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Allens Arthur Robinson

Focus: Energy – October 2003

Energy reform and greenhouse gas emissions

In brief: One of the recommendations of the Parer Committee was the replacement of the existing disparate Commonwealth and State greenhouse abatement schemes with a national emissions trading scheme. Partners Jim Parker (view CV) and Grant Anderson (view CV) look at these schemes and the Parer Committee recommendations as well as the Kyoto Protocol and the emerging prospect of climate change litigation.

Renewable energy

The introduction of the Commonwealth's renewable energy legislation in December 2000 and other greenhouse gas measures have resulted in the development of a number of large renewable energy projects across Australia. These projects involve the generation of electricity using biomass, water, wind and solar power. Demand for green electricity is also growing: early this year, 62,000 Australians were paying a premium to purchase green power. This has elicited a response from electricity retailers who are keen to develop green power offerings to meet this demand. For example, Ergon Energy has recently entered into a ten-year agreement to purchase electricity generated by CSR using the sugar extract bagasse.

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Commonwealth's MRT scheme

The Commonwealth's renewable energy legislation, the Renewable Energy (Electricity) Act 2000, creates a form of transferable intangible property known as 'Renewable Energy Certificates' (RECs). RECs are able to be created by the operators of power stations that generate electricity from renewable energy sources above a given baseline between 1 April 2001 and 31 December 2020. These RECs can be traded independently of the electricity that is generated. The scheme operates by creating a demand for RECs by requiring certain wholesale purchasers of electricity to purchase and surrender an amount of RECs that corresponds to the amount of electricity that they purchase, or otherwise to pay a charge (the 'renewable energy shortfall charge') for any shortfall.

This legislation also supports the implementation of the Commonwealth's 'Mandatory Renewable Energy Target' (MRET), that target being to achieve the generation of 9,500 MWh of electricity per annum from renewable energy sources by 2010. It does so by specifying the renewable energy targets that must be achieved during the period 2001 to 2020.

On 25 March 2003, the Commonwealth Government established a panel to review the operation of the Commonwealth's renewable energy legislation. Broadly, the panel is charged with the task of determining the extent to which the legislation has contributed to reducing greenhouse gas emissions and has encouraged the additional generation of electricity from renewable energy sources, or whether there is a need for an alternative approach. The panel has received more than 5,000 submissions and delivered its report to the Commonwealth Government on 30 September 2003.

Other Commonwealth initiatives include:

  • the Generator Efficiency Standards, which are a set of voluntary standards that apply to power generating plant with a capacity above 30MW and that use fossil fuels – these standards seek to encourage best practice; and
  • the Greenhouse Gas Abatement Program, which offers grants to assist with new programs to reduce carbon emissions.

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State-based greenhouse gas schemes

A number of State-based greenhouse gas schemes coexist and overlap with the Commonwealth's MRET scheme.

NSW Greenhouse Gas Abatement Scheme

The NSW Greenhouse Gas Abatement Scheme began on 1 January 2003 and applies until 31 December 2012. The scheme requires NSW electricity retailers and certain large customers (who are known as 'Benchmark Participants') to ensure that the greenhouse gas emissions which can be attributed to the electricity that they consume is less than a pre-determined benchmark level. Failure to comply with the benchmark results in a penalty per tonne of excess emissions (the 'Greenhouse Penalty'). Excess emissions can be offset by surrendering NSW Greenhouse Abatement Certificates (NGACs) purchased from accredited Abatement Certificate Providers and by surrendering Large User Abatement Certificates ( LUACs). The scheme therefore operates by creating a demand among Benchmark Participants to acquire Abatement Certificates in order to reduce or avoid their potential Greenhouse Penalty.

Victorian Greenhouse Strategy

As part of its commitment to reducing greenhouse gas emissions and ensuring a secure and sustainable energy supply, the Victorian Government earlier this year released a consultation paper, The Greenhouse Challenge for Energy, which was designed to encourage discussion of the pertinent issues and to elicit input on how the Government may best achieve its commitments to reducing greenhouse gas emissions from energy supply and use, while also maintaining a secure, efficient and affordable energy supply. The issues raised by this paper were the focus of an Industry Greenhouse Roundtable, that was held on 11 September 2003. The consultation paper and the roundtable are examples of initiatives that are part of the overall Victorian Greenhouse Strategy, launched in June 2002, to ensure that Victoria plays its part in helping Australia to achieve its greenhouse gas emissions targets under the Kyoto Protocol. As part of this strategy (which is designed to reduce Victoria's greenhouse gas emissions by 5-8.3 million tonnes per annum over the period 2008-2012), the Victorian Government has established an $8 million Renewable Energy Support Fund to provide financial assistance for the development of small-scale renewable energy generation projects. The Government is also providing financial assistance to encourage partnerships between renewable energy generators and electricity retailers.

