Transcript Paper 36-PPS-Stoianoff

From Brave New World to Paradise
Lost: The Demise of Australia’s
Carbon Pollution Reduction Scheme
THINK.CHANGE.DO
Professor Natalie Stoianoff
Faculty of Law, University of Technology, Sydney
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Introduction
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Strategies for mitigating emissions
Theoretical landscape for market based instruments
Tax Incentives since the 1990s in Australia
Australian Climate Change policy development
Ignoring a key sector?
Consequences
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Strategies for Mitigation of Emissions
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Educational or informational
Voluntary agreements
Command and control regulation
Market based instruments
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Educational strategies
> Long term strategy
> Informational leading to change of behaviour: eg product
labelling of energy efficiency
> Supplementary to other strategies in that it paves the way
for greater acceptance and effective implementation of
those strategies
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Voluntary agreements
> Government – industry voluntarily determined emissions
target schemes – usually with high rate of compliance but
low standards.
> Industry self-regulation
> Australian example of voluntary agreements for
biodiversity protection (eg SA) but often back-up with
concessions or benefits.
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Command and control regulations
> Much more familiar strategy for dealing with
environmental problems.
> Public authority either requires the cessation or reduction
of the damaging activity (performance based regulation)
or requires action to be taken that mitigates the
damage.(often technology based regulations).
> Need to be backed up by sanctions and these may or may
not be sufficiently deterrent.
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Market based instruments
> Pollution caused by human economic activity
> Price is not placed on the damage to the environment as
a cost of production
> Need to internalise this externality to maximise social
welfare
> Various instruments available but there are two key ones
to be considered
> Carbon taxes and emissions trading schemes.
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Theoretical Framework – Pigou & PPP
> Pigou (1920): The Economics of Welfare
– theoretical foundation for taxing pollution
– Emission fee levied on polluters according to output of
pollution
– Effect is to internalise external costs of pollution and
therefore maximise welfare
> In line with the Polluter Pays Principle espoused by the
OECD in 1972 which was primarily adopted to avoid
market distortions through the use of direct and indirect
environment-related subsidies.
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Theoretical Framework – PPP – 1972 Guidelines
> This principle is “to be used for allocating costs of pollution
and control measures to encourage rational use of scarce
environmental resources and to avoid distortions on
international trade and investment”.
> It is expected that “the polluter should bear the expenses
of carrying out… [these] measures” and further
> “the cost of these measures should be reflected in the
cost of goods and services which cause pollution and/or
consumption”
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Theoretical Framework - Coase
> Coase (1960): The Problem of Social Cost
– criticised the use of taxes to correct market imperfections favouring the
market’s ability to correct itself where externalities exist
> “If factors of production are thought of as rights, it becomes
easier to understand that the right to do something which has a
harmful effect (such as the creation of smoke, noise, smell, etc.)
is also a factor of production…” p.44 Journal of Law and
Economics (October 1960)
> Through such transferable ‘property rights’, the market can be
used to value them and ensure their best possible use.
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Theoretical Framework - Baumol & Oates
> Baumol & Oates (1988): The Theory of Environmental
Policy
> Elaborate on Coase’s property rights theory
> Suggest that these property rights be distributed to parties
granting them the right to pollute to a specified level
> The government will allocate as many ‘rights to pollute’ as
necessary to a tolerable level of pollution.
> Accordingly, businesses that keep their emissions below
their permitted level have capacity to trade in their remaining
rights to pollute to those who have exceeded their rights.
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Theoretical Framework - Brundtland
> The Brundtland Report – Our Common Future
– The Report espoused “[t]he integration of economic and ecological
factors into the law and into decision-making systems”
– The PPP was acknowledged as an economic efficiency measure that
discourages subsidies leading to international trade distortions.
– The Report embraced the idea of internalising environmental costs and
passing on those costs to the consumer through products of the
enterprise.
– But it recognised the importance of economic incentives working
together with environmental regulations to ensure the necessary
investment in environmental measures by industry
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Tax Incentives since the 1990s in Australia
> Mine site rehabilitation expenditure concessions – various
incarnations since 1990/91
> Concessions for environment protection expenditure
(since 1990/91) and for expenditure on environmental
impact statements (1992)
> Deduction for donations to environmental organisations Register of Environmental Organisations established 1992
> Conservation Covenant expenditure and capital gains
concessions (2002)
> Carbon sink forest concessions (2008)
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The Policies of the previous Conservative Gov.
> Australia signed Kyoto Protocol 1997
> Did not ratify due to concerns about the potential impacts
of emission reduction strategies on local industries,
particularly mining and energy sectors
> Adopted a soft approach to emissions in 1998 National
Greenhouse Strategy
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National Greenhouse Strategy
> Centred on voluntary industry partnership program Greenhouse
Challenge.
