Chapter 3
Response to business concerns
3.1
The bills introduced into Parliament on 14 May 2009 include a number of
changes which were made in response to industry representations. This chapter
looks at some of these major changes, including the additional allocation of
permits to trade exposed industries via the 'global recession buffer', changes
to treatment of landfill, and changes made to reviews of assistance.
3.2
Further discussion of the impact of the Global Financial Crisis, and the
delays in the commencement of the scheme arising from it, is provided in
Chapter 5.
EITE assistance and the global recession buffer
3.3
In his second reading speech on introduction of the CPRS Bill, the
Parliamentary Secretary for Climate Change, the Hon Greg Combet MP, provided the
following explanation for providing assistance for companies in the Emissions‑Intensive
Trade-Exposed (EITE) category, and for providing additional assistance in the
form of the global recession buffer:
Free emissions permits will be issued to our emissions-intensive
trade‑exposed industries to reduce the risk of ‘carbon leakage’. Carbon
leakage occurs when industries move from Australia to elsewhere, with no
benefit in terms of global emissions reductions, upon introduction of a carbon
price in Australia. This risk occurs when Australia imposes a carbon price on
our trade-exposed industries ahead of competitor economies. Transitional
industry assistance is designed to reduce this risk. Regulations will provide
the detail of eligible industries and rates of assistance, but the key
parameters have been elaborated in significant detail in the white paper and
the Prime Minister’s announcement of 4 May 2009.
As announced on 4 May 2009, a global recession buffer will be
provided for emissions-intensive trade-exposed industries for the first five
years of the scheme, in addition to previously announced rates of assistance.
This buffer will provide an additional five per cent free
permits for EITE activities eligible for 90 per cent assistance, giving an
effective rate of assistance of almost 95 per cent to these highly
emissions-intensive trade‑exposed activities in the first year of the
scheme.
The buffer will provide an additional 10 per cent free
permits for EITE activities eligible for 60 per cent assistance, giving an
effective rate of assistance of 66 per cent to these moderately
emissions-intensive trade‑exposed activities in the first year of the
scheme.
Rates of assistance will decline at a rate of 1.3 per cent
per year, in line with the carbon productivity contribution set out in the
government’s white paper.[1]
3.4
Some economists regarded the timing of this assistance as inconsistent
with the Government's own macroeconomic forecasts:
The five per cent recession buffer is interesting given that
the government is forecasting 4.5 per cent growth in its budget over the same
timeframe.[2]
3.5
Provisions concerning EITE assistance can be found in Part 8 of the CPRS
Bill. The detail of the EITE programme will be contained in regulations. The
Department of Climate Change is currently engaged in a process with industry of
identifying industry activities which will be eligible for assistance under the
EITE programme.[3]
3.6
The Department of Climate Change has indicated that the 'primary reason'
for the increased allocation of free permits was the global recession.[4]
The Global Recession Buffer is expected to cost an additional $1 billion over
five years, with assistance rising from $70 million in 2011-12 (the time at
which the cost of permits will be capped to $10) to $290 million in 2015-16.[5]
This comes in addition to previously announced assistance provided to industry
under the EITE programme.
Carbon Leakage – economic arguments
3.7
The committee heard a diverse range of views concerning the true extent
of likely 'carbon leakage' after implementation of the scheme, and the
necessity for increasing the level of assistance already announced in the White
Paper.
3.8
The Productivity Commission has acknowledged that there is an
'in-principle' argument in favour of providing assistance to emissions
intensive trade exposed industries, but that judging the correct level of
assistance presents difficulties:
In practice, determining the level of assistance to EITE
activities is complicated by uncertainty about the extent of carbon leakage. A
global carbon constraint would help abatement activities shift to where they
impose the lowest costs. However, if Australia imposes a constraint ahead of
other countries, production may shift to countries not because of cheaper
abatement opportunities, but because firms in those countries do not pay the
full price of their pollution. So, judging the extent of carbon leakage
requires estimating a counter-factual: what activities would stay in Australia
in the environment of a uniform and consistent global carbon constraint?
