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Ernst & Young’s Matthew Bell explains Australia’s Carbon Pricing Mechanism and discusses where the country stands on the international climate debate

Australia has an interesting history when it comes to climate change policy. Until a change in government in 2007, Australia and the US were the only two developed nations not to have ratified the Kyoto Protocol. While this didn’t commit Australia to significant emissions reductions targets, it did begin a nearly five-year political struggle to establish a carbon market.

The last few years have seen several failed attempts to set up an emissions trading system, and this has led to a change in leadership for both the government and its opposition. Despite this, a carbon price has now been established under the Commonwealth Government’s Clean Energy legislative package. It’s a comprehensive raft of legislation that sets out an emissions trading system and complementary taxation changes that establish an equivalent carbon price adjustment on certain synthetic gases and fuels.

So how does it work? The so-called Carbon Pricing Mechanism (CPM) sets an obligation on operations that directly emit greater than 25 kilo tonnes of carbon dioxide equivalent (CO2e) emissions per annum. It began on 1 July 2012 and liable parties will need to buy a permit to emit (a carbon unit) each tonne of CO2e. For the first three years, these will be at a ‘fixed’ rate of AUD$23 (rising at a real rate of 2.5% per annum). Given the fixed price, popular press has labelled the scheme the ‘carbon tax’, but by 2015 it actually transitions to a flexible price, more akin to the sort of market-based emissions trading systems we’ve seen in Europe. Indeed, recent announcements set out that the CPM will allow the import of European allowances (EUAs) on a like-for-like basis, with bilateral trading established by at least 2018. This announcement was coupled with the government’s decision to remove a price floor associated with this flexible price period (originally proposed to be AUD$15).

Alongside the ‘polluter pays’ principle is a scheme to generate carbon units from the agriculture, farming and land-use sectors. The Carbon Farming Initiative (CFI) has begun in earnest, and the first projects are already being established that will allow the sector (which was excluded from any direct obligation under the CPM) to generate carbon units from carbon abatement activities. Initial trades have set a modest discount against the fixed price, at AUD$22.50, though liquidity is expected to be low for a few years.

The CPM is a comprehensive approach to carbon pricing, in that it sets a price for all six classes of greenhouse gas under the Kyoto Protocol, unlike Europe where this remains a longer-term aim. While there are provisions for certain activities that are deemed trade exposed to receive some of their carbon units for free (to avoid those companies moving, termed ‘carbon leakage’), these are also far smaller levels of free-allocation than were seen in earlier periods in the EU.

Land of plenty

Australia enjoys the benefit of some of the richest natural resources the world offers. It is a major exporter of coal and other minerals, it annually increases forecasts on gas and oil reserves, and it consequently houses some of the world’s largest resource companies. Yet its rich renewable natural resources of wind, wave, solar and geothermal energy remain largely untapped due to uncompetitive economics. This conflicting reality has meant a reliance on coal-fired power generation and a relatively low uptake of renewable energy, despite targets to increase renewable energy generation.

Whether a carbon market in Australia is sufficient to provide the economic incentive to shift this paradigm has yet to be seen, and whether this can be achieved while maintaining a competitive manufacturing and resources industry is equally difficult to predict.

Businesses are already beginning to form carbon strategies that include active and passive positions on the carbon market, as well as identifying opportunities to reduce greenhouse gas emissions at least cost. This initial activity is an indication of the potential the carbon market has to drive a fundamental change in Australia’s carbon future. These are the initial steps in helping Australia to achieve its initial target of reducing the nation’s GHG emissions by 5% by 2020 (based on 2000 levels). Some argue that Australia is setting itself into an uncompetitive position, where business costs will increase without appropriate environmental benefits. It isn’t enough for some though. Lobbyists that highlight Australia as having one of the highest per-capita emissions globally are also seeking more challenging emissions reductions targets. They make claims that Australia is a ‘climate laggard’, and is ‘doing nothing’ on climate change.

With our European counterparts having actively traded carbon markets for a number of years, one might be excused for thinking Australia has indeed been a laggard in the debate. In fact, it’s an unhappy phenomenon that a country is labelled as ‘doing nothing’ when, in fact, the most populous state of New South Wales was responsible for implementing the first greenhouse gas emissions trading scheme anywhere globally, some 12 years ago.

So what will the future hold? It’s hard to say. Australia is already running towards another general election, and campaigning from the Opposition is focused on repealing the carbon pricing legislation. Needless to say, there will be some winners and some losers as a result of the CPM. Whether the environment itself will be counted in the former or latter camp may depend on your point of view.

 

Matthew Bell is a member of ACCA’s Global Sustainability Forum. He is a partner at Ernst & Young and the leader of its climate change and sustainability practice in Sydney, specialising in carbon market advisory and greenhouse gas assurance. A published doctoral-level scientist, he was previously the head of the project office for climate and energy in the government department responsible for the UK’s involvement in the European Emissions Trading System.

This article first appeared in Accountancy Futures, Edition 6, 2013

 

Published: 29 Aug 2014