The Coalition’s proposed CPRS amendments could cost nearly $1.6billion in the first full year of the scheme’s operation, and over $20billion between now and 2020.

The cost of the additional compensation proposed for big polluters and the revenue lost from the Coalition’s proposal to exempt coal mining emissions pose probably the biggest obstacle to a deal between the Government and the Liberal Party over the CPRS.

The calculations are based on emissions of Australia’s six biggest polluting trade-exposed industries, which will receive massive additional compensation from the Coalition’s proposal not merely to increase compensation for lower-tier polluters who would otherwise only receive 66% of their permits free, but to remove the tapering of compensation rates between now and the early 2020s, leaving compensation locked in at 90% until 80% of our trading partners commence carbon abatement initiatives.

The Coalition has also proposed to further reduce the threshold level for compensation for emissions-intensive, trade-exposed industries from 1000 tonnes per $m revenue to 850 tonnes, allowing threshold industries who would not have received any compensation to obtain 94.5% of their permits for free.

However, the decision to exempt fugitive coal emissions will be an even greater cost. According to Australian Conservation Foundation data prepared last week, exemption of emissions from the coal mining sector would cost up to $4.8b over the first five years of the full operation of the scheme from 2012-13.

If accepted, the Coalition’s proposed amendments would mean in the first five years of the scheme, including the first year in which the price of permits would be capped at $10, additional funding of around $7.7b would be required from the CPRS itself or from the Budget.

2011-12 $m 2012-13 $m 2013-14 $m 2014-15 $m 2015-16 $m
Small business 64.0 192.0 199.7 207.8 216.2
Coal 200.0 777.0 870.0 960.0 1,050.0
Industry compensation 22.4 596.7 761.6 850.5 753.3
Total 286.3 1,565.7 1,831.3 2,018.3 2,019.4

There will also be significant additional costs from 2016, when compensation for the coal-fired electricity generation sector is scheduled to end. The Coalition propose to continue compensation for a further decade, removing a further $6b from the scheme over 10 years.

The Coalition has stuck to its “base-line” proposal for the electricity sector, but offered to negotiate with the Government on other ways to reduce electricity costs for small businesses, who will not be compensated under the CPRS but expected to pass cost increases on to households. Lower and middle-income households will be compensated under the CPRS for price rises. A very conservative estimate for small business compensation suggests a relatively small cost of around $200m would assist in offsetting – but not completely eliminating — the expected price rises for small businesses.

Last night Malcolm Turnbull and Ian Macfarlane indicated much of the cost increases or lost revenue under their proposals would be offset by reduced compensation to households, which would require less compensation because electricity and other prices rises would be lower, although Macfarlane appeared to indicate the Coalition was considering costs from a long-term perspective, funding the CPRS from the budget in its initial stages before moving to “surplus” later.

The primary source of additional funding, however, is the $50 billion in free permits the Coalition claims remain unallocated by the Government under the CPRS.

The Government has denied there is a substantial portion of unallocated permits in the scheme. While there is likely to be some wriggle room given the speculative nature of some of the assumptions underpinning permit allocation projections, a quantum of $50b appears unlikely.

Another factor in the Government’s considerations is that the few supporters of the CPRS in the environmental movement will abandon it if it increases industry compensation. The appeal of passage of the CPRS, however, would more than offset criticism from those who have previously supported it, like the Australian Conservation Foundation. But the sheer cost of the Coalition’s demands will be the biggest problem as Penny Wong and Ian Macfarlane sit down to negotiate this afternoon.