Australia’s Clean Energy Action Plan Explanation and commentary

Summary of Australian Government’s approach 2 Achieve a 5% reduction in carbon emissions in 2020 compared 2000: Introduce a price on carbon Establish a Clean Energy Finance Corporation ($10b) Create a new Australian Renewable Energy Authority Achieve 20% Renewable Electricity Generation in 2020 Introduce a National Energy Savings Initiative Put in place a Carbon Farming Initiative – tradeable credits for carbon storage and reduction

Australia’s contribution to world carbon emissions 3

CSIRO on Warming Climate in Australia 4

CSIRO on Climate Change 5 “Studies have linked most of the warming in global temperatures in the past 100 to 120 years, especially in the last 50 years, to Increasing greenhouse gases and the enhanced greenhouse effect. It is extremely unlikely that the observed global-scale warming is due to natural variability.” Karl Braganza and John A Church CSIRO, Observations of Global and Australia Climate, 2011

CSIRO on Sea Levels 6

Why Should Australia Act to Cut Carbon Pollution 7 Australia is vulnerable to climate change Generally a hot dry climate Vulnerable to extreme weather events Great assets under threat – Barrier Reef Population concentrated along coast Potential to Influence USA Great potential to build a low carbon economy Plentiful supply of high quality renewable energy sources Abundant supply of natural gas Great scope to improve energy efficiency Build future competitive strength on low carbon products and services “Our research has shown that latecomers are losers… I hope Australia can provide a very positive signal with ambitious targets. It's not difficult for Australia, even though they use a lot of coal, because the economy is in very good shape and they have a lot of renewable energy sources.” Jiang Kejun, Director of Research, ERI, China

Economics of Climate Change 8 Australia will continue to achieve strong economic growth Federal Treasury projections – GNI per person increases by $9,000 by 2019/20 Change composition of products and services Reduction in Energy Intensity of GDP Winners Critical factors – carbon price level and complementary measures Service sector – Tourism, Education, Health, Research Cleaner energy sources – ETS part of the solution Gas Renewables Energy Efficiency Losers Carbon intensive electricity generators Carbon intensive products and services

Politics of Climate Change: Europe 9 Contrast with the UK and other European countries Conservative UK Prime Minister announced major new initiatives Dramatic shift away from fossil fuels Developing leadership in European Union Support carbon price, increase cost of fossil fuel, make low carbon power more attractive Feed-in-Tariff for low carbon power Germany major parties support emissions trading and foster renewable energy Feed-in-Tariff for solar and wind Support for emissions trading scheme

Politics of Climate Change: Australia 10 Australian debate degenerated to base politics Ad hoc policies dominated over past decade Opposition focus on a “great big new tax” Partisan politics reigns supreme Virtually no debate on the detail of climate change policy No consensus between major parties

International Perspective 11 The UK Government’s Approach Ensuring all countries are well placed to deliver Cancun mitigation measures Develop a detailed verification and reporting system Work towards an international deforestation agreement Ensure that accounting rules are established which underpin the integrity of actions Put in place detailed design arrangements that support developing countries taking action Pursue the development of new market mechanisms to support cost effective emission reductions

12 The construction of Australia’s scheme in four steps 1. Define pollution 2. Define polluters 3. Polluters to surrender permits 4. Constrain permit supply 4. Unlimited fixed price Fixed price period Flexible price period

Step 1: Define pollution 13 Pollution = emission of 4 Kyoto Protocol greenhouse gases in Australia from liable entities Around 60% of Australia’s emissions covered by the Clean Energy Action Plan legislation with another 6% affected by other legislation.

Step 2: Define polluters (liable entities) 14 >25ktonnes CO2e direct emissions per “facility” per year (a bit different for landfill); excludes emissions from agriculture, legacy landfill, decommissioned coal mines, and combustion of some processed fossil fuels that are covered by excise or customs entity that has operational control of a facility; if facility operated by joint venture, liability is split proportionate to ownership; liability is transferrable; there are about 500 liable entities.