Accordingly, identifying activities that may contract,
shut-down or shift offshore following the introduction of a domestic constraint
is not sufficient. The test for carbon leakage is whether these shifts would
still have occurred even if other countries efficiently constrained their
carbon usage. The difficulty in forming these judgements make it likely that
any policy response will at times fail to protect against carbon leakage and
also at times provide assistance where no carbon leakage would have otherwise
occurred.[6]
3.9
Many organisations characterised 'carbon leakage' as a significant
threat. Dr Brian Fisher provided the following example:
There is no doubt that, if you are faced with a regime that
taxes methane—which, as a greenhouse gas, is 21 times more potent than carbon
dioxide—at the rate that is potentially suggested, there is no doubt that any
gaseous mine will become less competitive; and it will become potentially
radically less competitive than mines, for example, in Indonesia. As a consequence
of that, jobs will be lost from those mines in Australia.[7]
3.10
Similar concerns were expressed by Dr Moran of the Institute of Public
Affairs:
If the major users of energy have to incur a cost or a
doubling of the price of the energy—even if energy is 20 per cent, and it is rather
more than that in the case of aluminium—then they would not be competitive and
they would move offshore. Even quite small changes in price do cause firms to
move offshore, as we are seeing in terms of all the globalisation debates of
industries like Adidas, Puma and organisations like that moving where they manufacture
their shoes from one country, Indonesia, to Vietnam et cetera on the basis of
quite small changes in costs. That is the sort of reality of the world economy
as it is now.[8]
3.11
Many other economists take the view that the concerns about carbon
leakage are exaggerated and/or that the assistance in the CPRS is more than
enough to prevent it. The author of the Stern Review recently wrote:
...the evidence from studies of the mobility of firms in
response to environmental policies is that it is negligible.[9]
3.12
Mr Richard Denniss of the Australia Institute has argued:
I think the risk of carbon leakage is overstated. We have to
ask ourselves: where was all the exchange rate leakage when the exchange rate
was US$0.90? The fact is that a lot of mobile capital stayed put—and for good
reason. And carbon leakage is not the only risk that Australia faces, from an
economic point of view. It is certainly not the only risk that big investors
face.[10]
3.13
This view was also strongly expressed to the committee by environmental
groups:
...the emissions trading assistance is in excess of what is
genuinely needed in terms of the threats...[11]
...the claims made are overexaggerated, that the risk of
so-called carbon leakage is overstated...[12]
I think that the claims that are being made by industry are
very exaggerated. I find it extraordinary that so many major corporations, who
have been on notice for a very long time and have been preparing for this for a
very long time, can claim that they will not be able to innovate to deal with
this.[13]
3.14
The potential for permit allocation under the EITE assistance programme
to exceed actual emissions for some companies was tacitly acknowledged by the
Department of Climate Change:
The other point to make is that the basis of that assistance
is provided on 2007-2008 intensity baselines. To the extent that industries
have been able to improve their emissions intensity efficiency over the period
to the commencement of the scheme, that does not reduce the amount of
assistance provided but does reduce their liability under the scheme. So the
level of actual liability for the most emissions intensive firms is
significantly reduced by the emissions-intensive trade-exposed assistance and
moves it to a level that is relatively small compared with the overall costs.[14]
Committee View
3.15
In its inquiry into the exposure drafts of the carbon pollution
reduction scheme legislation, the Standing Committee on Economics found that
carbon leakage was a matter of genuine concern:
The Committee regards carbon leakage and the need to smooth
the adjustment process to a low-carbon economy as good reason for some
government assistance to industry...The CPRS structures these assistance measures
in a manner that retains incentives to take measures to reduce emissions of
greenhouse gases.
The committee notes the persistent advocacy of industry
groups for further assistance under the scheme. On the other hand other
stakeholders have criticised the scheme for being too generous to polluting
industries.
The committee believes that the Bill has the balance right,
retaining strong incentives to reduce carbon intensity while enabling important
economic assets to remain viable throughout the adjustment. This is fundamentally
important to protecting jobs and enabling jobs in the green economy to grow.[15]
3.16
The committee remains satisfied that carbon leakage is a legitimate
concern, and that there are strong arguments in favour of providing
transitional assistance to trade‑exposed industries. The committee sees
no virtue in the elimination of an emissions intensive industry in Australia
(and consequent loss of jobs) if that industry simply relocates to another
jurisdiction where it is allowed to pollute more heavily. Such a scenario would
lead to no net gain in terms of global emissions reductions. Ideally, however,
assistance to these industries should continue only until industries on
competitor countries face a similar emissions constraint.
