The legislation for the CPRS was rescinded by the Abbott Government in 2014, but we provide this information for historical purposes. The Rudd Government proposed an emissions trading scheme in 2008 as its central policy response to persuade Australian businesses to reduce their greenhouse gas emissions. The scheme is based on a cap and trade system.
Liable firms will be required to surrender permits to the Government each year and the total cap for Australia will be reduced over time.
By limiting the availability of carbon permits, the scheme creates scarcity. As the permits will be traded in a market, this scarcity creates a price signal. The price will be an incentive for organisations to either reduce their carbon emissions or to buy permits from other firms that can reduce the same amount more cheaply.
By reducing the cap annually, Australia will meet its international commitments to reduce its emissions over time.
The Rudd Government planned to ease the cost of transition by compensating low-income households, motorists and export exposed industries.
A very similar cap and trade system has been operating in the EU for a number of years. The global market for carbon has grown quickly - from $65B in 2007 to $120B in 2009, with forecasts of $1.9T by 2020.
Climate change presents a significant risk to Australian businesses and the country’s future economic prosperity. The Rudd Government proposed an emissions trading scheme as Australia's main policy response to mitigate climate change and to comply with international obligations. The scheme is called the Carbon Pollution Reduction Scheme (CPRS). At present, it appears that this policy will be subject to a completer review by the Gillard Government.
Australia’s proposed CPRS was designed to give effect to Australia’s obligations under the Kyoto Protocol. Australia has proposed initial emissions reductions targets of 5-25% below 2000 levels by 2020 and mid-term reductions of 60% by 2050. The “cap-and-trade” system requires a limit, or cap, to be set on the amount of greenhouse gases (GHG’s) emitted in Australia. This will restrict greenhouse gas pollution and is designed to achieve incremental targets, which are reduced periodically. The cap is translated into saleable permits and these permits are sold or distributed in the market. The cap-and-trade system is a mechanism outlined in international negotiations to reduce carbon pollution and it will allow for the integration of Australian businesses into the global emissions trading market.
International Climate Change Policy
The United Nations Framework Convention on Climate Change (UNFCCC) is an international treaty that was signed by most countries in 1994. This treaty recognized the need for a global agreement to limit greenhouse gases and it encouraged industrialized nations to stabilize GHG emissions over time. Under this international framework, the Kyoto Protocol was designed in 1997 as the first international agreement on climate change with legally binding targets. It came into force in 2005, with targets to be achieved by 2008-2012. The summit in Copenhagen in December 2009 addresses the post Kyoto period.
Australia is a signatory to the Convention and the Protocol.
Cap-and-Trade
Market mechanisms are generally recognized as the most efficient way of achieving emissions cuts – achieving the deepest cuts at the lowest economic cost. By limiting the availability of carbon permits, the cap and trade scheme creates scarcity that will force the price of carbon to go up. This scarcity creates a price signal and an incentive for firms to reduce carbon-intensive activities.
The scheme also creates a market for carbon permits – enabling their trade as a commodity. The government will set the timetable for emissions reduction trajectory. The “cap” for a given financial year will correspond to this emissions trajectory, and saleable permits will be created accordingly. Liable firms will be required to surrender permits to the regulatory body each year.
Australia's proposed CPRS
The scheme that was proposed would have introduced an annual cap equivalent to Australia’s national reduction targets. Liable entities are required to purchase permits and surrender them according to their annual emissions.
A person can be liable for entry into the scheme if they are:
- Responsible for emitting greenhouse gases from a facility;
- Import, produce or supply certain upstream fuels;
- Import, manufacture or supply synthetic GHG’s.
Entities that emit over 25,000 tonnes carbon dioxide equivalent annually (10,000 tonnes for landfill sites) are liable for entry into the scheme. This scheme would have covered approximately 1,000 registered businesses in Australia.
The scheme would have covered the following sectors - stationary energy, transport, fugitive emissions, industrial processes and waste. Agriculture and forestry sectors were excluded.
Permits would have had a no "use-by-date". They could have been banked indefinitely and limited future borrowing will be allowed. Once acquired, permits become personal property; they could not be extinguished without appropriate compensation.
For the first year of implementation, a fixed charge ($10/tonne GHG) would have applied to all sold permits, with an unlimited number of (not bankable) permits available. For the first 5 years of the scheme, permits additional to those auctioned would have been available for a fixed charge.
International Emissions Units (IEU) may be used to purchase offsets or credits from international carbon markets as an alternative to national abatement or purchasing credits on the domestic market. There would have been no limit to the number of IEU’s that could be surrendered to meet obligations under the scheme.
In November, 2009 the Rudd Government and the Coalition negotiated the terms of the CPRS legislation. As a result, considerable concessions were made to industry that is trade exposed, power generators and coal mines. However, the Senate subsequently voted down the legislation.
Opportunities
With the introduction of an emissions trading system, the domestic carbon trading will expand and Australian business and industry can become involved in established international carbon markets. With a price attached to carbon pollution, carbon offset markets will grow, creating a value for energy efficiency and carbon neutrality within business. Businesses with improved environmental credentials would gain access to these markets and through new pricing mechanisms, would achieve strategic advantage over competitors in the new business environment.
A new investment environment will be created with a commodity market for carbon credits at its centre. New markets, investment opportunities and environmental products will emerge. With carbon credits a scarce and tradable commodity, financial instruments including futures markets and tradable derivative instruments will be traded like any other financial commodity. Carbon funds, banks and multilateral institutions are already evolving to accommodate Kyoto obligations in carbon markets, and clear domestic carbon trading policy will allow Australian business and industry to become involved in this market.
The corporate and business sectors have a key role to play in the transition to the low-carbon economy. This will be facilitated by clear, robust policy and informed strategic business planning.
- Carbon Pollution Reduction Scheme: Green Paper, July 2008, Commonwealth Government, Canberra.
- Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future, White Paper, Volume 1, December 2008, Commonwealth Government, Canberra.
- Carbon Pollution Reduction Scheme Act 2009