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Client Update: Climate Change – 29 February 2008

Garnaut Review's interim report

In brief: Professor Garnaut's recently released interim report on the impact of climate change in Australia outlines the type of recommendations that may feature in the ultimate report which will be released in September this year. Partner Grant Anderson (view CV) and Senior Associate Suzanne Westgate report.

The Garnaut Climate Change Review (the Review) has been commissioned by the Commonwealth, state and territory governments of Australia to examine the impacts of climate change on the Australian economy and recommend medium to long-term policy options to produce the best possible outcomes for Australia. The Review's report is to be released in June 2008 in draft, and in final form in September 2008, and will assist the Commonwealth Government in the design of an Australian Emissions Trading Scheme (ETS).

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Findings on global ramifications

On 21 February 2008, Professor Garnaut released the Review's interim report, which sets out some of the Review's preliminary views. Key interim findings in relation to Australia's global position include the following:

  • The world is moving towards 'high risks of dangerous climate change' more rapidly than has previously been understood, associated with strong economic growth in developing countries (particularly China).
  • Given its location and climate, Australia is in a position of exceptional sensitivity to climate change but also has an exceptional opportunity to do well in a world of global mitigation. The Review strongly supports Australia's role in supporting international efforts on climate change, while accepting that achieving an effective global agreement that will sufficiently reduce the risk of dangerous climate change (ie an agreement that also encompasses the major developed countries) will be difficult. The interim report suggests that, in an attempt to drive a more satisfactory global approach to climate change, Australia should establish two sets of targets: one that it would be prepared to adopt unilaterally and the other that it would be prepared to adopt in the context of an effective global agreement.
  • It is in Australia's interest to seek the strongest feasible global mitigation outcome, which the Review suggests to be around 450 parts per million of carbon dioxide equivalent. If the emissions budget for each country is to be calculated on the basis of equal per capita emissions rights by 2050, then this suggests that Australia's absolute emissions would have to be approximately 70 per cent below 2000 levels by that time (although this does not take into account the possibility of Australia buying offsets from other countries). Achieving the stabilisation of greenhouse gas emissions at this level would mean that there would be a 50 per cent probability of constraining the increase in global temperature to below 2ºC.

In terms of international linkages, the Review's preference is for international trade opportunities to be defined as fully as possible from the beginning of any ETS.

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Findings on domestic ramifications

Key interim findings of the Review in relation to Australia's domestic position include:

  • In 2008, Australia should make firm unilateral commitments on emissions targets for 2020 and 2050 that are comparable with those accepted by other developed countries (such as the European Union).
  • An ETS supported by measures to correct market failures or weaknesses related to innovation, research and development, information and network infrastructure, and with appropriate international linkages, should be the centrepiece of Australia's greenhouse gas reduction strategy.
  • The most efficient ETS would allocate rights to emit within Australia's emissions budget over a specified time period and allow the owners of permits to use them at a time of their choosing within that period. However, interim targets are required to guide the emissions reduction trajectory, and the Review will be recommending an interim target for Australia for 2020 (it is likely that this will be quite an aggressive target).
  • Both the banking of permits (ie the use of earlier dated permits to acquit emissions liabilities in later years) and the borrowing of permits (ie the use of future dated permits to acquit emissions liabilities in earlier years) should be allowed under an ETS. Despite the fact that the previous National Emissions Trading Taskforce and Prime Ministerial Task Group reports recommended against allowing borrowing, the Review considers both banking and borrowing to be desirable to enable emitters to cost effectively meet their emissions reduction obligations where there is an unexpected increase in the price of permits (eg due to unexpectedly hot weather). However, the proviso is that an independent authority would be established to issue permits in accordance with Australia's emissions budget, and that it is this authority which would be empowered to lend permits. Under the Review model, the authority would be able to lend permits to authorised dealers, who could then on-lend them to industry participants who wish to use the permits for borrowing purposes. The responsibility for any default of those borrowers in failing to meet their emissions reduction obligations as a result of the early use of such permits would rest with the relevant authorised dealer.
  • The Review supports addressing the impact of an ETS on trade-exposed energy-intensive industries, but questions whether the provision of free permits is a sufficiently transparent way of doing this. Instead, it suggests that a better alternative may be to make cash payments to firms in those industries. The March discussion paper (referred to below) will set out suggested principles to guide the form, level and timing of support for trade-exposed emission-intensive industries.
  • Conversely, the Review does not appear to be in favour of support being provided to businesses in the non-traded sector (eg fossil fuel-fired electricity generators) whose profitability is adversely affected by the introduction of an ETS. This is because, in the Review's opinion, the business community has been aware of the risks of carbon pricing for many years, such businesses are likely to be able to pass through to consumers at least some of the cost impact of an ETS, and it will be very difficult to calculate in advance the cost impact of an ETS on businesses of this kind. In response, the Federal Minister for Climate Change and Water, Senator Penny Wong, was quick to announce that the Rudd Government continued to support an ETS that addresses the competitive challenges facing not just emissions-intensive trade-exposed industries but also strongly affected industries.

The next step will be for the Review to release its discussion paper, in early March 2008, on the design principles that it proposes for an ETS. We will continue to keep you updated.

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