The Australian Government has released draft legislation of its proposed emissions trading scheme, but the project faces an uncertain passage through parliament and will likely require significant changes if it is to become law.

The Rudd Labour government, which made the establishment of an ETS a major plank of its policy during the successful election campaign, does not have sufficient numbers in the upper house, the Senate, to guarantee passage, and will need to strike a deal with members of the Greens, and two independent Senators.

Emissions cap

The carbon trade scheme, which Australian Prime Minister Kevin Rudd describes as its Carbon Pollution Reduction Scheme, proposes a cap and trade system designed to reduce emissions by between 5 and 15 per cent – depending on the outcome of international negotiations - from 2000 levels by 2020.

The scheme, which the Rudd Government wants to come into effect from July 1, 2010, would allow for a series of compensation packages to affected industries, changes to fuel tax and assistance of low and middle income households, from the estimated annual revenue of around $11.5 billion to $12 billion raised in the scheme.

About $3.9 billion has been set aside for the most polluting coal-fired power stations, accounting for around one third of their required permits from 2010 to 2015, as a transition measure. Trade exposed industries will receive around $2.9 billion a year, with some receiving permits accounting for 90 per cent of their emissions and others up to 60 per cent.

Scope of the trading scheme

The scheme is designed to affect 75 per cent of total emissions (agriculture is not included), and some 1,000 companies (those emitting more than 25,000 tonnes of Co₂ equivalent annually) will be affected.

The government estimates an average carbon price of around $23, and has imposed a price cap of $40. Australian companies will be able to buy international permits such as CERs to help meet their obligations. It estimates that around 25 per cent of permits will be issued free, but this could rise to around 45 per cent, depending on the growth of trade exposed industries.

The government is seeking responses to its draft legislation by mid April, with a view to submitting final legislation to parliament in May so it can secure passage and become law by June 30.

However, it faces several major hurdles. The opposition Conservative coalition parties have struck an unlikely partnership with the Greens to establish a Senate inquiry into the ETS. Both parties object to the scheme but for differing reasons: the Coalition because it says it goes too far, and the Greens because it does not go far enough.

Political disputes

Coalition leader Malcolm Turnbull, a former Minister for the Environment in the Howard Government, does not want an ETS to be introduced before 2011 or 2012, and is now canvassing a possible carbon tax in its place, reflecting the view of an increasingly vocal group of economists. Turnbull argues the ETS will cost both jobs and investment.

The Greens say that the reduction targets are too meek, do not reflect the science of climate change and will undermine efforts to seek broad consensus at the Copenhagen climate talks at year end.

To secure passage of the ETS bill, Labour will need to make concessions to either the coalition, or to the Greens and two recently elected independent senators. One, Nick Xenophon, says the emissions target is too low and describes the scheme as “overly bureaucratic, cumbersome and won’t achieve what needs to be achieved”. The other, Steve Fielding, the sole representative of the Family First party, says the scheme should be delayed so jobs are not “booted offshore”.

Business response

Business groups are also increasing pressure on the government to either extend compensation to various industry sectors (Business Council of Australia), delay the scheme (Australian Industry Group and Australian Chamber of Commerce and Industry), or scrap it altogether (Minerals Council of Australia).

Individual companies have also increased the ante. Xstrata this week threatened that four coal mines in Australia could close while TRUenergy, the owner of a brown-coal power station in Victoria, says many such utilities could be bankrupted and cease operations when compensation ends in 2015.

Despite this, environmental groups are still hopeful of an eventual passage through the Senate, although they agree it is impossible to predict its final content. “I think that when people come to grips with the message from scientists out of Copenhagen, they will recognise the ETS as an important part of the solution”, says Fiona Wain, the head of Environment Business Australia, an industry lobby group.

However, Tony Mohr, the climate change campaigner with the Australian Conservation Foundation, says it will be difficult to get legislation through the Senate.

His main concern, if the legislation makes it through parliament without major changes, is that the scheme would impose limitations on the country’s ability to reduce emissions further than 15 per cent by 2020, even if there was a more ambitious international agreement. If the trading scheme failed however, it would open up a new host of policy challenges. “If there is no CPRS, then we will have to rely on a lot of other policy measures,” he argues.

FACTS: Australia’s Carbon Pollution Reduction Scheme:

- Proposed start date: July 1, 2010.
- Trading system: Cap and Trade.
- Emission reduction targets: 5%-15% below 2000 by 2020.
- Carbon price cap: $A40/tonne.
- Permit distribution: Auction.
- Assistance packages: Trade exposed heavy emitting industries to receive between 60% and 90% permits free in transitional arrangements. Coal-fired power stations to receive around 1/3 permits free for first five years of scheme.
- Estimated permit revenues: $A11.5 billion in 2010/11
- Offsets: Carbon credits from the UN Clean Development Mechanism will be accepted as carbon offsets