Tag Archives: climate
Carbon Pricing Mechanism – Moving To An ETS: Next Steps
Norton Rose Fulbright LLP Elisa de Wit , Noni Shannon , Edward Campbell and Hannah Gould Australia August 6 2013 Author page » Author page » Author page » Introduction As we head towards the September Federal election, the Labor Government has sought to lock in its policy of an Australian emissions trading scheme. On 16 July 2013, the Government officially announced that it will transition from a fixed carbon price to a flexible carbon price a year earlier than planned and that Australian businesses will have “ earlier access to international permits from the European Union Emissions Trading Scheme (EU ETS) and credible Kyoto units from international markets .” Under the existing arrangements, the carbon price was set to be fixed at $25.40 per tonne for the financial year starting on 1 July 2014 and was not set to move to the flexible price period (which included a “one-way” indirect link with the EU ETS) until 1 July 2015. The Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (DIICCSRTE) has now released the Starting Emissions Trading on 1 July 2014: Policy Summary and two draft Bills to give effect to the changes required to bring forward the move to the flexible price period and one-way indirect link with the EU ETS by one year. Submissions may be made to DIICCSRTE up to 5pm on 15 August 2013. Clean Energy Legislation Amendments The draft Clean Energy Legislation Amendment (Emissions Trading Scheme) Bill 2013 ( Amendment Bill ) sets out amendments to the Clean Energy Act 2011 (Cth) ( Clean Energy Act ), the Australian National Registry of Emissions Units Act 2011 (Cth) and the Fuel Tax Act 2006 (Cth) to start emissions trading on 1 July 2014. The key changes set out in the Amendment Bill are the following: Start of the flexible price period – The amendments provide for the start of emissions trading on 1 July 2014 by amending the definitions of ‘fixed price year’ and ‘flexible price year’ Price ceiling – The price ceiling will apply from 2014-15. Regulations to set the amount of the fixed charge (starting level of the price ceiling and the escalation rate) and the duration of the price ceiling must be made before 1 July 2014 Surrender limits on eligible international emissions units – Liable entities will be able to surrender eligible international emissions units (including European Union Allowances ( EUAs ) and eligible Kyoto units) from 1 July 2014. The 50% general limit on the use of eligible international emissions units by liable entities will be brought forward to apply from 1 July 2014. The surrender limit for access to Kyoto units will be decreased to facilitate the convergence of the price of EUAs and Australian carbon units. The sub-limit on Kyoto units will be 6.25% of an entity’s liability in 2014-15, increasing to 12.5% for liabilities that accrue from 1 July 2015 Energy Security Fund – Assistance provided to eligible emissions-intensive coal-fired generators under the Energy Security Fund will be revised. The allocation of free carbon units to eligible generators in the 2016-17 financial year will not proceed and the allocation of free units to eligible generators in the 2015-16 year has been brought forward to the 2014-15 financial year Equivalent carbon pricing for liquid fuels and synthetic greenhouse gases – The per-tonne carbon price equivalent will also apply from 1 July 2014. It is applied to some uses of liquid and gaseous fuels and to synthetic greenhouse gases through fuel tax, excise and tariff legislation. The Excise Tariff Amendment (Emissions Trading Scheme ) Bill 2013 sets out amendments to the Excise Tariff Act 1921 (Cth) which are also required to start emissions trading on 1 July 2014. This Bill is required to ensure compliance with section 55 of the Constitution, which requires that laws imposing duties of excise deal with the subject of excise only. Given that the Government has now entered caretaker mode, the Amendment Bill will not be put before the Parliament before the election. Whether it is placed before Parliament after the election will depend upon the election result. It is worth noting that at the moment it appears that the Greens would not support the amendments. The Coalition remain firm in their opposition to the Labor Government’s scheme as a whole. Emissions Cap The “carbon pollution emissions cap” ( Emissions Cap ) dictates how many carbon units the Clean Energy Regulator ( Regulator ) can issue for each year of the flexible price period. The Emissions Cap has not yet been set. In order to set the Emissions Cap, regulations are required to be made and passed by both Houses of Parliament. Before regulations can be tabled in Parliament, however, the Climate Change Authority ( CCA ) must provide the Minister with a report which sets out a review of the level of carbon pollution caps and recommends an appropriate Emissions Cap (known as the ‘Caps and Targets Review’). Previously, this review would only have recommended an Emissions Cap commencing on 1 July 2015. The current deadline for the CCA to provide