Examining The "Diabolical" Policy Problem

The Garnaut Climate Change Review draft report has suggested that climate change is a diabolical policy problem – "it is harder than any other issue of high importance that has come before our polity in living memory". The Garnaut draft report explains that the solution to this problem lies in appropriate and timely international action. Notwithstanding Australia's small contribution to the level of global emissions (approximately 1%), it has an important role to play, particularly in securing international agreement on the global mitigation response. Ultimately, Garnaut suggests that the solution to the climate change challenge is to remove the link between economic activity and greenhouse gas emissions.

Background

The Climate Change Review being undertaken by Professor Ross Garnaut was commissioned by Kevin Rudd (as leader of the Opposition) and the State and Territory governments in April 2007. Following the November 2007 election, the Commonwealth government joined the Review. The objective behind the Review was to examine the impacts of climate change on the Australian economy, and look at medium to long term policies for Australia to achieve the best possible outcomes.

The current draft report was scheduled for release at the end of June 2008, with the final report due for publication at the end of September 2008. Professor Garnaut has also indicated that he will release an interim report dealing with the economic modelling aspects in August 2008. During the course of the Review's work, other reports have also been released to encourage public discussion and debate, such as the February 2008 Interim Report http://www.deacons.com.au/legally_green/articles/0508_garnaut_climate.pdf and the March 2008 Discussion Paper on the design elements of an Emissions Trading Scheme (ETS) for Australia http://www.deacons.com.au/legally_green/articles/0508_garnaut_releases.pdf

Content of draft report

The draft report looks at matters such as the current science of climate change; the impacts of climate change on Australia, and the economic consequences of those impacts; the costs and benefits of climate change mitigation within Australia; and the international context of, and response to, climate change. It also includes further detailed discussion on the possible design of Australia's ETS, which this Legal Update will focus on.

A summary of the above aspects includes the following:

• The Review takes as its starting point the majority opinion of the Australian and international scientific communities that human activities have caused substantial global warming since the mid 20th century, and continued growth in greenhouse gas emissions would lead to high risks of dangerous climate change;

• The Review considers 4 different future scenarios concerning mitigation: no-mitigation; ad hoc mitigation; strong global mitigation; and ambitious mitigation. Strong global mitigation would restrict greenhouse gas emissions to 550 ppm CO2-e, with a likely global mean temperature increase of 3% above pre-industrialised levels, whereas ambitious mitigation would stablise emissions at 450 ppm CO2-e, with a 50% chance of limited global mean temperature increase to 2% above pre-industrialised levels.

• Economic growth, the energy intensity of that growth and the emissions intensity of energy use, are growing at higher projections than previously predicted, particularly in China;

• Emissions from other developing countries are growing, and with no mitigation, could account for about 80% of emissions growth over the next two decades;

• Growth in emissions is expected to have a severe and costly impact on agriculture, infrastructure, biodiversity and ecosystems in Australia. As an example, a global mitigation scenario of 450 ppm CO2-e would result in a 6% decline in irrigated agricultural production in the Murray-Darling Basin, compared to 20% at 550 ppm CO2-e, or 92% in a no mitigation scenario. For the next two decades, the impacts of climate change on Australia are likely to be dominated by stressed urban water supply, and the effects of changes in temperature and water availability on agriculture;

• Australia's per capita emissions are the highest in the OECD and amongst the highest in the world (4 times the world average), primarily as a result of the emissions intensity of energy used in Australia and our high reliance on the use of coal to generate electricity;

• Mitigation effort is increasing around the world, but at a pace which is currently too slow to avoid high risks of dangerous climate change, and given the recent and projected growth in emissions, the mitigation strategies by all major economies will need to be stronger and earlier than previously considered necessary;

• All developed and high-income countries, including China, will need to be subject to binding emissions limits from 2013.

Themes of the draft report

The central themes of the draft report are:

• Uncertainty surrounding the climate change science should lead to disciplined analysis and decision, not the delaying of decisions;

• Australia is well placed to meet the climate change challenge because it has a prosperous, flexible, market-orientated economy;

• An effective market-based system needs to be as broadly based as possible, and should therefore include transport and petroleum products;

• Australia's domestic policy must feed into achieving international agreement, because only a global agreement has any prospect of reducing the risks of dangerous climate change to an acceptable level.

ETS design

An emissions trading scheme is viewed as the main mitigation measure by the Australian Government, which is supported by Professor Garnaut.

The draft Report builds on the March 2008 Discussion Paper, taking on board comments and submissions received by the Review team. The design proposed in the draft report includes the following elements:

• Expressing the overall national emissions limit as a trajectory of annual emission targets, with a number of trajectories specified upon establishment of the scheme. Movement between trajectories will depend upon international policy developments and agreements, with a 5 year notice period of movement between different trajectories. There would be 5 years of firm caps, with longer trajectories of indicative caps, up to 2050.

• The ETS should cover all 6 greenhouse gases and stationary energy, industrial processes, fugitive emissions and transport from the outset. Waste and forestry should be included as soon as practicable, and the inclusion of agriculture will be subject to progress on measurement and administration issues.

• If a sector is not covered by the scheme, other policies should be developed to achieve emissions reductions from that sector.

• The point of obligation would usually be the emissions source, and can be set at the facility level for oil and gas production, gas processing, industrial processes and fugitive emissions from coalmining. Emissions from transport can be covered at the point of excise for petroleum, subject to excluding petrol sales related to manufacturing processes.

• Domestic offsets would have a small role, however offset credits from the forestry sector should be allowed both before and during coverage in the scheme. International offset credits should be allowed, with restrictions on the source and quantity.

• All permits should be auctioned.

• There should be no controls over pricing, except perhaps during an initial transitionary period (up to 2012).

• Unlimited banking should be allowed, and borrowing of permits within a 5 year period also allowed.

• For trade-exposed emissions-intensive industries¹, global sectoral agreements should be pursued as a matter of priority, with assistance provided in the interim (through cash or free permits).

• The emissions limit and policy framework should be set by the Government, but the administration should be undertaken by an independent regulator (e.g Independent Carbon Bank, similar to the Reserve Bank).

• There should be a financial penalty for non-compliance as well as a make-good provision.

The draft report suggests that it may be appropriate to have an initial transitional period, covering 2010-2012, during which permits could be sold at a low fixed price. Alternatively, if permits from the EU ETS were accepted under the Australian ETS, this would set the price at the current European level (around €25-28).

With respect to the revenue that the ETS will generate, the draft report suggests that this should be allocated as follows:

• 50%: households, through adjustments to the tax and social security systems to enhance energy efficiency, particularly amongst low-income households;

• 30%: business sector, primarily to the trade-exposed, emissions-intensive industries;

What next?

The Government has indicated that it will be issuing a Green Paper, setting out its own views on the design of the ETS later this month. As mentioned above, a further interim report is expected from the Garnaut Review which will focus on the economic modelling work currently being undertaken by the Review team and the Commonwealth Treasury to evaluate the costs of climate change mitigation and the benefits of avoiding climate change, and include material relating to the issues of adaptation, with the final report being released in September. The final report will include recommendations on the appropriate emissions reduction targets and trajectories for Australia, and what this will mean for the carbon price (ie the cost of permits under the ETS).

To find out more of the detail from the draft report, and obtain an overview of the Government's Green Paper, you are invited to attend breakfast briefings which will be held in our Sydney and Melbourne offices, on 7 and 8 August respectively. Alternatively, please contact a member of our Climate Change team.

Footnotes

1 Trade-exposed emissions-intensive industries within Australia include metals, liquefied natural gas, cement and sheep and cattle products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.