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Allens Arthur Robinson

Focus: Senate committee reports on draft CPRS legislation

4 May 2009

In brief: Recently, the Senate Standing Committee on Economics handed down its report on the draft legislation to implement the Federal Government's proposed Carbon Pollution Reduction Scheme. While the Federal Government requires the support of either the Opposition or the Greens and the two independent senators for the legislation to pass, the positions of the non-Government parties (as outlined in the report) make it clear that there is some way to go before the Government is likely to achieve the necessary support. Partner Grant Anderson (view CV) and Lawyer John Henderson report.

How does it affect you?

  • The Senate Standing Committee on Economics was split along party lines, casting doubt over the passage of the Carbon Pollution Reduction Scheme legislation through the Senate in June.
  • The Senate Select Committee on Climate Policy is also examining the legislation and is due to report on 14 May 2009, casting further doubt on the timing of the legislation.
  • Both the Coalition and one of the independent senators are advocating the examination of alternatives to the Carbon Pollution Reduction Scheme, such as a carbon tax, the McKibbin-Wilcoxen hybrid model and intensity-based targets. Returning to the drawing board, however, will set the timetable back considerably and is unlikely to result in a better scheme as each of these alternatives has its own drawbacks. 

Background

On 11 March 2009, the Government referred the exposure draft of the legislation to implement the Carbon Pollution Reduction Scheme (CPRS) legislation to the Senate Standing Committee on Economics (the committee). The committee was comprised of four ALP senators, four Coalition senators, an independent senator and a Greens senator.

Despite the very short timeframe (written submissions were due by 25 March 2009), the committee received 140 written submissions as well as considerable oral evidence and reported to the Senate on 14 April 2009. This is consistent with the ambitious timetable that the Government has set for the introduction of the CPRS:

March-April 2009 Consultation on exposure draft legislation; Senate committee inquiry
May 2009 Legislation introduced into Parliament
June 2009 Desired passage of legislation
September quarter 2009 Australian Climate Change Regulatory Authority established
December quarter 2009 Legislative instruments tabled in Parliament
March quarter 2010 Scheme caps to 2014-15 and gateways for 10 following years set
First half 2010 First auction of permits
July 2010 Start of first compliance year
June 2011 End of first compliance year
October 2011 Deadline for lodging of emissions reports for first year
December 2011 Deadline for surrender of permits for first year

Not unpredictably, the committee was split along party lines and the reports of the various senators foreshadow the major issues that are likely to be debated when Parliament considers the CPRS legislation. These are discussed below.

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Targets

The Government's 2020 target is to reduce Australia's greenhouse gas emissions by between 5 per cent to 15 per cent of their 2000 levels. Although in absolute terms this target range is considerably below the 25 per cent to 40 per cent cuts that were advocated at the Bali meeting, the Government has justified these targets on the basis that they:

  • represent a greater per capita emissions reduction (of between 34 per cent and 41 per cent from 1990 levels) than most other developed countries have proposed to date; and
  • take into account Australia's comparatively larger costs of mitigation, which are the result of its increasing population, emissions and energy intensive industry profile, heavy reliance on coal-fired electricity generation, and the lack of mitigation opportunities.

The Greens have flagged that they consider these targets too low and Senator Xenophon (the independent senator on the committee) has suggested that more ambitious targets could be adopted if the costs of the CPRS were reduced through moving to a scheme that utilises intensity-based (rather than absolute) targets. Conversely, the Coalition has criticised the targets as pre-empting the outcomes of the Copenhagen meeting, which might not mandate targets even of the level the Government is proposing. Of course, if the Copenhagen meeting does actually endorse tougher targets, then the Government will find itself in the invidious position of having locked itself into too low a target for 2020, which means that it (taxpayers) will need to foot the bill for the purchase of international units to make up that deficit.

A further risk in the Government's position is that it opens the way for special pleading at the Copenhagen meeting: each country will be able to point to circumstances which 'justify' it in adopting more lenient targets than other countries. Moreover it can be argued that, because Australia's per capita emissions are extremely high in the first place, it is appropriate that Australia adopts correspondingly tougher targets. It is also somewhat disingenuous to contend that emissions are proportional to population as, at least to the extent that the output of the emitting industries is exported, there is no necessary correlation between emissions and population.

The other point (which has not gone unnoticed by the Greens and Senator Xenophon) is that the Government's targets are hardly rigid. The ability to access fixed price permits in the first five years of the CPRS means that there is scope to exceed the annual caps in the period 2010-15. Moreover, the fact that Australian emissions units may be banked, and that an unlimited number of international units may be imported to satisfy CPRS liabilities, means that gross domestic emissions may well exceed the annual caps in any event.

