-2014 (after the first fixed-price year of the CPRS in 2011-2012).
  • Assistance will be capped at:
    • 50% of the projected increase in retail electricity prices in 2012-13 due to CPRS; &
    • 25% of the projected increase in retail electricity prices in 2013-2014 (subject to available funds).
  • Recipients will need to consume electricity above a minimum threshold of 300MWh per year.
  • Assistance will not be provided to facilities eligible for EITE, Coal or ESAS assistance.
  • The government has released a second paper in respect of its proposed electricity price related changes, see this link..
  • The government has stated that it reached this decision following consultation with the energy market bodies.
  • The Government’s proposal is a new approach, which deviates from the Coalition’s:
    • requested intensity-based cap-and-trade model for generators – which has not been addressed by the Government. That proposal had not been embraced by generators; and
    • focus on SMEs – the Government’s proposal will only apply to medium and larger electricity users in the manufacturing and mining industries. We would expect the Government to say SMEs could access the Climate Change Action Fund (CCAF) or pass thorough their costs to consumers, some of whom will receive household compensation.
  • It provides a new source of compensation for manufacturing and mining companies which are not eligible for EITE or coal mining CCAF assistance.
Complementary measures: voluntary action & energy efficiency
  • Commitment to a national ‘white certificate’ style energy efficiency scheme to provide stronger incentives for households and business to invest in energy efficiency measures.
  • Commitment to a voluntary carbon market, and the principle that voluntary action must lead to a quantitative reduction in Australia’s overall emissions.
  • Voluntary action by households will now allow Australia to go beyond our 2020 emissions reduction target of a 5 to 15% reduction, or 25% reduction against 200 levels if there is a comprehensive global agreement.
  • All existing and future purchases of GreenPower will be counted, and allow Australia to go beyond our 2020 national targets.
  • A new Energy Efficiency Mechanism will also be developed in 2010, designed to complement the CPRS and RET.
  • A voluntary market for offsets will be promoted through implementation of the National Carbon Offset Standard.
  • The government’s proposal largely accedes to the Coalition’s requests. But details remain sketchy.
  • The Energy Retailers Association of Australia has endorsed the GreenPower recognition, see this document..
  • Continue the Greenhouse Friendly Program.
  • No comment from the government suggests this is not accepted.
Offsets
  • Did not request offsets outside of the agricultural context.
  • Offsets will be available not only from agriculture but also ‘other sectors not covered by the CPRS (for example, legacy waste) that are counted towards Australia’s international climate change obligations’.
  • Restrictions will apply, including that internationally accepted principles of permanence, additionality, measurability, avoidance of leakage, independent audit and registration be met.
  • Approval of projects and crediting of abatement would be available from the 1 July 2011 commencement of the CPRS. Interested persons will be able to refer methodologies for assessment.
  • Provides great commercial opportunities for offsets beyond that previously expected.
  • In particular see the Waste and Forestry discussion below.
Waste
  • Issue not addressed.
  • Extend the fuel tax credit scheme to the forestry industry (similar to the application to agriculture and fishing).
  • May have access to offsets for sectors not covered by the CPRS. The government expressly noted legacy waste emissions and closed landfill sites.
  • Depending on the final terms this opportunity may also apply to small waste facilities which fall below the CPRS thresholds (being 25kt CO2e or 10kt Co2e if within a yet to be prescribed distance of a facility over the 25kT CO2e threshold),
  • Accepted.
  • There may potentially be an offset based financial driver to support Alternative/ Advanced Waste Treatment initiatives.
  • There may be particular application for waste water and regional waste facilities.
  • Forestry may benefit from the broader crediting options mentioned and the extension of the fuel tax credit scheme (though potentially not a significant cost).
  • Forestry sequestration will now need to compete with the broader offset market, which previously was not expected.
  • Issue not addressed.
  • Specific comments are made regarding forestry:
  • credits will be provided for regrowth forests on deforested land (legally cleared between 1990 and 31 December 2008);
  • conditions will be included for earning forest credits to have adequate water entitlements and planning approvals; and
  • a requirement that offset projects do not involve, or include material obtained as a result of, clearing or harvesting of native forests.
Other issues
  • Free permits as new low emissions technology assistance for projects such as ZeroGen and HIsmelt to overcome their first-of-a-kind disadvantages.
  • No comment from the government suggests this is not accepted.
  • The government has focused on what are perhaps the more critical issues.
  • However, the government may still be open to taking action on the others to which it has made no comment.
  • Clarify the treatment of upstream feedstock.
  • No comment from the government suggests this is not accepted.
  • Impose CPRS liability on the entity with operational control of a facility.
  • Allow joint venture operators to pass CPRS liability to joint venture participants in proportion to their participating interests.
  • There will be public consultation post passage of the CPRS with a view to amendments before the start of the CPRS that enhance pass-through of carbon costs under existing contracts, in consideration of these issues.
  • Exempt hydrofluorocarbons.
  • No comment from the government suggests this is not accepted.
  • Only allow limited auctioning during 2011/2012 to help the development of secondary markets and systems to strengthen Australia’s competitiveness as a regional hub.
  • No comment from the government suggests this is not accepted.
  • Make amendments to exclude emissions from exported fossil fuels from the CPRS.
  • Accepted.
  • Amendments regarding CPRS review mechanisms.
  • Related proposals made.