> Improvements to monitoring of national emissions
> Communication and education
> Promoting efficient and sustainable energy use
> Efficient transport and sustainable planning
> Enhanced greenhouse sinks & sustainable land management
> Best practice in industrial processes and waste management
and adaptation strategies.
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Mandatory Renewable Energy Target Scheme
(MRET) 2001
> Required wholesale purchasers of electricity to contribute towards an
aggregate target of an additional 9500 Gigawatt hours of renewable
electricity per year by 2010
> Prescriptive approach – ‘command and control’ + Coase-style property
rights approach by establishing a market for renewable energy certificates
hence giving more flexibility
> Prior to MRET, 10.5% of electricity market was from renewable energy
sector – mostly hydro-electric but also landfill gas, biomass, photovoltaic
and wind.
> Target represented an increase of 60% over pre-existing renewable
energy generation in Australia but scheme oversubscribed since 2006
> Proportion of renewable energy to total electricity dropped since MRET
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Move towards trading
> National Emissions Trading Taskforce (NETT) released
discussion paper Possible Design for a National Greenhouse
Gas Emissions Trading Scheme August 2006
> The Government commissioned the Garnaut Climate Change
Review in April 2007 to report on medium to long term options
for Australia
> Prime Ministerial Task Group on Emissions Trading releases
final report May 2007
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Moving Closer
> In June 2007 an Australian Carbon Trading Scheme
planned to be introduced by 2012 but lapsed with change
of government in November 2007
> Beforehand, National Greenhouse and Energy Reporting
Act 2007 introduced to standardise framework for
reporting emissions and energy use as a precursor to
emissions trading scheme. First annual reporting period
began 1 July 2008
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Labour Government
> Labour Party wins government in November 2007 and quickly
moves to ratify Kyoto Protocol
> National Emissions Trading Taskforce (NETT), a multi-state
taskforce, released final report December 2007
> Green Paper released July 2008
> Strategic Review of Climate Change Policies (Wilkins Review) July
2008
> Garnaut Review released in September 2008
> Concluded that an emissions trading scheme would be best
approach to achieve effective emission reduction post Kyoto period
and for longer term targets
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Australian conditions
> the latest National Greenhouse Gas Inventory reveals that
most sectors of the Australian economy, including the
agricultural sector, have increased emissions significantly
between 1990 and 2006
> Meanwhile, the only sectors which have achieved a
reduction in GGE in this period are Land Use Change,
Forestry and Waste
> It is these three areas that are primarily responsible for
Australia being on track to meet its Kyoto target
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Green Paper – early 2008
> Espoused the key design features of the Emissions
Trading Scheme (ETS):
– The ETS will be a ‘cap and trade’ scheme – scheme
caps will be designed to place Australia on a low
emissions path, in a way that best manages the
economic costs of transition.
– The scheme will be designed to facilitate international
linkages in the future.
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Green Paper cont.
> The scheme will have maximum coverage of greenhouse
gas emissions and industry sectors, to the extent that this
is practicable.
> The scheme will address the competitive challenges
facing emissions-intensive, trade exposed industries in
Australia and will also address the impact of emissions
trading on strongly affected industries.
> Measures will be developed to assist households,
particularly low income households, to adjust to the impact
of climate change.
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Strategic Review of Climate Change Policies
(Wilkins Review)
> One of the key aspects of this review is the establishment
of principles for complementary policies:
> Principle 1 (mitigation): The Government should rely on
the ETS to achieve least cost abatement and only take
action in addition to the scheme where there is a
demonstrable and compelling case that the market is not
working efficiently and that government action will not
distort or undermine the scheme.
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Wilkins Review
> Principle 2 (adaptation): The Government’s key role in
adaptation should be to facilitate informed decision making
across the economy.
> Principle 3 (other policy priorities): The Government
should take into account the potential for its non-climate
change policies to compromise or enhance the ability of the
ETS to achieve least cost abatement.
> Principle 4 (roles and responsibilities): The
Commonwealth should be primarily responsible for mitigation
policy and all jurisdictions should contribute to a nationally
coordinated approach to adaptation.
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Wilkins Review
> Principle 5 (good policy design): As in all areas of
policy, climate change measures should conform to the
best practice policy design, including the need for an
evidence-based assessment of options and rigorous
evaluation.
> Of the 62 programs reviewed only one related to taxes –
the carbon sink forests concession.
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Wilkins Review and the CPRS
> The Council of Australian Governments (COAG) Working
Group on Climate Change and Water developed Principles
of Complementarity to determine whether measures to
reduce emissions complement the Carbon Pollution
Reduction Scheme (CPRS). These principles are
consistent with those developed by the Wilkins Review and
were endorsed by COAG on 29 Nov 2008.