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Timing

The Government supports introducing the CPRS without delay on the basis that:

  • Australia needs to be able to present a credible position at the Copenhagen meeting which will encourage other countries to sign up to an international climate change agreement to succeed the Kyoto Protocol;
  • industry requires certainty to enable future investment to be undertaken (both in low emissions technologies and sectors covered by the CPRS) taking into account the impact of the CPRS and the resultant carbon price;
  • a number of businesses have already made investment decisions based on the assumption that the CPRS will come into operation from 1 July 2010 and those decisions would be undermined if the CPRS were to be delayed beyond that date;
  • there are economic benefits which accrue to countries which are 'early movers' – econometric modelling suggests that the difference in economic costs in 2050 for early movers could be up to 35 per cent below that for 'late movers'; and
  • instead of presenting an impediment to the introduction of the CPRS, the global financial crisis may actually be an opportune time to introduce the CPRS as it has resulted in low labour and capital costs which will support investment in the kinds of technologies that the CPRS is designed to encourage (as a footnote, the Government has expressed the perhaps optimistic view that the world should be coming out of recession in 2010 in any event).

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Costs and alternative models

Both the Coalition senators and Senator Xenophon have expressed concerns about the potential cost impact of the CPRS. In particular, the Coalition has criticised the Federal Treasury modelling, which suggests that there will only be a 0.1 per cent reduction in Australia's per capita GNP growth as a result of the introduction of the CPRS, for adopting unrealistic assumptions (including that there will be a comprehensive global international climate change agreement, and that the 20 per cent national renewable energy target). It also criticises the modelling for failing to take into account the risks posed by the global financial crisis and the substantial adjustment costs entailed in transforming Australia's economy from a high to a low carbon economy.

In this regard, and contrary to the position of the Greens and Senator Xenophon, the Coalition considers that the structural adjustment assistance that is to be given to emissions-intensive trade-exposed industries is unlikely to be sufficient to maintain their competitiveness (especially if Australia's trading partners do not adopt a similar carbon constraint). Moreover, catering particularly for its rural constituency, the Coalition senators have expressed serious concern about the potential increase in costs for farmers as a result of the effect of the CPRS on the prices of inputs such as fuel and fertilisers, and as a result of the possible liability of agriculture for its direct non-energy emissions should they be covered by the CPRS from 2015. Given that the weight of scientific evidence is that rises in global temperature will have a serious and immediate impact on agriculture, this will undoubtedly continue to be a sensitive political issue.

Concern about the potential costs of the CPRS has led both the Coalition1 and Senator Xenophon to advocate a re-examination of whether a cap and trade scheme such as the CPRS is the most appropriate model to adopt. This issue will be dealt with in more detail by the Senate Select Committee on Climate Policy which is charged with reporting on, among other things, the choice of an emissions trading scheme as the central policy plank in reducing Australia's greenhouse gas emissions and is due to report on 14 May 2009.

There does appear to be at least some scope for the Federal Government to investigate complementary measures to support greenhouse gas reductions (such as increased energy efficiency and soil sequestration), but it needs to be recognised that any alternative models will also have their pitfalls and that Australia runs the risk of being isolated from international carbon permit trading if it adopts a model that is not used by the majority of other developed countries.

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Voluntary abatement efforts under the CPRS

The committee considered the question of whether the CPRS reduces the effectiveness of voluntary action to reduce emissions. The issue is that the imposition of a national emissions cap means that businesses and households that reduce their emissions 'free up' carbon permits for use by other emitters to increase their emissions. To date the Government's response has been that action of this kind (eg conserving energy or using renewable energy) would benefit the individual or business taking that action in the form of reduced energy costs. However, the argument for providing support for voluntary emissions reductions has struck a chord with the ALP committee members who have recommended that the Federal Government should develop policies to encourage such action and that the CPRS legislation should be amended to require the Minister, when setting the annual emissions caps, to have regard to voluntary emissions reductions. This is an issue which has assumed some importance for both the Greens and Senator Xenophon.

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The next step

The Senate Select Committee on Climate Policy, which is inquiring into the effectiveness of the CPRS as a cost-effective emissions reduction policy mechanism, and the role of complementary measures, is due to report to the Senate on 14 May 2009. This committee is dominated by the non-Government parties and so is likely to be equally controversial. We will update you on its findings.

In the meantime, there is some indication that the Federal Government is already looking at reaching a compromise on aspects of the CPRS, including delaying the commencement of the scheme for a year and announcing tougher targets providing that other countries sign up to a global climate change agreement.2 This follows on the heels of the 30 April 2009 Council of Australian Governments announcement of modifications to the 20 per cent renewable energy target scheme which (among other things) will provide assistance to trade-exposed electricity-intensive industries that will face an increased cost of electricity a result of the expanded target.

If you would like further information, please contact any of the people below.

Footnotes
  1. More detailed analysis of such alternatives has been supported by a report commissioned by the Coalition from Mr David Pearce of the Centre for International Economics: 'Review of the proposed CPRS' (April 2009).
  2. The Australian Financial Review, 'Rudd ready to bargain on ETS', 1 May 2009, p.6; The Age website 'Setback for emissions trading scheme', 4 May 2009.

For further information, please contact:

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