Free permits versus auctioning
3.17
The Government intends that, after a period of transition, all permits
will be auctioned. This is consistent with the fundamental idea that the CPRS
is correcting the problem that CO2 emissions (like all other forms
of pollution) will be too high if those responsible for them do not bear the
resulting cost:
...auctioning permits ensures that the entities who are
responsible for high levels of emissions are the ones that pay for the environmental
costs (consistent with the ‘polluter pays’ principle).[16]
The Carbon Pollution Reduction Scheme will build a
low-pollution economy of the future for Australia. Under the Scheme,
Australia's biggest polluters will pay for the pollution they generate...[17]
3.18
However, auctioning was criticised by some industry representatives. The
Minerals Council of Australia (MCA) cited some economic literature that holds
that there is little difference in terms of environmental impact as to whether
permits are auctioned or allocated by other means.[18]
Dr Brian Fisher (in his capacity as Chief Executive Officer, Concept
Economics, which provided consultancy services for the MCA) argued that auctioning
of permits from commencement were not necessary to drive environmental benefits:
This issue is being debated long and hard. The reason that
most economists put that point of view is simply that, whether or not the
permit is given to you, you still face the same opportunity cost; basically,
your costs as an operator are still the same. Whether you are transferred a
permit is a matter of an income transfer; it is not an efficiency question. As
a consequence of that, the vast majority of the literature on this matter says
that it makes no difference.[19]
3.19
Because it argues there is little environmental impact from free
allocation of permits, the MCA asserted that there is no justification for the
additional economic impacts it argues arise from imposing auctioning of
permits on their industry. Mr Hooke expressed the opinion that auctioning
permits from commencement of the scheme was the 'essential and fundamental
flaw' in the CPRS.[20]
3.20
There are three main problems with the MCA argument. Firstly, even if
giving the mining sector free permits still retains an incentive to reduce
emissions, this is not an argument for making such a large income transfer to
the mining sector anymore than it is an argument for making a large income
transfer to any other sector.[21]
Such a transfer to the mining sector has to be justified on some public policy
grounds such as the above argument on carbon leakage, which then implies it is
appropriate that the transfer be limited in time and coverage.[22]
3.21
Secondly, it is not uncontested that the environmental impact from
giving permits to large polluters will always the same as under auctioning. As
argued in the White Paper:
In practice, because administrative allocations will be made
for reasons other than pure efficiency, the initial allocation of permits will
not be made to the highest valuing users. Firms will be able to trade permits
in the secondary market, but trading costs and information issues mean that
this will not be costless. Furthermore, international experience suggests that
where permits are issued for free there may initially be some inefficient hoarding
by the recipients.[23]
3.22
This view is supported by the author of the Stern Review:
...auctioning can hasten adjustment. The longer allocations are
given free, the less pressure there is on firms to move quickly. It is true
that the marginal incentive of a carbon price should give a strong reason to
economise on emissions even if allocations are given free. But that pressure is
intensified if weak or no adjustment implies significant losses, rather than
profits simply being lower than they might otherwise be.[24]
3.23
Finally, the Department of Climate Change argued that the MCA proposal
is not predicated on the assumptions made by those economists arguing that the
environmental outcome is invariant to the means of allocating permits:
It is true that, if you provide permits to people, and you do
it in such a way that they are fully tradeable after you give them to them and
they are not conditional on the amount of output that they continue to produce,
in some circumstances you can have incentives to reduce emissions. But, as far
as I am aware, that is not the proposal that the Minerals Council have been
putting forward. They tie the amount of permits to the amount of production,
and in that case you significantly reduce the incentives to undertake emissions
reductions to achieve an environmental outcome. So, in terms of the actual
proposal that the MCA has been talking about, there is a significant blunting
of the environmental incentives compared with the Carbon Pollution Reduction
Scheme.[25]
3.24
The question therefore before the committee is whether the amount of temporary
EITEs assistance provided in the bills is appropriate, and whether
circumstances exist to justify the increased level of support announced on 4
May 2009.
Is the revised level of assistance
adequate?
3.25
The committee was presented with a diverse range of views about the
potential impact of the expansion of temporary EITE assistance through the global
recession buffer.
3.26
The increased assistance was welcomed by organisations representing the
industry sector, including the Australian Industry Group (Ai Group) and the
Business Council of Australia.[26]
However, these groups have flagged their intention to continue working with
government on the content of the package, and both have nominated EITEs
assistance as an area where improvements are possible. Both organisations have
stopped short of saying the level of assistance is now sufficient:
Senator EGGLESTON—To go specifically to some of the
changes, you talked about emission-intensive, trade-exposed industries, but
under these changes there is only going to be a five per cent increase in
coverage for a period of five years from 90 to 95 per cent, from 60 to 65 per
cent and then five-yearly reviews. Five per cent in many quarters is not
regarded as a very sufficient additional coverage. What is your opinion?
Mr Burn—I just wonder if coverage is the appropriate
term. What the five percent will do will be for those activities raise the
overall allocation to 94 and a half per cent—
Senator EGGLESTON—That is what we are talking about,
yes.