Step 2: Defining polluters (treatment of gas suppliers) 15 Gas retailers are liable for “potential” (not actual) GHG emissions related to gas which they withdraw from distribution pipelines (not transmission pipelines); Gas users who combust natural gas and this causes emissions > 25ktonnes per year, can choose to accept the liability for emissions associated with this gas, and negotiate a “carbon-free” gas price; Gas users who use gas a feed-stock or to manufacture CNG, LNG or LPG can accept liability themselves (and hence negotiate a “carbon-free” gas price); Gas users who buy their gas directly (i.e. not through retailers) are liable either as a direct emitter or “application to own use” provisions.

Step 3: Polluters to surrender permits (emission units) to match their pollution: Fixed charge period 16 Unlimited supply of carbon units issued by the Regulator at a fixed price. Assumed to be automatically surrendered when bought. Not transferable and no banking allowed. Limited supply of free units issued to emission intensive trade-exposed industries and high emission electricity generators. Free units are tradable, can not be banked but can be sold back to the Government (at the annually fixed price) if not used. Emission units from carbon farming initiative can be used to acquit up to 5% of the obligation. During the fixed charge period (1 July 2012 to 30 June 2015) there is no cap. Liable parties are required to buy emission units issued by the government for $23/tonne CO2-e in 2012, rising at 2.5% in real terms per year.

17 Limited supply of units to be auctioned by the Regulator, up to the level of the cap. Unlimited supply of fixed charge units priced at $20 above the international price from 2015 to 2018; Minimum reserve price of $15 in 2015 rising at 4%+CPI (but implemented only if surrender charge for international units is implemented); Surrender charge for international emission units so that international units can not be cheaper than the minimum reserve price of Australian units; Unrestricted use of units from carbon farming initiative; Volume limit of 50% on use of international emission units; Export of Australian units only allowed if bilateral links between Australia and other emission trading scheme. Step 3: Polluters to surrender permits (emission units) to match their pollution: Flexible charge period

Step 4: Constrain the supply of permits (emission units) to create scarcity (from start of flexibility period) 18 Overall objective: Unconditionally reduce emissions (globally) by an amount equal to 5% below Australia’s year 2000 levels, by 2020 (and at least half of this reduction to be achieved in Australia) The emission cap in 1 July 2015 will be 38 Mt less than emissions from liable entities in year from 1 July The emission cap from 1 July 2016 will be 16 Mt less than the year before unless Parliament sets higher reductions.

Industry assistance 19 Primary objective is to reduce carbon leakage and provide transitional assistance. The assistance provided for: direct (liable) emissions; emissions associated with the use of steam in an activity; the cost increase associated with the indirect emissions from the use of electricity in an activity; the cost increase related to the upstream emissions from the extraction, processing and transportation of natural gas and its components, such as methane, used as feedstock and sequestered by an activity. Eligible activities (currently 31) meet thresholds for trade-exposure and impact of emission prices on value-added or revenue. 94.5%, 66% and 50% (for LNG) assistance categories (i.e. allocation of free permits), declining by 1.3% per year. Baselines (GHG per unit of production of different activities) to be set in regulations, based on emissions and production between 2006 and Volume of free permits based on production in the last financial year. To be reviewed by the Productivity Commission in 2014/15 (or before if the Government asks it to).

Electricity generator assistance $1bn in cash payments in 2011/ m free permits to be divided amongst eligible generators for each year from 2013 to 2017 (although slightly different in 2014). Only for power stations that are grid-connected, have emission intensity above 1 tonne CO2- e/MWh and that use coal for 95% of production. Permits divided amongst eligible generators based on their “annual assistance factor”: –Difference between emission intensity (capped at 1.3 tonnes CO2-e/MWh) and 0.86 topnnes /CO2-e; –Production between 1 July 2008 and 30 June 2010 relative to that of all other eligible generators. In addition to allocation of permits, there will be payments for closure of the most polluting plant. 20

By our calculation, the most GHG-intensive generators are likely to profit from the compensation 21