its final report to the Minister is 28 February 2014. However, as 2014-15 is now proposed to be a flexible price year, the Government must set an emissions cap for that year. The legislation requires that the Minister must consider a report by the CCA that recommends the level of the pollution cap for 2014-15 when setting the cap for 2014-15. Accordingly, the Minister wrote to the Chair of the CCA, on 19 July 2013, requesting a “special review” under section 59 of the Climate Change Authority Act 2011 which will require the CCA to provide a recommendation on an Emissions Cap for 2014-15 in its review. Additionally, the Amendment Bill provides for a pollution cap to be in place by 1 July 2014, either as set in regulations (in accordance with the process set out above) or as a default cap. The default cap, which protects against the possibility of the Government not being able to legislate a suitable Emissions Cap, will be 25 million tonnes below total covered emissions for 2012-13. Auctions The Clean Energy (Auction of Carbon Units) Determination 2013 ( Auction Determination ) has already come into force and provides a mechanism for the auctioning of carbon units. The Auction Determination, however, specifically refers to carbon units with a vintage year beginning 1 July 2015 or later. Although the Government has not prepared amendments to the broad range of existing secondary legislation to give effect to starting emissions trading on 1 July 2014, DIICCSTRE has indicated that the following provisions of the Auction Determination will be amended: sections 6 and 13(2) (concerning the auction schedule and the number of units to be auctioned in 2013-14) to add additional auctions for the 2014-15 carbon unit vintage, including advance auctions to be conducted in 2013-14. We note it is possible the Emissions Cap may not be set by the time these auctions are due to commence, therefore the volume of carbon units available at these auctions in 2013-2014 is proposed to be set at 40 million; and section 19, to make additional provision for the setting of an opening price for carbon unit auctions including advance auctions at 80% of the EUA price for the duration of the interim link. Although we understand that it will take another couple of months for the Regulator to technically design the auctioning software, even prior to the Government’s announcement to move the ETS forward a year, auctions had been scheduled to commence in the first quarter of next year, so there should be no timing issues in relation to this aspect. Linking with the EU ETS Amendments have already been made to the Clean Energy Act and the Australian National Registry of Emissions Units Regulations 2011 which will enable the linking of the carbon pricing mechanism with the EU ETS. There are no additional legislative steps which need to occur in order to make the one-way link operational. It appears the EU is supportive of the early move to an ETS with the EU’s climate commissioner, Connie Hedegaard, tweeting that it is “great” to see Prime Minister Rudd’s decision to seek a move to trading from mid-2014, and adding that the EU is “Speeding up #ETS linking discussions”. Nevertheless, there remain a number of technical developments which need to be implemented in order to harmonise the Australian and European registries. This is necessary because under the linking system, allowances are issued under both the Australian ETS and EU ETS and are solely represented by electronic entries in a registry. It is therefore necessary for the registries to be linked or ‘harmonised’ before linking can occur. The Government has officially said that the interim link will be in place by 1 July 2015 (that is when it was originally planned) and specifically states that this is “seven months before the 2014-15 compliance date of 1 February 2016” and that “in the meantime, liable entities and other market participants are able to open accounts in the EU Registry and trade in EU allowances”. Not linking with the Californian ETS In a cautious move towards a global carbon market, the Clean Energy Regulator ( CER ) has entered into a Memorandum of Understanding with the California Air Resources Board ( CARB ) which will run until 1 January 2016 ( MOU ). The purpose of the MOU is to establish the framework for the CER and the CARB to collaborate and share information on: the implementation of their respective market-based programs; opportunities for complementary actions (including the harmonisation of reporting and technical standards) to expand carbon markets, lower costs and preserve the environmental integrity of the programs, and the development and implementation of complementary programs to reduce greenhouse gas emissions. The MOU also provides for each party to build the capacity of their respective experts in the area with the option of temporarily exchanging personnel. It appears, however, that this collaborative process is not intended as the groundwork for linking the Australian and Californian schemes, at least not yet. In her public addresses last week, Mary Nichols, the chair of