C P R SWelcome to the world of carbon.
Nextgen is Australia’s premier Broker in the wholesale Carbon market and has just won the 2008, Australasian Markets GHG Emissions Award for the Best Broker.
We can provide a broad range of services in the energy sector and our sector professionals are available to discuss any questions that you may have.
Please call our Melbourne Dealing Room on +613 8684 2300 if you would like further information on anything from AEUs and CERs to how the scheme will affect you going forward.
- Understanding the CPRS
- What are the emission reduction targets which underpin the scheme?
- Who is covered by the scheme?
- Emissions Trading Scheme or Carbon Tax?
- Compliance
- Which compliance permits can be used?
- Auctions
- Registry
- Scheme Rules
- NGERS
Understanding the CPRS
Around the country and across much of the world there is an underlying feeling that immediate action is needed to address the serious affects of climate change. In a response to this climate change challenge the Australian Government has signed and ratified the Kyoto Protocol and hence is now liable to meet a set greenhouse gas emission target (108% of 1990 during the 2008-2012 period). Negotiations for a new, post 2012 international greenhouse gas agreement are well under way.
The centrepiece of the various measures put forward by the Government for dealing with Australia’s greenhouse gas emissions into the future is a trading scheme known as the Carbon Pollution Reduction Scheme (CPRS).
To date, Australia has implemented numerous measures to reduce greenhouse gas emissions and encourage renewable energy investment through a variety of mandated state and federal government schemes. Among the most notable are the federal Mandatory Renewable Energy Target (MRET) that started in April 2001 and the NSW Greenhouse Gas Abatement Scheme (GGAS) which began in January 2003.
Following a consultation process the Federal Government released its CPRS White Paper Australia’s Low Pollution Future. The White Paper outlines many characteristics of the emissions trading scheme, including its scope, compensation, compliance processes and the emission reduction targets that will underpin it.
What are the emission reduction targets which underpin the scheme?
The Australian Government has made a commitment to reduce Australia’s carbon pollution to 60% below 2000 levels by 2050. To do this, the Government has put forward (via the White Paper) an interim emissions reduction range of between 5-15% below 2000 levels by 2020, which is projected to represent a cut of around 27-34% of emissions on a per capita basis.
Who is covered by the scheme?
According to the White Paper, initially the CPRS will require roughly 1000 Australian companies that are responsible for around 75% of Australia’s greenhouse emissions to obtain and surrender carbon pollution permits equal to their emissions each year. There are a variety of industries, specifically those that fall under the Emissions Intensive Trade Exposed (EITE) and strongly affected categories who are eligible for compensation.
From commencement, the scheme covers all six greenhouse gases included under the Kyoto Protocol (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons).
Obligations under the scheme apply both on a geographical level (i.e. where emissions occur at a specific facility) as well as at an upstream organisational level (i.e. with gas retailers, who retain the obligation for the emissions arising from the gas used by their customers).
Under the National Greenhouse and Energy Reporting System (NGERS), which underpins the CPRS, the threshold for reporting greenhouse gas emissions, energy consumption and energy production at a facility level is 25,000 tonnes of CO2-e per annum. This relates to both Scope 1 or direct emissions (e.g. waste methane released/escaping from mines) as well as Scope 2 or indirect emissions (e.g. emissions arising from electricity generation).
However, unlike NGERS, the 25,000 tonnes of CO2-e per annum threshold for facilities that incur a liability under the CPRS relates solely to Scope 1 emissions. This means that there are entities that do not have obligations under CPRS that will still need to report under NGERS.
Industries set to be covered by the CPRS from scheme commence include:
- transport,
- stationary industry,
- fossil fuels,
- industrial process emissions,
- fugitive emissions.
Forestry will be covered on an opt-in basis provided that individual projects meet the scheme eligibility requirements and will be the only means of offset creation under the scheme.
Obligations for the waste sector will not commence until 2018 and the Government has indicated that agriculture will be included in the scheme from 2015 pending a review.
Emissions Trading Scheme or Carbon Tax?
The Government and the Garnaut Review have agreed that an ETS was the best way ahead, primarily because climate change is a global problem that requires a global solution that linked nations.
In theory, an ETS sets a target and then issues just enough carbon permits to ensure that target is reached by the sections of the economy covered by the scheme. Industries then buy enough permits either through the auction process or in the secondary market to cover their emissions and face a penalty if they emit any more.
A carbon tax is a much cruder instrument that to some extent localises the situation. The size of the cut is ultimately left up to industry, which can choose to pay a higher rate of tax or transform itself to cut costs over the longer term. As a rule, business is opposed to a new tax and prefers to share the cost across the economy. But the simplicity and transparency of a carbon tax seems to be winning wider support.
Others have argued for a hybrid scheme and the opposition is currently arguing for a focus on Biochar and increased Energy Efficiency whilst also concentrating on Clean Coal.
Compliance
Compliance under the CPRS will be founded upon the monitoring, reporting, and assurance procedures in the NGERS framework. At the end of each compliance period (financial year) each liable entity will be required to report their emissions by 31 October. The final date for the surrender of eligible compliance instruments (see below) is 15 December of the same year, though surrender can take place at any time up to that date. Once a permit is surrendered it cannot be revived.