Mr Burn—The 10 per cent increase for the lower
threshold will raise it to 66 per cent. Is that adequate? That is a different
issue, but it is better than what was on offer before. That is why we welcomed
the changes, of course.[27]
3.27
Other industry representatives recorded views more forcefully that the
level of temporary assistance provided under the bills for trade exposed
industries, even including the global recession buffer, remains inadequate:
Rio Tinto retains the position that all EITE activities
should maintain their initial percentage allocation of permits (ie, 60 per cent
and 90 per cent as well as the additional recession buffer) until 80 per cent
of all carbon emissions globally are covered by a comparable carbon constraint.[28]
The Amended Draft Legislation does not remedy the fundamental
flaws that have been addressed in all previous submissions. The negative impact
on the international competitiveness of trade exposed Australian industry, such
as the LNG industry, in an international market has the potential to cost
Australian jobs and tax revenues, not have the intended effect on reducing
global emissions and in fact probably increase global GHG emissions.[29]
The change to the assistance for emissions-intensive, trade
exposed (EITE) industries announced on 4 May 2009 will do little to relieve the
burden that will be imposed on Caltex’s two oil refineries. We currently expect
a nominal assistance rate of 60% although this is still subject to negotiation
with the Department of Climate Change and the Government. The proposed Global
Recession Buffer will reduce the CPRS productivity tax from a nominal rate of
40% to 34% for five years, which does little to cut the burden in the first
five years and nothing in the longer term.[30]
3.28
Some analysts from the finance and investor sectors recorded their view
that the current level of assistance is now satisfactory, and that the CPRS is
now no longer a matter for concern from the point of view of investors:
Based on research by IGCC members Goldman Sachs JBWere and
Citi Investment Research on the top 100 listed companies in Australia, IGCC
believes that compensation to EITE companies will result in minimal financial
impact on these companies in the short to medium term. IGCC believes the extension
of compensation levels means that existing investors in these companies will
receive sufficient protection to avoid capital flight in the early years of the
scheme.[31]
Most fund managers I speak to are pretty sanguine, feeling
that the impact of the CPRS will be small given the number of free permits that
will be allocated. They feel that other influences like commodity prices,
exchange rates and the state of the global economy are more important to their
investment decisions.[32]
3.29
The Committee's attention was also drawn to studies that show that
industry typically overstates the cost and difficulty of adjusting to
environmental measures:
I have a report by the Economic Policy Institute in
Washington, which did an analysis of the before and after costs of pollution
regulations in America, including some that are directly parallel in terms of
capturing emissions from industrial plant. Without exception they found that
the costs were exaggerated...[33]
3.30
A number of organisations expressed their opposition to the increased
level of assistance provided by the global recession buffer. For many of these
organisations, this is consistent with their opposition to the previous level
of EITE assistance on offer before the Government's announcement on 4 May 2009.
As noted above, many groups regard the arguments about carbon leakage as
exaggerated.
3.31
Uniting Justice Australia noted its concern about the additional level
of assistance provided via the buffer:
The Uniting Church has been supportive of assistance to
Australia’s most emissions-intensive, trade-exposed industries, on the grounds
of avoiding ‘carbon leakage’...We are, however, concerned about the increased
assistance to EITE industries through the ‘Global Recession Buffer’ and the
potential for increasing costs in other parts of the economy and potentially
reducing the incentives and economic signals driving investment towards
low-carbon industries and activities.[34]
3.32
Several environmental groups saw the revenue to be allocated to industry
assistance as being better used to promote alternative sources of energy.[35]
For example, the Australian Conservation Foundation advised:
...senators may be aware of a report we commissioned from Risk
Metrics recently that showed that, following the changes as of 4 May, free
permits worth $16.4 billion would be handed out to our most polluting
industries and coal power generators over the first five years of the scheme.
That would include $565 million worth of free permits for Rio Tinto in just the
first full year of the scheme.
That is a very large figure. If the $16.4 billion permits
were actually auctioned rather than given away that would be enough to fund at
least 30 large scale solar plants, based on the government’s budget
announcement. That is enough to put a solar plant next to every coal-fired power
station in Australia. To this end, we have been calling for the assistance to
the big polluters to be limited and for 20 per cent of the CPRS revenue to be
put into renewable energy and low emissions technologies to help boost our
moves towards a low carbon economy.[36]
3.33
The Climate Action Network Australia advised the committee that five of
its 67 member associations support passing the legislation if further
amendments were considered, whilst 14 rejected the changes.[37]
3.34
Professor Ross Garnaut noted that the package could lead to some
companies receiving more assistance than necessary to avoid carbon leakage:
I am on the public record in my report and also in the
evidence I gave to this committee and the other Senate committee earlier in
saying that I do not think that Australia has adopted the ideal approach to
assistance for trade-exposed industries. I now accept that we are not going to
get a big reform of that except in the context of changes in the international
environment—a comprehensive agreement that leads to comparable emissions
constraints in the main countries or agreement perhaps within the WTO on comparable
ways of achieving these things. Under the proposal of the government, comparing
that with the assistance that industries would get under a principled approach
that really dealt with the carbon leakage issue in an efficient way, my
assessment, my estimate, would be that a number of industries are getting much
more than would be necessary to avoid carbon leakage and some would be getting
less. I have accepted that that is where our discussions are at the moment and
we need progress in the international sphere to unwind the imperfections in the
system.[38]
Review of assistance mechanisms
3.35
There have been calls to ensure that industry assistance does not
continue longer than necessary; other stakeholders argued that industry
assistance should not cease too soon if the rest of the world has still not
taken appropriate action.