> The CPRS White Paper, released in December 2008,
states that the COAG Complementarity Principles will be
used to guide assessment of emission reduction measures.
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The White Paper, Carbon Pollution Reduction
Scheme: Australia's Low Pollution Future
> Pushed back a year to mid 2011 with $10 fixed price permit
for 1 year transitioning to full market trading from 1 July 2012.
> Global recession buffer for exposed industries
> Eligible businesses will receive funding to undertake energy
efficiency measures from 1 July 2009.
> Carbon pollution to be reduced by 25 per cent of 2000 levels
by 2020 if global agreement to stabilise levels of CO2
equivalent in the atmosphere at 450 ppm or less by 2050.
> Establish Australian Carbon Trust to allow households invest
directly in reducing emissions & drive energy efficient bldgs.
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The White Paper, Carbon Pollution Reduction
Scheme: Australia's Low Pollution Future
> Agriculture emissions consist mainly of methane and nitrous
oxide from livestock and cropping and make up 16 per cent of
Australia’s emissions. This is Australia’s second largest source
of emissions. P 6-43
> Agricultural emissions are excluded until 2015.
> Why? Consider the 2007 issues paper for Land & Water
Australia (Agriculture, forestry and emissions trading: how do
we participate?) Australia opted to exclude land-based activities
such as agriculture from national accounting inventories under
Article 3.4 Kyoto Protocol.
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The White Paper, Carbon Pollution Reduction
Scheme: Australia's Low Pollution Future
> Reforestation to be included from 2010 Scheme
commencement on a voluntary basis.
> This was a positive step as “Deforestation currently
accounts for around 11 per cent of Australia’s emissions
though this is declining due to state restrictions on land
clearing. Most land clearing is of native forest for
agricultural purposes (principally cattle grazing)” p.6-59
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The White Paper, Carbon Pollution Reduction
Scheme: Australia's Low Pollution Future
> Tax implications:
– Permits are a business input for an emitting entity and therefore
deductible as a cost of doing business
– But when it comes to the market of buying an selling permits gains
and/or losses are possible and the CPRS claims that treating such
gains or losses on revenue account is preferable to engaging with
capital gains tax.
– Rolling balance method ensures that entities bring permits to
account, for income tax purposes, when they are used - operation
akin to trading stock.
– GST rules to apply to CPRS transactions including the input taxed
treatment of supplies of financial derivatives of permits.
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Legislation Progress
> May 2009 introduces the CPRS legislation to be effective
1 July 2011 – a package of 11 bills – the main Scheme Bill
and 10 related bills
> Senate vote against CPRS August 2009
> But successor to MRET introduced: RET - ensure that 20
per cent of Australia’s electricity supply will come from
renewable sources by 2020
> Amended CPRS bills reintroduced into Parliament
October 2009
> Senate again votes against CPRS December 2009
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Opposition proposed amendments by industry
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Trade Exposed Industries
Agriculture
Coal Mining Emissions
Lower Electricity Prices
Compensation for Electricity Generators
Energy Efficiency and Voluntary Action
> Negotiations over suggested amendments result in agreed
Government proposal but only for a short while – leader of
Coalition deposed
> Greens oppose the concessions to polluters and the low targets
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Ripe for a Double Dissolution or just a new
leader?
> CPRS legislation reintroduced to Parliament in February 2010
> On April 27, 2010, the now deposed Prime Minister of
Australia, Kevin Rudd, announced that implementation of the
proposed CPRS would be delayed until the conclusion of the
current Kyoto commitment period at the end of 2012
> New Prime Minister and off to an election.
> Multi-party climate committee established to gain support of
the Greens who fear Australia is falling behind rest of the
world. Need to set a carbon price and increase emissions
target from 5 to 15%
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Henry Review of Australia’s Future Tax System
> This is a review of Australia’s entire tax transfer system – ie
the regime for taxing and the process of redistribution of
revenue.
> The recommendations assume the CPRS will eventual come
into operation and that it will have to be monitored and
reviewed and additional measures not justified on other
grounds should be phased out.
> As for tax concessions that support environmental outcomes, it
was recommended that the government monitor them and
consider targeted spending programs instead.
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Conclusions
> CPRS has been the preferred regime for implementing
emission reduction targets
> The Carbon Sink Forest concession has been consider
complementary to the CPRS but what about all the other
environmental tax concessions?
> The Greens have offered a compromise proposal for a
carbon levy along the lines of Garnaut’s recommendation
of a simple levy on polluters – back to the polluter pays?
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