Key Designs of Australian Climate Policy Architectures

The Australian Government’s Climate Change Plan: Securing Clean Energy Future was released on 10 July 2011. The Plan includes four main actions: putting a price tag on carbon pollution, driving innovation in renewable energy, improving energy efficiency, and creating climate-friendly opportunities on the land. Imposing a carbon price to big polluters is the central strategy. The key designs are as follow.

Carbon Price

CARBON PRICE MECHANISM

•  To start off from 1 July 2011
•  It will be charged on around 500 heavy polluters which emitting at least 25ktCO₂e  direct  green house gases (excluding emissions from transport fuels)
• The scheme coverage: emissions stationary energy, industrial processes, fugitive emissions (other than from decommissioned coal mines) and emissions from non-legacy waste. Agriculture will be excluded from the scheme. It will be covered by other Government measure called the Carbon Farming Initiative.
• It will be delivered in two phases: fixed carbon price for the first 3 years, followed by a floating price though a cap-and-trade emissions trading scheme (ETS)

• Phase 1 – Fixed Carbon Price – commencing on 1 July 2011

o   Carbon tax per tCO₂e (tonne CO2 equivalent) = an initial price $23 rising by 2.5% p.a. in real terms, assuming 2.5% inflation p.a = $23 in 2012, $24.15 in 2013, and $25.40 in 2014

o   Liable entities have to buy emissions permits from the Government at fixed price which will be automatically surrendered for that compliance year.

o   These fixed price permits are non-tradable and not bankable for future use.

o   Penalties for any shortfall: 1.3 X the fixed price for permits = $29.90 for 2012-13, $31.40 for 2013-14, and $33.00 for 2014-15

• Phase 2 – Floating Carbon Price – commencing on 1 July 2015

o   There will be pollution caps for each year

o   Pollution caps for years 2015-2019 will be announced on 31 May 2014

o   The price ceiling and floor will be set for the first three years of the flexible period, 2015-17

o   The price ceiling will be set $20 higher than the estimated international carbon price on 1 July 2015, rising by 5% in real terms per year

o   The price floor will be set $15 initially, rising by 4% in real terms per year.  

o   Penalties for any shortfall: double the average price of permits for the relevant year

o   It will be linked to international carbon market since the first year of operation

PLANNED ASSISTANCE FOR BUSINESSES 

• Jobs and Competitiveness Program to assist emissions-intensive trade-exposed industries, e.g. for the most emissions intensive industries – aluminium, steel, zinc, pulp and paper makers – will be allocated free permits representing 94.5% of industry average carbon costs, reducing by 1.3% p.a. This industry will be allocated $9.2bn by 2014-15 to assist the transition to the flexible price period.
• Clean Technology Program with $1.2 bn for investments on innovation across manufacturing industries.
• Energy Security Fund, including payment to phase out around 2,000 MW of highly polluted coal-fired generators by 2020.
• Small businesses: increase in instant asset write-off thresholds to $6,500
• Clean Energy Finance Corporation - $10bn to be invested in renewable energy and low polluting technologies.
• Australian Renewable Energy Agency (ARENA) – to administer $3.2bn for R&D and commercialisation of renewable energy.

ESTIMATED IMPACTS OF CARBON PRICE ON HOUSEHOLDS

Big polluters that must pay carbon prices will likely pass these carbon costs on to customers. It was predicted that it will increase living costs by 0.7% - on average, electricity will rise by $3.30/week, gas by $1.50/week and food expenses by 80c/week. Average costs will increase $9.90/week or $515/year.

PROPOSED ASSISTANCE FOR HOUSEHOLDS

• Average assistance rate for most households: $10.10/week or $525/year. 
• Tax-free thresholds will increase to $18,200 from 1 July 2012, then to $14,900 from 1 July 2015

At a glance, the Australian climate policy looks similar to EU ETS climate policy landscape to me. The EU charges polluters a carbon price through ETS and demands higher level of renewable energy and energy efficiency.  The first three years of fixed price period in Australia resembles a pilot phase in EU ETS – from 2005 to 2007 -  which mainly serves as a transition period to the more stringent rules of ETS.

The obvious difference is that the Australian climate policy appears to be better designed to charge polluters since the beginning of policy implementation compared to the EU’s. For phase 1 of the EU ETS, 95% of European Union Allowances (EUAs) – the permit to emit one tonne CO₂ equivalent gas during a specified period – are allocated free (termed grandfathered) to liable entities. In contrast, the Australian policy is going to really charge polluters with a carbon price, which I think will encourage businesses to alter business-as-usual operations to become more carbon conscious.


It is clear that Australian businesses need to start factoring in the impacts of future carbon prices. Not only liable entities that directly covered under the carbon price scheme, but industries outside the scheme will also be affected by carbon price through increased electricity prices transferred along the input supply chain.

All in all, this is a progressive step into our sustainable future. I think the Plan opens up lots of opportunities for both individuals and businesses. Let’s start carbonvestmens... It can be simply started off from investing carbon conscious into our daily activities, such as carbon mindful in using electronic equipments at home and at workplace J

More details on CleanEnergyFuture
KPMG summary on Australia's Climate Change Plan (pdf)