Understanding The Proposed Emissions Trading Scheme And Emissions Reporting Requirements

Whilst Professor Ross Garnaut continues to form recommendations on an Emissions Trading Scheme, the 1 July 2008 starting date for reporting energy use and production rapidly approaches. There are some interesting developments coming to light as the new regime begins to take shape.

Garnaut climate change review

Following the election of the Rudd Government and Australia's ratification of the Kyoto Protocol, Australia is on the path to developing an Emissions Trading Scheme (ETS). The Garnaut Review was commissioned by the Labor State and Territory governments and the then Federal Opposition to research the economic impact that climate change will have on Australia and to recommend strategies for sustainable prosperity. Professor Garnaut's final report is due in September this year.

It is clear from the interim reports that Professor Garnaut believes that action is required sooner rather than later, and that the extent of the action should be significant. There are many issues that remain to be addressed and it is important to remember that the Garnaut Report will only be an advice, not government policy.

Ultimately, the goal is to reduce emissions quickly and in a cost-effective manner. Two key market-based options were considered to achieve this goal:

• an emissions tax, where the price of emissions is determined arbitrarily by the government and emission levels are left to be determined by market forces, and

• an emissions trading scheme, under which overall emission levels are capped by the government, and permits to emit are issued up to those levels. Those permits can then be used or traded. Under this scenario, the government will set the absolute level of emissions and then the price of a permit is left to be determined by market forces.

Economists spend their lives debating markets and their efficiency. Absolute economics would suggest that markets should be free to operate without intervention. However, in the real world, this is rarely the case. The critical issue with an ETS is the extent to which it will be 'managed' and the effect this will have on its transparency and hence its integrity. Integrity will provide business with an ability to make reasonable assumptions about price and quantity into the future. Broad market coverage and transparency of the ETS should result in a high level of integrity for the pricing mechanism of the market.

Emissions Trading Scheme - key issues

Under an ETS there will be winners and losers. Some of the more contentious issues in determining who the winners and losers will be are outlined below.

• setting targets: Without setting a target for emissions reductions, the effect of an ETS on the Australian economy cannot be fully understood. The Federal Government has committed to a 60% emissions reduction target by 2050, and this will have a far-reaching impact. However, medium term targets will be crucial when establishing the ETS. A target for 2020 is still being debated.

• permit allocation: Permits will be either:

• sold by private treaty,

• auctioned, or

• given away.

Large emitters with considerable sunk costs (like those in the power industry) want permits to be given to them to compensate for the losses they will incur. It will be interesting to see the outcome, especially given the influence of some of the more powerful lobby groups such as the coal industry. Substantial revenue will be raised from a sale or auction of permits and the extent to which it is used to finance clean technology development or provide tax-relief for increased electricity costs is unclear.

• industry coverage: An ETS will have more integrity and will work best if it covers all industries and all emitters. Realistically, the costs of covering certain industries will outweigh the benefits of covering them. More analysis is required on the emissions produced by the agricultural and forestry sectors, but it is assumed that most industries, if not all, will be covered.

• trade-exposed, emissions intensive industries (TEEIIs): Some TEEIIs could be crippled by the increased costs associated with an ETS. Many industries, like the aluminium industry, are heavily dependent on the price of electricity. To prevent these TEEIIs being lost to offshore markets, where emissions could be worse and Australia loses their economic benefit, Garnaut argues that some TEEIIs should be rewarded if they have high emissions efficiency at the beginning of an ETS, again encouraging early action. This will be a highly contentious and political point of debate in establishing an ETS, as too much compensation, especially where it protects the wrong industries, could undermine the integrity of the market.

• international connections: Reductions in emissions are needed globally. It is sensible that this happens in a cost-effective manner and connecting our ETS with a foreign one will give the scheme more coverage. It may be the case that foreign countries can reduce emissions more cheaply than we can in Australia, so it would make sense that they should be encouraged to do so. One tonne of emissions reductions in Peru is as good for the environment as a one tonne reduction in Australia. There are, however, considerable risks in relying on a foreign country to make reductions on our behalf. It would be effectively passing on our responsibilities (and ultimately the credibility of our efforts) to a foreign country that does not necessarily have the same level of governance as Australia. Ensuring the bankabilty of our ETS when dealing with foreign countries will be a big challenge.

• price controls: Some people would like to see the price of a permit capped to prevent crippling some businesses. Others want to see a guaranteed floor price for permits so that businesses with large investment costs can bank on a minimum price. Garnaut believes that the costs of including price ceilings and floors in an ETS outweigh the benefits. Market controls like ceilings and floors would act as an effective carbon tax, which is an inherently arbitrary and less efficient method of pricing emissions reductions.

• offsets: The ability to offset the failure to reduce emissions by one participant with a project that reduces emissions in some other way, like planting trees, is an important consideration. It is essential that such offsets are genuinely in addition to reductions that may have taken place regardless of the scheme. Promoters of such projects will need to guarantee or insure against those trees burning down in bushfires which would eliminate the benefits of planting them. The details of each offset needs to be considered carefully to mitigate this risk.

Whilst many decisions are still to be made, the Federal Government is determined to have an Emissions Trading Scheme by 2010, in one form or another.

Emissions reporting from 1 July 2008

As outlined in our September 2007 update, the National Greenhouse and Energy Reporting Act requires large emitters and large producers and consumers of energy to register by 31 August 2009 and to measure and record their emissions, production and consumption from 1 July 2008. It is important to have adequate internal reporting systems in place that enable measurement by the start of this period.

Chief executive officers may be held personally liable for contraventions under the National Greenhouse and Energy Reporting Act. CEOs must take reasonable steps to prevent a breach, including arranging regular professional assessments, implementation of any recommendations from such assessments and ensuring that employees are adequately informed of the company's responsibilities. Internal compliance policies and procedures should be sufficient to avoid any doubt in this area.

All industries are bound by the National Greenhouse and Energy Reporting Act. This will include property developers, property owners, property managers, manufacturers, financial institutions, resources companies, transport companies and agricultural businesses - everyone and anyone who has a large energy bill.

Whilst the reporting period beginning on 1 July 2008 will require only significant emitters or energy users/producers to register, the thresholds will reduce over the first three years of the legislation being in force. First reports are due by 31 October 2009.

If you need assistance in ensuring compliance with your reporting requirements then contact gadens lawyers.

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.