Those of you who have read my previous articles will know that I analyse and comment on both the Australian and international policy landscapes with respect to environmental, economic, health and social issues. As a practicing business consultant and scientist, my work allows me access to a wealth of information and experience concerning the consequences of climate change in economic settings – including first hand engagement with: responses from business communities; how environmental initiatives are being implemented; and the way they are transforming bottom lines and corporate social responsibility (CSR) profiles of companies around the world. In this light with the Australian double dissolution election approaching, scheduled for 2 July 2016, I feel it is important to take note of the emissions trading scheme (ETS) proposed by the Australian Labor Party (ALP) – so let’s look at what ETSs are, what the ALP are proposing, and what implementing an ETS will mean for Australian businesses and the competitive global economy.

According to a joint handbook produced by the International Carbon Action Partnership and the Partnership for Market Readiness, published in March 2016 by The World Bank, carbon pricing is now a key part of the move to a low carbon future. Entitled ‘Emissions Trading in Practice: A Handbook on Design and Implementation’, this publication was produced to help decision/policy makers and stakeholders design an emissions trading scheme (ETS) that is effective, credible and transparent. It draws on lessons from ETSs around the world including the European Union, several provinces and cities in China, Quebec, California, the Northeastern United States, and New Zealand.

An emissions trading scheme is a policy tool that can achieve a range of beneficial environmental, economic and social outcomes

Currently operating in 35 countries, 13 states/provinces and 7 cities (covering 40% of global GDP) an emissions trading scheme is a policy tool that can achieve a range of beneficial environmental, economic and social outcomes. Before one is designed, a Government must decide how much the ETS will contribute to its emissions reductions target, the rate at which it will decarbonise its economy, and how the costs and benefits will be distributed. Other important considerations include a target area’s current and evolving emissions profile, existing regulatory environment and size, concentration, growth, and volatility of the economy.

Under the ALP proposal there would be two ETSs – one with two phases, and a separate ETS for electricity. In the first ETS, phase 1 would run from 1 July 2018 to 30 June 2020, and phase 2 for the following decade. Phase 1 is designed to reign in Australia’s greenhouse gas (GHG) emissions and establish the framework for phase 2 to drive a long-term transition of the economy.

Under Phase 1, only facilities that emit more than 25,000 tonnes of GHG are included in the scope, and an emissions cap would be set in order to meet target emission reduction levels. This cap would be finalised by the Government and implemented by the Clean Energy Regulator (CER). A price would not be imposed during this phase, and the facilities involved would not be required to purchase or receive permits to operate. If they exceed their cap however, they would be required to purchase an equivalent number of carbon offsets and provide them to the CER. These offsets could be purchased from within Australia or internationally.

The goal of phase 2 is to reduce Australia’s GHG emissions over the decade following 1 July 2020, in line with Australia’s commitment in Paris in December last year. The design of phase 2 would be finalised during the 2016-2019 Parliament and commence after the 2019 election, with the aim to strengthen energy security, reduce electricity costs and drive the transition to clean electricity.

The separate ETS for electricity would commence in 2018. Under this scheme, energy generation would be covered by a cap on emissions to reflect the sector’s proportion of reductions required by the 2 phase ETS. Each electricity generator would be allocated an emissions threshold calculated according to a sector-wide emissions intensity baseline.

Read the ALP ETS proposal here

Reading the ALP emissions trading scheme proposal, a number of thoughts come to mind

After reading the ALP ETS proposal, a number of thoughts come to mind. In terms of phase 1, I question the absence of a price or of the requirement to purchase permits and the presence of a cap alone. This virtually places the CER in the role of defacto Environmental Regulator, and each State and Territory already has one. They are responsible for placing monitoring and reporting conditions on facilities which release emissions to the air under instruments such as Licences (the name may vary between jurisdictions). In not including a price or the requirement to purchase permits and by implementing a cap, there is a potential that the CER will be simply duplicating what already occurs in each Australian State and Territory through Licence conditions.

I also question the bases on which the Labor Government (if successful on July 2 of course) will determine the cap for each facility. Will it be estimated from the facility’s production/throughput figures, based on emissions figures declared as part of site Environmental Licence or other Regulatory conditions, or based on National Greenhouse and Energy Reporting (NGER) figures or National Pollutant Inventory (NPI) figures? Will emissions estimates continue to be allowed or will only calculations based on verifiable figures be accepted? These questions require significant consideration, as regardless of the basis chosen, if emissions reduction is the ultimate aim the calculations and the validation of those calculations will need to be rigorous. This is likely to require significant work on the part of the Labor Government, the CER and each facility. From the perspective of each facility, the work involved is likely to increase their compliance costs significantly. Decisions will then be required as to how those cost and labour increases are met and dealt with.