The scheme regulator will possess a range of compliance, investigative and enforcement powers and failure to comply may result in penalties.
In the event that a liable entity fails to surrender a sufficient number of permits (shortfall) an administrative penalty will apply. The penalty begins at AUD 40.00 per tonne in financial year 2010/2011 and is indexed at 5% (above inflation) per annum for the first five years of the scheme. Any shortfall will also be required to be‘made good’the following year via the additional surrender of permits equal to the previous year’s shortfall.
Which compliance permits can be used?
(a) Australian Emissions Units
CPRS permits (AEU’s) will be issued by Australia’s scheme regulator, either via the monthly auctions or via direct support (allocations) to emissions intensive trade exposed industries and the most emissions intensive coal fired power stations. Over time the scheme will move toward 100% auctioning.
Auctions and the direct issue of permits will be the primary source of AEUs. A secondary market for AEU trading has, and will continue to develop along the lines of a traditional financial market. For this reason, ASIC have ruled that compliance permits will be classified as financial products under the Corporations Act 2001.
Along these lines it is anticipated that the International Accounting Standards Board will issue an exposure draft of proposed accounting regulations in 2009 that will be broadly in line with the existing treatment of current financial products and derivatives.
For further information on acquiring AEUs contact the Nextgen Green Team
(b) International units
In an effort minimise the cost of CPRS compliance the Australian Government has opted to link the CPRS to the international Kyoto Protocol markets which include:
- Certified Emission Reductions (CERs) under the Clean Development Mechanism,
- Emission Reduction Units (ERUs) under Joint Implementation, and
- Removal Units (RMUs) arising from land use, land use change and forestry activities.
According to the White Paper there will be no quantitative limits on the use of Kyoto Protocol units for compliance in the CPRS and eligible Kyoto Protocol units we be able to be surrendered from the first compliance period onward.
Due to the available quantities and the far greater level of liquidity in the international CER markets, CERs will be the Kyoto unit most employed for Australian Compliance.
For further information on acquiring CERs contact the Nextgen Green Team
(c) Domestic Offsets
The third possible option for CPRS compliance are certificates (known as offsets) created from biosequestration (forestry) projects. These projects, often referred to as sinks, sequester carbon from the atmosphere and keep it stored in trees. The Government is in the process of outlining the accreditation requirements for such projects but has already decided that only sinks which can be counted as part of Australia’Kyoto Protocol national account will be eligible. Hence the carbon sinks must be permanent and must occur on land that was cleared pre 1990.
For information on a variety forestry investment opportunities contact the Nextgen Green Team
It is important to note that all of the above compliance instruments are bankable for surrender in subsequent periods with some limitation on the quantity of Kyoto units that can be banked beyond 2012 (the conclusion of the first Kyoto period).
Auctions
From the scheme’s onset a majority of permits will be auctioned by the Federal Government, while some will be allocated to specific eligible industries. Over time, this will eventually head toward 100% allocation.
At present the specific auction policy and auction operation rules have not been announced. It is clear however that auctions will take place on a monthly basis throughout the financial year and the first auction is slated for early 2010.
As well as current vintages, auctions of three future vintages will take place at least once a year. It appears that simultaneous ascending clock auctions will be the auction type used and that the auctions will be double sided. Double sided auctions allow others, specifically those entities who have received free permit allocations, to be able to sell those permits via at auction.
Anyone will be able to participate in the auction process provided certain criteria are met, however not all entities will elect to participate given the costs involved and specialised expertise required.
Registry
Compliance permits of all descriptions, from AEUs to Kyoto units, are identifiable by a unique registration code. An online national registry is currently being developed to manage the ownership, transfer and surrender of compliance permits.
The registry will be used to transfer permits acquired in primary auctions as well as to transfer permits purchased in the secondary market.
The registry will be linked to the International Transaction Log to allow transfer of Kyoto units from abroad to domestic buyers, who will then be able to transfer to other Australian and international buyers .
As mentioned previously, compliance permits of all descriptions are bankable for use in future years (with some limitation on Kyoto units post 2012). Banking effectively means retaining possession of certificates in one’s registry account.
Scheme Rules
In a broad support measure to foster investment certainty, the government will give five years notice of any rule changes that would materially affect the supply or demand for permits and it will also give notice of changes to methodologies for estimating emissions.
NGERS
The National Greenhouse and Energy Reporting System (NGERS) which has been in operation since July 2008 will be the primary mechanism for handling emissions data on which obligations under the scheme will be based.
A key feature of this system will be the public disclosure of corporate level greenhouse gas emissions and overall energy information. The public capture of this information will enable consistent and comparable data for decision making within the CPRS.
An important point here is that the large emitters will be required to have their annual emissions reports audited by an independent third party prior to the submission to the scheme regulator. Large emitters are deemed to have obligations under the scheme for greenhouse gas emissions of 125,000 tonnes of CO2-e or more per annum.