3.36
Professor Ross Garnaut advised that EITE assistance should continue no
longer than necessary:
I think the most important thing is that we make it clear we
are going to get rid of the system of assistance for trade exposed industries
when the rationale for it disappears. The rationale will have disappeared either
when we have comparable emissions constraints in a large part of the rest of
the world or when the major countries of the world have agreed on a comparable
and principled approach to assisting trade exposed industries.[39]
3.37
This points to the need for robust review mechanisms to be in place.
This is recognised by the Government in its characterisation of EITE assistance
as 'transitional' and the establishment of independent review processes to consider
any modifications to the EITE assistance programme.[40]
3.38
A number of changes have been made in the bills to the processes for
reviews of assistance. In particular, more detail has been provided on
provisions relating to matters to be considered in the five-yearly independent
reviews of assistance and in the composition of expert advisory committees.
These changes are reflected in clause 353 and subclause 360(5).
3.39
The need to wait five years for a formal review received some comment in
evidence provided to the committee. In particular, the five year duration of
the global recession buffer, and its extent, were criticised by some witnesses:
We certainly do not support the five-year notice period
provided to EITEs. We believe that is certainly way too long. A five-year
notice period really does make it difficult for us to move with new developments
in climate change science, in international developments and in new
technologies that are coming forward. As I believe the previous speaker was
outlining, we have seen in other pieces of environmental legislation that the
costs after the fact are actually found to be a lot less than predicted. We
certainly would not want to lock in assistance which turned out to be
overgenerous, more than was necessary to compensate these industries.[41]
3.40
The Department of Climate Change, noted some of the factors that can be
considered in the reviews of industry assistance:
There are three levels of the nature of the change in
assistance. The first is the 1.3 per cent per year reduction in the rate of
assistance which happens each year, and that is an automatic reduction in the rate
of assistance. The second is the removal of the global recession buffer after a
five-year period. The third is that, if there is a review conducted of the
international environment, the review would essentially look at the extent of carbon
constraints that have been imposed in the rest of the world.
An important part of that review is that it will need to look
at both industries and sectors to look at carbon constraints in different
areas, but it would also have to look at the total level of emissions
reductions commitments across the globe. The broad intention is to look at the
extent of carbon constraints in different countries, bearing in mind that they
will not all be in the form of emissions trading schemes and they will not all
be in the form of carbon taxes. So the review will have to do an analysis of
the effective level of carbon price imposed in each country.[42]
3.41
Mr Daniel Price of Frontier Economics noted that, whatever formal
timelines exist for review, it was likely that governments would monitor the
scheme throughout and make adjustments as required. He cited the experience of
reform of electricity markets:
This is in the realm of highly organised energy markets, in that
there are very strict rules of engagement and price-setting rules. I was always
in favour, going back 15 years, of having a review soon after that market
started in case we got something fundamentally wrong. In fact, the Western
Australian Labor government put in place an electricity market there which was
very different from any other market in Australia and they required an annual
review. In the first review, the regulator there took the view that there were
signs the market may not be working quite as they intended but that the market
should be allowed to continue on, and so they kept a watching brief over that.
But let us say that there was a timed review in 2014. Governments do not just
walk away and let a market fall apart. Almost certainly, any responsible
government, if they saw something going fundamentally wrong, would probably step
in and make a change. So I think it is probably a moot point as to whether it
is a timed review or one that is ongoing, because governments generally are
pretty responsible about these things.[43]
Comparison with US Waxman-Markey
Bill
3.42
One of the arguments against the currently proposed level of industry
assistance provided to the committee was the assertion that other countries
were providing a higher level of support to their own trade exposed industries.
A frequently used example was the American Clean Energy and Security Act 2009
(commonly known as the Waxman-Markey Bill), which was passed by the United
States House of Representatives Committee on Energy and Commerce on 21 May
2009.
3.43
An example of some of the views expressed in relation to the US Bill was
the following call for greater alignment with US proposals made by Bluescope
Steel/OneSteel:
Given the global significance of the US, we believe that it
is important to obtain a clear understanding of the design of United States’
emissions trading scheme, including its provisions for assistance to EITEs, and
to fully consider the implications of the US approach for the design of
Australia’s CPRS. The current draft US legislation appears to differ markedly
from the Australian scheme in a number of important respects, including the
later commencement date, broader activity coverage for affected sectors
including steel, and a more prescriptive and quantitative test for
international action.