Queensland Gas Scheme

The Queensland 13 per cent Gas Scheme, which will begin on 1 January 2005 and operate until 31 December 2019, is a key initiative of the Queensland Energy Policy – A Cleaner Energy Strategy. The scheme will require electricity retailers and other liable parties to source at least 13 per cent of their electricity sold in Queensland from gas-fired generation from 1 January 2005. The aim of the scheme is to diversify Queensland's energy mix to include a greater use of gas and to encourage new gas infrastructure in Queensland. The expectation is that greenhouse gas emissions will be reduced by more than one million tonnes in the first year of operation of the scheme. In September 2002, a final position paper was released setting out the final design of the scheme and this will form the basis for the legislative framework for the initiative. It is anticipated that the relevant legislation will be introduced into the Queensland Parliament in late 2003.

South Australia

The South Australian Government endorsed the Commonwealth Government's National Greenhouse Strategy in July 1998 and approved plans for its implementation in October 1999. Various sustainable energy programs are currently being implemented to meet the Government's sustainable energy objectives, including the release of a draft South Australian Alternative Fuels Strategy that is designed to provide a framework within which the various South Australian Government agencies with roles related to energy use and energy policy, and an interest in the promotion of alternative fuels, will conduct those activities. The Strategy covers the use of fuels in transport, on farms, and in other commercial and industrial applications, as well as in off-grid electricity generation. The Strategy has not yet been approved by the South Australian Government and is still the subject of consultation.

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COAG Energy Market Review

The COAG Energy Market Review Panel (the Parer Committee) released its report, Towards a Truly National and Efficient Energy Market, on 20 December 2002.1 One of the Parer Committee recommendations was the abolition of the MRET scheme, as well as of the other Commonwealth and state greenhouse gas programs described above, and their replacement with a national emissions trading scheme. It also recommended that companies in the traded goods sector, whose energy costs are a significant component of their total production costs, should be excluded from the operation of the proposed emissions trading scheme until Australia's international competitors introduce similar schemes.

In order to protect investments in renewable generation capacity that have already been made on the basis of the MRET scheme, the Parer Committee further recommended that such projects should continue to receive a subsidy equivalent to that paid under the MRET scheme (with the final details of the payment of these grandfathered subsidies to be developed in parallel with the new emissions trading scheme).

The Parer Committee's recommendations have been strongly criticised by the renewable energy industry and environmental groups, who claim that the replacement of the existing greenhouse gas schemes with an economy wide emissions trading scheme will reduce the focus on greenhouse gases and will jeopardise thousands of jobs and billions of investment dollars in the renewable energy industry. Conversely, the introduction of an emissions trading scheme is likely to have significant implications for the broader electricity industry – and particularly for coal-fired electricity generators which are always likely to be in deficit and so would need to consistently buy pollution permits.

Further developments in this area will have to await the first Council of Australian Governments meeting in 2004, when the Commonwealth and State governments intend to consider a detailed assessment of the issues (including impacts) and options for greenhouse gas abatement, with a view to agreeing a national approach.

Nonetheless, there is likely to be considerable ongoing debate about the advantages and disadvantages of a national emissions trading scheme. Such a scheme has the advantage that it is technologically neutral (ie. it focuses on the reduction of greenhouse gases rather than supporting a particular technology), and so leaves it to the market to determine the most cost-effective approach to reducing greenhouse emissions. On the other hand, if the scheme takes the form of a 'cap and trade' scheme, it will expose industry to the potentially large and uncertain costs of emission abatement. However, such exposure can be made more certain by, for example, introducing a system under which the government (having issued to existing industry participants tradeable emission permits equivalent to a specified base level) offers for sale an unlimited number of additional annual emission permits at a fixed price per tonne of carbon dioxide. The price of these additional permits effectively caps the cost of the scheme to industry: a business will invest in abatement up to the fixed price of the permits but, for abatement measures that cost more than this, it will choose to buy the permits (and emit greenhouse gases) rather than invest in further abatement.2

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Kyoto update

The Kyoto Protocol to the Convention on Climate Change is designed to limit global greenhouse gas emissions. Australia is one of many parties to the United Nations Framework Convention on Climate Change (UNFCCC) who have signed the Protocol since the negotiations were concluded at the third session of the Conference of the Parties to the UNFCCC. In order to come into force, the Protocol must be ratified by at least 55 countries, including countries that account for at least 55 per cent of the total 1990 carbon dioxide emissions of the developed countries in Annex 1 of the UNFCCC.

