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Allens Arthur Robinson

Client Update: Climate Change – 30 September 2008

Release of the Garnaut Climate Change Review Final Report

In brief: The Garnaut Climate Change Review's Final Report, which was released today, contains no surprises but simply confirms many of the findings and recommendations made in the Review's previous reports. Partner Grant Anderson (view CV) reports.

Overview

As in the Review's interim report and draft report, Professor Garnaut's final report makes it very clear that Australia has a strong interest in an effective and comprehensive international response that mitigates the potentially serious consequences of climate change. The case for Australia developing a credible mitigation response now – with an emissions trading scheme as its centrepiece – is directed almost entirely at facilitating the achievement of an effective global agreement:1

There would be no point in Australia introducing mitigation policy on its own. The entire purpose of Australian mitigation policy is to support the emergence of an effective global effort ... A significant mitigation effort by Australia and other developed countries is the cost of preserving some hope of a comprehensive international agreement for avoiding dangerous climate change.

  

As the Final Report also acknowledges, a strong Australian mitigation effort which is not accompanied by an effective global agreement in the short term will simply damage Australia's economy without having any appreciable effect on global greenhouse gas emissions.

It is this philosophy which underpins both the Review's proposed design of Australia's emissions trading scheme and the emissions trajectories that the Final Report recommends.

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Emissions trajectories

In order to strike a balance between protecting Australia's economy and demonstrating that Australia is prepared to bear its fair share of the climate change mitigation effort, the Final Report recommends that Australia should, at the very least, commit to reducing its emissions by 5 per cent from 2000 levels by 2020. The 'carrot' is that, if a post-2012 international agreement that covers both developed and developing countries is achieved, and that agreement is to hold greenhouse gas concentrations to 550 ppm CO2-e, then Australia would adopt a 2020 target of reducing its emissions from 2000 levels by 10 per cent (this would be consistent with reducing its 2000 emissions level by 80 per cent by 2050). In the unlikely scenario of there being a comprehensive international agreement to hold greenhouse gas concentrations to 450 ppm CO2-e, Australia's commitment would be to reduce its 2000 emissions level by 25 per cent (by 2020) and 90 per cent (by 2050).

While some have criticised these targets as not sufficiently ambitious, on a per capita basis this translates into quite substantial reductions: a 5 per cent reduction target for 2020 represents a 25 per cent per capita reduction in emissions, a 10 per cent reduction target for 2020 represents a 30 per cent per capita reduction in emissions and a 25 per cent reduction target for 2020 represents a 40 per cent per capita reduction in emissions.2 

According to the Final Report, the 550 ppm scenario would result in Australia's GDP falling by 1.8 per cent compared to the level which it would otherwise be in 2020 (under the 450 ppm scenario this reduction would be 2.4 per cent). Under these scenarios, the carbon price in 2020 would be $34.50/tCO2-e and $60.00/tCO2-e respectively. However, importantly, these outcomes assume that there is free trade in international permits so that abatement occurs wherever in the world it is most cost effective to do so. 

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Emissions Trading Scheme

The key recommendations relating to the design of Australia's emissions trading scheme, as set out in the Review's Draft Report, remain unchanged. These include the recommendation that the period 2010-12 be regarded as a transition period with the permit price being fixed.

However the Final Report makes very clear its opposition to the Federal Government weakening the basic design of the scheme so as to accommodate industry demands for compensation or special treatment. As the Final Report states, apart from jeopardising the international credibility of Australia's emissions trading scheme3 :

Exempting some sectors or particular greenhouse gases would distort the burden of reduced emissions and shift it disproportionately onto others. Freely allocating permits to some users but not others safeguards the profits of the fortunate recipients while imposing even greater adjustment costs on other emitters and on the community.

  

It is in this context that the Final Report reiterates its case against compensating coal-fired electricity generators for the reduction in profits that they will suffer as a result of the imposition of a carbon price. However, the Final Report does recognise that there may be a case for providing structural adjustment assistance to regions where such generators are located so as to assist in the transition to low emissions technologies. In particular, it proposes additional funding of around $1 billion (to be matched by industry funding on a dollar for dollar basis) to support investment in emissions-reducing technologies in the coal-fired generation sector.

In contrast, emissions-intensive trade-exposed industries are regarded as warranting assistance on the basis that (pending the negotiation of a comprehensive international agreement or separate sectoral agreements) it is necessary to correct for distortions in efficiency that will result from Australia's international competitors not being exposed to a comparable carbon constraint. For this purpose the Final Report considers that the assistance should be calculated by reference to the expected uplift in world product prices that would eventuate if these competitors adopted a carbon constraint similar that imposed by the Australian emissions trading scheme, and should apply to the extent that the expected increase in world price exceeds a relatively low threshold. However the Final Report recommends that this assistance should be provided, not through the allocation of free permits, but rather in the form of cash or a cash-equivalent reduction in the liable party's obligation to acquit emissions permits. It also suggests that such assistance would be significantly below 30 per cent of total permit revenue.

By reiterating previous recommendations of the Garnaut Climate Change Review, the recommendations of the Final Report as to the design of Australia's emissions trading scheme diverge in a number of respects from the design parameters proposed in the Federal Government's Green Paper, and it seems doubtful that these recommendations will be adopted. For example, the Final Report recommends that the scheme should have a 'make good' obligation, as well as a penalty that applies where a liable party fails to acquit sufficient permits to cover its emissions. This is contrary to the Government's preferred position as set out in its Green Paper. Moreover, unlike the Green Paper, the Final Report sees substantial scope for the development of offsets (particularly in biosequestration).

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Complementary policies

While an emissions trading scheme is the central feature of Australia's policy response to climate change, the Final Report recognises that such a scheme needs to be accompanied by other policies. The most significant of these (at least in monetary terms) is a substantial increase in funding for the research, development and commercialisation of low emissions technologies. This would entail Australia contributing to an international low emissions technology commitment at a cost of around A$2.7 billion per year (which would be funded out of the revenues raised from auctioning emissions permits). In this regard, given its heavy reliance on coal-fired electricity generation and coal exports, Australia has a significant interest in the development of carbon capture and storage technologies.

Conversely, the Review reiterates its concern that the Mandatory Renewable Energy Target (and similar state-based schemes) are inconsistent with a properly designed emissions trading scheme and will only serve to increase the price of electricity above that which it otherwise would be.

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What is Allens doing

The Allens climate change team will host a series of seminars around Australia at the end of October, wrapping up all of the latest on the proposed emissions trading scheme.

To register your interest, click on the preferred location below:

Footnotes
  1. Final Report, p. 307.
  2. Reducing Australia's 2000 emissions level by 80 per cent by 2050 represents a 90 per cent per capita reduction in emissions and reducing Australia's 2000 emissions level by 90 per cent by 2050 represents a 95 per cent per capita reduction in emissions.
  3. Final Report, p.314; see also p. 315.

     

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