The precedent set by the US is particularly important for the
iron and steel industry. Approximately 30% of BlueScope Steel’s exports from
its Australian operations go to the United States. The Australian steel industry
also competes with US steel producers in third party export markets. It is essential
that material differences between Australian and US climate change legislation
do not distort our trade competitiveness.
At a minimum, the Government should ensure that the important
precedent set by the US is acknowledged, and that it has sufficient flexibility
to adjust the CPRS as US policy becomes clearer. This will assist in ensuring
that Australian industry is not put at a disadvantage with respect to its
international trade competitors.[44]
3.44
The Department of Climate Change has responded to unfavourable
comparisons between the proposed levels of industry assistance in the CPRS
Bills and in the US proposal in the following terms:
Most importantly however, and contrary to some of the
reporting, neither scheme guarantees 100 per cent assistance to industries at
risk of carbon leakage.
In fact, the Waxman-Markey Bill has set a hard cap on
allocations to these industries at 15 per cent of total permits in 2014,
falling to 13.4 per cent in 2016. This initial allocation is substantially
lower than the CPRS policy, where around 27 per cent of permits will be
allocated to EITEs in the first year of scheme. Direct comparisons of these
shares should be treated with caution given the different economic structures
of the two countries, but information provided to the Committee via testimony
from a US energy intensive industry representative suggests that even at
commencement, assistance to EITE industries could be less than 100 per cent.
The number of permits that will be allocated to these
industries over subsequent years will be directly linked to the decline in the
US cap on emissions, with no provision for increased allocations in response to
growth in these industries – in this sense there are similarities with our
Green Paper model but with a lower share of permits available for EITEs.
This means that if the calculated allocations to US EITEs are
greater than the number of permits that have been set aside for them,
allocations to each EITE will be reduced accordingly. In addition, if emissions
from US EITEs increase (on account of these sectors growing) and the overall
cap on emissions falls, the effective rates of assistance to EITE industries
will decline. This is because the number of permits available for allocation to
EITEs will be falling while the total number of emissions from these industries
is increasing.[45]
3.45
The Department of Climate Change has provided the attached chart to
summarise the different levels of assistance to trade exposed industries under
the CPRS Bills and the latest version of the Waxman-Markey Bill. As discussed
by Mr Comley in the preceding paragraph, the proposed rate of assistance
for trade exposed industries under the Waxman-Markey Bill will decline as a
proportion of emissions liability over time:
Source: Mr Blair Comley, Deputy
Secretary, Department of Climate Change, Speech to APPEA conference and
exhibition, http://www.climatechange.gov.au/media/2009/pubs/Comley_APPEA.pdf,
viewed 3 June 2009
3.46
There may be many iterations of the Waxman-Markey bill, including the
level of assistance provided to export industries, before it is ultimately
passed by the US Congress. However, it is likely that any bill passed by Congress
will include some level of assistance for trade exposed industries.
Detail in regulations
3.47
A number of stakeholders expressed concern that important details of the
EITE assistance programme will be contained in the regulations:
We also remain concerned that EITE activities will be defined
in regulations rather than legislation, despite the fact that these definitions
will be crucial in determining whether the Government delivers on its
commitment to ensure no competitive disadvantage for EITEs. Similarly, the
eligibility criteria for EITE assistance and the timing and rate of decay in
EITE assistance – both critical issues for the iron and steel industry - are
also not dealt with in the Bill but will be dealt with in regulations.[46]
3.48
Others express concern that the proposed regulations are not currently
available:
I think there is for us a concern around the sequencing of
the act versus the regs. A lot of the detail to do with the emissions-intensive
trade-exposed is in the regs, and that is what we will want to see. I still can
imagine that you can get both the regs and the act reviewed by business before
the end of the year.[47]
3.49
The Explanatory Memorandum provides the following explanation for the
detail of the EITE assistance programme being provided in regulations:
The technical aspects of precisely defining
emissions-intensive trade‑exposed activities, the eligibility criteria
and relevant production units, and the need for flexibility to include new
activities, make the program appropriate to locate within regulations rather
than the bill itself. After the detail on emissions, electricity use, revenue
and/or valued added has been assessed for a given activity, the regulations
will be able to provide a relatively simple allocation methodology per unit of
production which provides investment certainty, minimises ongoing compliance
costs and reduces the risk of assistance decisions being subject to lengthy
appeal and review process which may divert resources from more important issues
for business.[48]
3.50
The Department of Climate Change has indicated that at least some of the
regulations will be available as exposure drafts before the Parliament votes on
the CPRS Bills (currently anticipated before the end of June 2009):
I think the emissions-intensive trade-exposed area is the
clearest example of what is happening. The intention is to release some
exposure draft regulations before there is a vote—before the Senate considers
the bill finally. It is unlikely to be possible to have all the emissions-intensive
trade-exposed activities listed at that time, and that is essentially because there
is that process going on with the affected industries about defining precisely
what the activities are and then collecting audited data to feed into what the
actual rates of assistance are...I think the tranches of regulations that will
come through and be available at the time, plus the policy commitments that
were made in the white paper, will give an indication of where that process
will end up.[49]
Committee view
3.51
As previously noted, the Committee regards the provision of assistance
to emissions-intensive trade exposed industries as appropriate to guard against
the risk of carbon leakage.