The eligibility of offsets for phase 1 will also be very important, particularly in the case of international offsets. As each country or region that has an ETS sets its own rules for the eligibility of offsets, the Labor Government will need to scrutinise the offset eligibility rules of existing international schemes when deciding exactly what the rules will be for ours. In terms of phase 2, it is clear that far more information is required -however this additional information is not likely to be available in the short term. With respect to the electricity ETS, I question the basis on which an emissions cap will be determined, the extent to which workload will increase in order to ensure compliance, and the increased cost of that compliance.

The ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ contends that a carbon price can direct the flow of private capital, promote actions to reduce and mitigate emissions, and inspire creativity in developing low carbon products. It further outlines ten steps for creating an ETS as follows:

1) Decide on the scope of the scheme

  • Which sectors and gases will be covered
  • Which industries and companies will be included
  • What thresholds will be set

2) Set an emissions cap

  • Create a baseline dataset to determine the cap
  • Determine the level and type of cap
  • Choose a timeline for setting the cap and provide a long term cap trajectory

3) Distribute allowances

  • Match emissions reduction allocation methods to policy objectives
  • Define eligibility
  • Methods for free allocation and balance with auctions over time

4) Consider the use of offsets

  • Decide whether or not to accept offsets from industries and companies not included in the scheme from within and/or outside the geographical area covered by the ETS
  • Choose eligible sectors, gases and activities
  • Decide limits on the use of offsets and establish a system for monitoring, reporting, verification and Governance

5) Determine temporal flexibility

  • Set rules for banking allowances
  • Define the terms for borrowing allowances and early allocation
  • Confirm the length of reporting and compliance periods

6) Address price predictability and cost containment

  • Establish the rationale for (and risks associated with) market intervention
  • Choose whether or not to intervene to address low prices, high prices or both
  • Decide the appropriate instrument for market intervention and the degree of delegation for market oversight

7) Ensure compliance and oversight

  • Identify the regulated companies and monitor their reporting systems, plus manage the performance of emissions reduction verifiers
  • Establish and oversee the ETS registry as well as the market for ETS emissions units
  • Design and implement the penalty and enforcement approach

8) Engage stakeholders, communicate, and build capacities

  • Map stakeholders and respective positions, interests and concerns; coordinated across departments for a transparent decision making process
  • Design an engagement strategy for consultation with stakeholder groups specifying format, timeline and objectives in view to creating a communication strategy that resonates with local and immediate public concerns
  • Identify and address ETS capacity building needs

9) Consider linking your ETS to another Government’s ETS to broaden access to lowest cost emissions mitigation

  • Determine linking objectives and strategy, and identify linkage partners
  • Confirm the types of link and align key program design features
  • Form and govern the links

10) Implement, evaluate and improve

  • Decide on the timing and process of ETS implementation
  • Establish the process and scope for reviews
  • Evaluate the ETS to support reviews

Read the ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ here

With each new report written and published on ETSs and the environmental, economic and social outcomes being achieved, the evidence as to why Governments should consider introducing an ETS grows stronger. Given that there is currently no carbon pricing mechanism in Australia, there is little opportunity for Australian companies to capitalise on the environmental, economic and social benefits that ETSs can deliver.

Australia’s most significant trading partner China will introduce a nationwide emissions trading scheme next year

Australia’s most significant trading partner China (2013/14 trade worth AUD$160 billion) will introduce a nationwide emissions trading scheme next year, having introduced 7 provincial level schemes back in 2012. It is not inconceivable that ETSs will be a factor in trade agreements with China at some point in the near future. As a result, owners of Australian companies that export goods and/or services to China should consider the implications of China’s nationwide ETS in the lead up to our double dissolution election.

Given the worldwide emissions reduction drive, it makes sense for Australia to adopt an ETS in order play its part in reducing emissions. From the perspective of Australian businesses, an ETS can assist them to maintain their global competitiveness. However, based on my analysis of the cap and potentially significant increase in the compliance cost burden that the proposed ALP emissions trading scheme may place on Australian businesses, I am not certain that it will deliver cost effective emissions reduction in its current form.

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