The Kyoto Protocol introduces three innovative new mechanisms. These mechanisms aim to reduce the cost of curtailing emissions by allowing Parties to pursue opportunities for curbing emissions more cheaply abroad than at home. These mechanisms, which allow Parties to take credit for action taken in other countries, are:

  • Joint Implementation – under which developed countries can implement projects that reduce emissions, or remove carbon from the air, in other developed countries in return for Emission Reduction Units;
  • the Clean Development Mechanism – under which developed countries can implement projects that reduce emissions in developing countries in return for Certified Emission Reductions, and can assist those countries in achieving sustainable development and in contributing to the objectives of the UNFCCC; and
  • Emissions Trading – under which developed countries can acquire 'units' from other developed countries – these units may, for example, be in the form of Emission Reduction Units or Certified Emission Reductions.

The Australian Government announced in June 2002 that it will not ratify the Kyoto Protocol at this time because it has been rejected by the United States and because it does not provide for developing country commitments. However, the total number of countries that have ratified, acceded or accepted the Protocol is currently 113. All that is required now to bring the Protocol into effect is ratification by Russia, which is coming under increasing international diplomatic pressure to ratify the Protocol without delay.

Emissions trading

The European Union, the Kyoto Protocol's greatest champion, is planning to introduce a greenhouse gas emissions trading scheme in January 2005 (an initial two-year pilot phase will be followed by full operation from 2008). Emissions trading allows reductions in carbon dioxide emissions to take place in the most flexible and cost effective way possible because companies that can cut their emissions cheaply can sell their surplus allowances to companies with high abatement costs. But the scheme has already faced strong criticism, and is likely to prove controversial because it will inevitably create winners and losers.

Of particular interest to Australia is that the scheme also makes provision for the EU to conclude agreements with other developed countries that are parties to the Kyoto Protocol. This would involve mutual recognition of allowances between the EU scheme and other emissions trading schemes. If such cooperation proves to be economically beneficial, then this may have the effect of encouraging Australia to ratify the Protocol and to link its trading scheme to the European one. The European initiative is significant for a number of reasons, including the fact that, as the most extensive trans-national emissions trading scheme yet proposed, it would inevitably form the core of any global emissions market.

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Litigation threat by CANA

On 30 July 2003, the Australian Climate Justice Program was launched by the Climate Action Network Australia (CANA). CANA is an alliance of more than 30 regional, state and national environmental, health, community development and research groups throughout Australia. CANA was formed in 1998 as the Australian branch of the global Climate Action Network, which has representative groups in more than 70 nations. The aim of the network is to tackle climate change globally. The Australian Climate Justice Program was launched to explore possible legal avenues for making the perpetrators of climate change accountable for the damage caused by them.

Simultaneously with the launch of the Program, CANA notified the directors of selected Australian companies, being companies that CANA identified as major emitters and major facilitators of greenhouse gas emissions, of the possibility they could be sued for damage caused by their companies' greenhouse gas emissions. The notification served to put company directors on notice of the existence of climate risk, and that a failure to assess, and if necessary address, climate risk may amount to a breach of directors' duties under the Corporations Act and general law. It comes at a time when corporations are becoming increasingly aware of the significance of the link between their activities and climate change. Indeed, there have already been increasing signs of corporations taking a more progressive stance on the issue, such as increased disclosure and reporting on the environmental consequences of their activities, particularly given that it is anticipated that further legislative and regulatory measures will be introduced in the near future to deal with greenhouse gases emissions and related issues.

Nonetheless, in our view, the risk of climate-related litigation remains low. This is because of the inherent difficulties involved in attributing climate change to a corporation's activities, including providing scientific evidence to support a claim that a corporation's activities have contributed to climate change, and the problems of quantifying such a change. Of course, given the amount of media attention that this issue continues to attract, it will be in the interests of corporations to be able to demonstrate that they are taking appropriate steps to do their part in minimising global climate change.

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Conclusion

There are a variety of ongoing developments associated with the control of greenhouse gas emissions, and a number of these are likely to have a significant impact on the energy industry. We will continue to monitor these developments and keep you updated.

References
  1. A description of the recommendations made by the Parer Committee is contained in Focus: Energy, November 2002 and Focus: Energy, December 2002. Focus: Energy, June 2003 outlines the governmental responses to some of these recommendations. 
  2. This kind of scheme is referred to as the McKibbin-Wilcoxen hybrid and was described in The Australian Financial Review, 3/9/03, p.62.

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