3.52
In view of the extraordinary circumstances presented by the global
financial crisis, the Committee regards the expansion of assistance via the
global recession buffer as prudent.
3.53
The Committee notes the assurance of the Government that at least some
elements of the regulations will be available for consideration before the Senate
considers the legislation, and that regulations will likely reflect the
commitments of the White Paper.
3.54
The Committee, while recognising that it is not unusual for regulations
to be formulated after a Bill is presented to Parliament, encourages the Government
to make as much of the draft regulations available as soon as practicable.
Changes to rules on landfill
3.55
Methane emissions arise from the decomposition of organic matter in
landfill. These emissions can occur a long time after the waste was deposited
in landfill – as noted by the Department of Climate Change, 'estimates [of
emissions from landfill] in any year include a large component of emissions
resulting from waste disposal over the preceding 50 years. This means recent
changes in waste management only impact reported methane levels over time'.[50]
3.56
In 2006, methane emissions from solid waste disposal on land were 13.2
MT CO2e, or 2.3 per cent of net national emissions. Once waste has
been disposed of to landfill, one of the few means of reducing emissions is to
put in place methane gas capture (for energy generation purposes) or by flaring
the emissions. In 2006, 4.6MT CO2e of methane was recovered from
solid waste.
3.57
The Government's original proposal for dealing with emissions from waste
deposited prior to the commencement of the scheme ('legacy waste') was to
include certain special arrangements for landfill facilities. These were
included in the White Paper and in the exposure draft of the CPRS bill.
These included:
- Establishing a separate emissions liability threshold of 10,000
tonnes of CO2e for landfill facilities within a prescribed distance
of other facilities (this was established to prevent 'waste displacement from
covered to uncovered sites'), particularly in urban areas.[51]
All other landfill facilities would use the scheme's standard 25,000 tonne
threshold;
- Excluding all facilities which closed before 1 July 2008; and
- Excluding emissions from facilities attributable to 'legacy
waste' for the period to 1 July 2018.
3.58
The Government estimated in the White Paper that legacy emissions
would fall between 30 and 60 per cent between the release of the White Paper
and 1 July 2018. 'Excluding legacy emissions for this period will reduce the
financial impact on landfill operators accordingly and will allow time to assess
other abatement opportunities'.[52]
3.59
The waste sector raised concerns at this treatment. The Australian
Landfill Owners Association (ALOA) informed the Committee during its inquiry
into the exposure draft of the CPRS bills:
The inclusion of legacy waste in the CPRS (as of 2018) is the
equivalent of retrospectively taxing landfill owners and their customers for
waste deposited as early as 1968...Penalising landfill owners from 2018 onwards
does not in any way have an impact on waste generation or waste composition
modification as this waste has already been deposited...the cost of legacy waste
emissions simply cannot be passed on to our current customers as a CPRS charge
as the liability was created by past customers. Therefore, it will be pushed
into the market as a base price increase.[53]
3.60
ALOA also raised ongoing concerns about methodologies used to calculate
emissions from landfill.
3.61
In the bills as introduced into the Parliament, the Government has
refined the treatment of emissions from landfill. The principal changes are:
- To exclude emissions from waste deposited before 1 July 2011 from
being counted towards the operator's emission liability (i.e. the operator of
the facility will not need to surrender emissions units for these emissions).
However, legacy emissions will still be counted toward whether a facility meets
the 25,000 tonne or 10,000 tonne liability threshold. The detail on how the
facility's annual legacy emissions profile will be determined will be provided
in regulations;[54]
and
- To clarify that the 10,000 tonne threshold will apply to
facilities within a prescribed distance of other facilities which exceed the
25,000 tonne threshold and which accept a similar classification of waste.[55]
The distance will be prescribed in regulations.
3.62
The Government has indicated that the changes on legacy emissions was a
direct response to feedback from affected stakeholders, and in particular the
views of local government concerning potential impacts on ratepayers.[56]
3.63
The changes to treatment of landfill have been broadly supported by
industry. The Australian Industry Group describing the changes as a 'victory
for common sense,' whilst noting some ongoing uncertainties with regard to
measurement methodologies.[57]
The changes announced by the Government have also been welcomed by the
Australian Local Government Association.[58]
3.64
The ALOA has also welcomed the removal of legacy waste emissions from
the CPRS.[59]
However, ALOA did note continuing concerns with regard to methodologies used
under the National Greenhouse and Energy Reporting System with regard to
calculation of waste emissions, but expressed satisfaction that the Department
of Climate Change was responsive to these issues.[60]
3.65
A more significant concern was the impact of the removal of incentives
for methane gas capture and energy production following the cessation of the
NSW Greenhouse Gas Abatement Scheme (NGAS):
The situation today is the landfill gas operator has three sources
of income. He has income coming from the landfill operator; he has income
coming from the sale of the electricity itself at normal tariff rates; and he
has RECs, the renewable energy certificates. That is what he has going forward...
