The emission trading scheme proposal unveiled by Penny Wong this afternoon is a light-touch model intended to forestall criticism from politically-potent sectors such as the coal industry, motorists and exporters. It offers something for virtually all affected stakeholders.

The scheme will take the broad shape outlined by Ross Garnaut in his interim report of a fortnight ago, but with a number of key modifications.

Coverage

As flagged overnight, transport will be included in the scheme, although with special arrangements for petrol excise.

Agriculture will be out until 2015, on the basis identified by Garnaut, that there is insufficient information of that sector’s emissions.

The waste sector will be included. So too will forestry, but on an opt-in basis. Both had been recommended for exclusion by Garnaut.

The level for inclusion in the scheme will be 25,000 tonnes of CO2 equivalent pa. This is estimated to cover about 1,000 firms.

Scheme operation

Permits will be called “an Australian emissions unit” (cos Aussie emissions are the best!) and be good for 1 tonne of CO2 equivalent pa. They will not expire and can be banked. Up to 5% of a company’s emissions can be “borrowed” from the following year’s permits. Auctions will be quarterly, with a further three years’ permits on offer once a year.

The price of permits will be capped until 2015 – but set so high above the market price that the cap will not be likely to be used – basically for emergencies only. The actual carbon emissions cap (which won’t be revealed until the Government’s White Paper later in the year) will be set for the following five years (“hard caps”), with “gateway” target ranges for the ten years beyond.

Reporting and compliance will be via the Howard Government’s National Greenhouse and Energy Reporting Act, which kicked in this month, supplemented with additional requirements where necessary.

Scheme to be overseen by an independent regulator but with the Government retain decision-making role.

International

The scheme is intended to complement international agreements when developed and link internationally with current Kyoto Protocol processes, but not other international mechanisms at this point. Australian permits will not be tradable overseas, but foreign ownership of permits is permitted. The Government will wear the risk if we join an international agreement with additional carbon abatement requirements beyond those operating in the scheme.

Compensation

Households

All revenue to be returned to the community and business.

Low-income households up to $53,000 a year no worse off, via the tax and welfare system. Middle-income earners to receive some assistance as well; people on fixed incomes given increased payments above indexation. Support for household energy efficiency measures through a separate program.

Fuel excise offset for carbon price on petrol and diesel – the petrol offset to reviewed after three years, the diesel offset after one year. Adjustments to the excise rate will be made “periodically” (Wong declined to be any more specific than that).

Trade-exposed industries

Up to 30% of all permits will be set aside and given free to emissions-intensive trade-exposed industries (those with emissions greater than 1,500 tonnes CO2 equivalent emissions per million dollars revenue).

Heavy emitters to get permits worth 90% of their emissions, but based on an industry average of emissions per unit of output (i.e. an inefficient producer would not be given free permits for 90% of their emissions, but 90% of the emissions that on average their industry requires to produce the same unit of output). Moderate emitters to get 60%.

Electricity generators

Government promises a “limited amount of direct assistance” to existing coal-fired electricity generators” through a new Electricity Sector Adjustment Scheme which “could include the provision of free permits”.

Everyone else

A new Climate Change Action Fund to “assist business transition to a cleaner economy” including investment in low emissions processes, energy efficiency projects and “dissemination of best practice.”

“Additional support” for heavily-affected regions.

In short, carbon-intensive trade-exposed industries – especially more energy-efficient ones – will have minimal obligations under the scheme, the Government has left the door open to fully compensating the electricity industry, motorists won’t notice the difference and there’ll even be a regional assistance fund (where have we seen those before?).

In short, something for everyone – in a scheme in which a substantial proportion of permits won’t even be auctioned but provided free to our biggest polluters.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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