Next steps

The government’s proposal now appears likely to be passed through the Senate this week.

While the government’s offer has not met all of the Liberal Party’s requirements, there is still significant pressure on the Liberal Party to pass the CPRS legislation. A rejection could provide the government with a double dissolution election trigger.

However, the extremely tight timetable remaining for the Senate to debate and vote on the CPRS legislation (by the end of Thursday) raises the probability that the Senate will not have time this sitting year to consider and vote on the CPRS legislation.2 High Court authority suggests that this outcome would not be sufficient to provide the government with a double dissolution election trigger.

For further information on the possible double dissolution scenarios see our article ‘The Senate and the CPRS’.3

Despite the double dissolution pressure, there have been public indications that potentially a significant number of members of the Parliamentary Liberal Party (especially back bench members) do not support the CPRS. A number, as well as all National Party members, have indicated that they would ‘cross the floor’ to vote against the legislation in the Senate. The Australian Greens protest that the amended CPRS is worse than useless because it will perpetuate the use of ‘dirty’ energy for many years. Senator Fielding remains opposed.

Consequently, the passage of the CPRS while looking likely, is not certain.

The Coalition’s discord and therefore likelihood of floor-crossing may be lessened now following Mr Turnbull’s survived leadership spill.

For the legislation to be passed the government needs at least seven other Senators to support it.

UN Copenhagen Conference

The United Nations’ Copenhagen Conference will be held on 7-18 December 2009.

This conference has been planned for the international community to outline exactly what steps will be taken post 2012 by developed and developing nations to avoid dangerous climate change. This may include a global emission reduction target and key strategies needed to achieve this target. However, the final effectiveness of the conference is yet to be seen.

This conference will be very important in determining any international consensus which will guide our domestic climate change focused measures which can be expected to be adapted as necessary against the international backdrop.

We will soon provide information regarding the Freehills presence at the conference.

CPRS Regulations

Even if the CPRS bills are passed by the Senate now, the government will still need to pass the necessary supporting regulations in 2010. There are indications from the National Party that it would potentially look to disallow those regulations to frustrate the implementation of the CPRS. However, to achieve this result it would need the support of the Liberal Party and at least one of the Greens or independents, which would appear unlikely.

This article was written by John Taberner, Consultant, Sydney, and Michael Voros, Senior Associate, Perth.

Endnotes

  1. Here is a list of the official changes.
  2. ABC News article, ‘Wong tightens climate vote deadline’; News.com.au article  
  3. Freehills article, ‘The Senate and the CPRS’

If you experience difficulties printing this article, please contact Michael Voros on (08) 9211 7519 or michael.voros@freehills.com.au for a PDF copy.

More information

For information regarding possible implications for your business, contact

Image of John Taberner
John Taberner
Consultant, Sydney
Direct +61 2 9225 5427
john.taberner@freehills.com
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Peter Briggs
Partner, Sydney
Direct +61 2 9225 5155
peter.briggs@freehills.com
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Tim Power
Partner, Melbourne
Direct +61 3 9288 1484
tim.power@freehills.com
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Tony van Merwyk
Partner, Perth
Direct +61 8 9211 7660
tony.vanmerwyk@freehills.com
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John Ware
Partner, Brisbane
Direct +61 7 3258 6515
john.ware@freehills.com
 
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