About 40 per cent of these companies’ revenue comes through NGAS or through
Greenhouse Friendly, so they get paid for the power; they are paid generally
something from the landfill operator and they get paid for renewable energy certificates.
But they will lose NGAS under the current scheme...The people who actually
created this 12 per cent reduction over the last 10 years are the two
companies, Energy Development Limited and LMS, and both of those that actually
created all the good work are going to be penalised. Both the companies are in jeopardy
because of the loss of this revenue.[61]
3.66
Mr Spedding called for transitional arrangements to be put in place to
cover the loss of revenue arising from the cancellation of the NGAS and similar
schemes.
3.67
The committee notes that the Government has undertaken to work with the
NSW and ACT Governments on arrangements for termination of the NGAS.[62]
The Committee would encourage these discussions to be concluded swiftly, in
consultation with affected stakeholders, to ensure that meaningful projects in
methane gas capture and storage are not jeopardised.
3.68
The Committee commends the government for responding to the concerns
raised by industry in regard to legacy waste emissions.
The Energy Efficiency Trust
3.69
As part of a suite of changes to the Exposure Draft legislation
announced on 4 May 2009, the Government proposed to establish a $50.8
million Energy Efficiency Trust. Along with the Energy Efficiency Savings
Pledge Fund, it forms the Australian Carbon Trust, whose stated purpose is 'to
help all Australians to do their bit to reduce Australia's carbon pollution and
to drive energy efficiency in commercial buildings'.
3.70
The Energy Efficiency Trust will provide funding to cover upfront
capital costs for businesses seeking to undertake energy efficiency measures.
Businesses would pass the cost savings back to the Trust at a commercial rate
until the borrowed costs (with interest) are repaid.[63]
Other changes to the legislation affecting business
3.71
The committee notes that the Government has made a number of other
changes to the bills in response to feedback from stakeholders on the exposure
draft bills.[64]
These include clarifications of the application of the CPRS to the Joint
Petroleum Development Area and Greater Sunrise Field (between Australia and
Timor-Leste), technical changes to the operation of Obligation Transfer Numbers
(OTNs), amendments to provisions relating to Liability Transfer Certificates
and Enforcement Provisions. Although few witnesses at hearings made reference
to these changes, some submissions referred to these issues.
3.72
Technical suggestions were made in relation to OTNs and Liability
Transfer Certificates by BP Australia,[65]
the Energy Supply Association of Australia,[66]
Woodside Petroleum[67]
and Caltex Australia.[68]
Rio Tinto and Woodside raised a number of concerns in relation to the operation
of Liability Transfer Certificates as a means of resolving liability between a
controlling corporation and other entity within the corporate structure.[69]
3.73
ConocoPhilips expressed concern concerns that the implications of the
CPRS on Timor Leste need to be more fully understood. APPEA also expressed
concern about this issue.[70]
3.74
Leighton Holdings repeated its concern about the use of 'operational
control' to determine liability for reporting emissions under the National
Greenhouse and Energy Reporting Act 2007 (NGER Act) and under the CPRS. It
argued in its submission that the Liability Transfer Certificate mechanism,
even as amended, does not resolve these concerns, primarily due to the timing
of commencement of the CPRS bills after the first year of reporting under the
NGER Act:
The mechanism to address the contract mining issue in the
CPRS Bills, the Liability Transfer Certificate (LTC), is a second-best solution
because parties need to resolve the ‘operational control’ issue under NGERS
before registering under the Act by 31 August 2009 and not under the CPRS in
2011.
If mining contractors, such as Leighton Holdings’ subsidiary
companies, have operational control of a facility under NGERS they will
therefore be the liable entity under the CPRS. Leighton Holdings will be in the
invidious position of having to spend millions of dollars to set up systems,
review and renegotiate contracts and collect data to meet NGERS obligations for
three reporting years until there is a possibility of transferring these
responsibilities using the LTC mechanism. There appears to be little gain to
the Government and a significant burden to our business with this approach.[71]
3.75
The Committee agrees that it is desirable that the entity which is
ultimately likely to have CPRS liability should be the entity which has
responsibility for providing reports on emissions under the NGER Act prior to
commencement of the CPRS. The Committee encourages the government to liaise
further with the industry in relation to this problem.
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