Carbon Pollution Reduction Scheme and use of Kyoto units
Providing unlimited access to cheaper international units is not without its critics.
A key feature in the design of the Federal Government's proposed Carbon Pollution Reduction Scheme (CPRS) is the proposal to allow entities to use Kyoto units to satisfy their CPRS obligations. The ability to access Kyoto units for compliance purposes, where the price of Australia's domestic permits ('Australian Emissions Units' or AEUs) exceeds the price of these international units, provides liable entities with a cheaper compliance alternative. Indeed, Commonwealth Treasury's modeling of the economic impact of the CPRS is heavily dependent on the assumption that carbon permits are freely traded between countries. If this is not, in fact, the case, the costs to Australia of achieving its emissions reduction targets would increase.
The current price of Certified Emission Reductions (CERs) on the secondary market is around A$20.50/tCO2-e. This compares with an expected initial price of AEUs of between A$23/tCO2-e and A$32/tCO2-e, which suggests that it may not be long before importing CERs makes economic sense. Under this scenario, Australia's carbon price will then be set by international prices.
However, providing unlimited access to cheaper international units is not without its critics. To the extent that liable entities use these units to fulfil their CPRS obligations, Australia will be able to achieve its emissions reduction targets by buying overseas emissions reductions rather than by reducing its own emissions – indeed, its own emissions could even increase but be covered by imported international units.
While access to international units is advantageous to liable entities, it is important to note that, under the Kyoto Protocol, there are restrictions on the amount of these units that can be carried over from the first commitment period (2008-12). If the number of international units held in Australia's national registry by the Government and other participants exceeds any such restriction, then the Government has stated that it will apply this restriction pro rata to all such holders. This means that those who hold international units run the risk that they will be precluded from using a portion of those units to acquit their CPRS liabilities in a subsequent period.
It is also important to note that the Government does not intend to accept all kinds of Kyoto units as being eligible to meet a liable entity's CPRS obligations. This is because it wants to avoid any mismatch between the Kyoto units which can be used to satisfy obligations under the CPRS and the Kyoto units which the Government can surrender to satisfy its international obligations. So, for example, temporary and long-term CERs (which are generated from reforestation and afforestation activities) will not be able to be used to meet CPRS obligations because these units have a limited life and so would need to be replaced by the Government on their expiry. In the early stages of the CPRS, Assigned Amount Units (AAUs) will also not be eligible for surrender to meet CPRS obligations that, as there is likely to be a surplus of AAUs (partly due to the existence of a large number of 'hot air' AAUs), accepting AAUs into the CPRS will significantly depress Australia's carbon price.
By accepting international units into the CPRS, the CPRS will effectively be linked (albeit indirectly) to other emissions trading schemes, such as the European Union and New Zealand schemes, which also accept these kinds of units. Looking to the future, the CPRS has been designed using internationally accepted principles so that, once the five-year transitional price cap expires, it can be linked more directly with other emissions trading schemes in such a way that permits specific to those schemes can be used to acquit CPRS obligations and/or Australian AEUs can be used to acquit obligations under those schemes. Linking in this way has the potential to provide liable entities under the CPRS with access to an even greater pool of lower-cost international emissions reductions to offset their domestic liabilities.
In the meantime, there is considerable scope for Australian companies either to invest directly in overseas projects that generate CERs and Emissions Reduction Units (ERUs), or to invest indirectly (eg through a fund) in CERs and ERUs that are traded on the secondary market. This will provide those companies with a means of acquiring international units that they can use to satisfy their CPRS liabilities or that they can sell to other companies that need them to meet their own CPRS liabilities.
Grant Anderson is a partner of the law firm Allens Arthur Robinson and is one of the leaders of the firm's climate change practice.
Grant has written extensively on climate change issues over the past 18 months. To download these articles, go to www.aar.com.au/pubs/cc/index.htm
For more information on Allens' Climate Change practice, go to www.aar.com.au/services/cc/index.htm
MikeM
February 11, 2009 at 10:46 am
CPRS is by necessity not simple
Provision for international trading makes good sense. If a Ukrainian coal-burning power station upgrades its equipment so that, while it still burns coal, it is twice as efficient as before and produces half the emissions per kilowatt that it did before, there is no reason why an Australian aluminium smelter should not pay for the upgrade cost.
The original big success in pollution trading was the US Environmental Protection Agency's Acid Rain Program, which began in 1995 and had the goal of dramatically reducing US electric plants' emissions of sulfur and nitrogen oxides. But it allowed measures such as an oil refinery paying a bounty to take rustbucket cars off the road, rather than reducing its own pollution output.
As Grant explains, sources of greenhouse gases are much more various (indeed international shipping and air traffic, and farm animals, are yet to be seriously tackled; as Greg Hunt notes elsewhere, biochar as a carbon removal mechanism is yet to be accepted). It is inevitable that a variety of non-fungible Emission Reduction Unit (ERU) certificate types will develop. Given a choice between complicated systems and simple systems anyone except perhaps a lawyer might prefer the latter. In this case, reality dictates the former.
The only lawyer whom MikeM knows lives in Little Rock, Arkansas, and prefers simple solutions too.