CARB, made it clear that the philosophy behind the Australian and Californian programs (for example, the different approach to offset credits) and the politics and current uncertainty surrounding the future of Australia’s programs, meant full linkage would be very difficult. How far the parties will be able to move along this collaborative path will be clearer in a matter of months, once the result of the Federal election is known and the policy of the winning party is able to be put into practice. Market expectations on price Given the decision to link Australia’s ETS to the EU ETS and given that the EU ETS is a much larger market than our own (Europe’s covered emissions are more than 6 times those of Australia) it is more likely than not that the price of Australia’s carbon units will match that of European Union Allowances, which as at July 2013 are trading at around A$6-$7.50. However, Europe is currently trying to make changes to its ETS which are aimed at pushing the carbon price up. A recent vote in the European Parliament has taken the first step towards implementing these changes. Accordingly, it is possible that these changes could be in place prior to 1 July 2014, in which case the European carbon price is likely to be higher than its current level and this will flow through to the price of Australia’s carbon units. Next steps Subject, of course, to the outcome of the Federal election, liable entities may wish to start considering a compliance strategy which includes the purchase of EUAs and Kyoto units (the latter of which are currently at record low prices). Our extensive experience in advising on transactions within the EU ETS means we are extremely well placed to advise you on the different options available. Liable entities will also wish to ensure that they have put in place appropriate internal arrangements to enable participation in the forthcoming auctions. In the meantime, it will be important for liable entities and others associated with the emerging Australian carbon market to keep a close eye on developments within Europe, and in particular the progression of the backloading proposal and longer term structural reforms. We can assist with a tailored updating service to keep you linked in to these developments. Please contact a member of our climate change team if you would like to investigate this opportunity. Continue reading
Carbon Market Australia-New Zealand July 19
19 Jul 2013 08:42 All the latest news and developments on carbon trading and climate change policies in Australia and New Zealand, including Kevin Rudd’s plans to introduce an ETS in Australia one year early. Guest commentary by CME’s Bruce Mountain. Download Carbon Market Australia-New Zealand July 19 Continue reading
This Gamble On Carbon And The Climate Could Trigger A New Financial Crisis
There is little evidence that institutional investors have recognised that they are sitting on a carbon-asset timebomb Kevin Watkins theguardian.com , Friday 2 August 2013 Summer 2013: eastern Europe is facing one of the heaviest floodings in the last 50 years (Photograph: Ruben Neugebauer/Corbis If you want to see market irrationality in action, look no further than current stock market valuations for the world’s major oil, gas and coal companies. At a time when governments are supposedly preparing for a global climate change deal that will cut carbon emissions , energy multinationals are investing in carbon assets like there’s no tomorrow. Put bluntly, either we’re heading for a climate catastrophe, or the carbon asset bubble will go the way of sub-prime mortgage stock. Yesterday’s disappointing second-quarter results for Royal Dutch Shell provided a useful guide to the future. Over the past couple of years the company has invested heavily in exploration. It has pumped billions of pounds into fracking for natural gas in Ukraine and Turkey; the development of tar sands in Canada, and drilling in the Arctic. The market verdict, prompted by a dip in prices, reduced profits, and concern over costs: a drop in share prices. You can’t help wondering what will happen when carbon prices are aligned with climate imperatives. We are now just two years away from the crucial 2015 UN climate negotiations. If successful, they will put a price on carbon, driving down returns on fossil-fuel investments by capping carbon emissions. Market reactions will make Shell’s results look positively healthy. Yet there is little evidence that institutional investors have recognised that they are sitting on a carbon asset timebomb. You don’t have to dig too hard to find the gap between market valuation and real world ecology. Avoiding dangerous climate change, defined as a temperature rise of 2C, will require the global community to operate within a constrained carbon budget. That budget has a ceiling of 545 gigatons in carbon dioxide (GTCO2) emissions to 2050. Today, state energy firms and private companies are sitting on reserves amounting to three times that level. Carbon arithmetic points in only one direction. If governments are serious about reaching a 2015 multilateral agreement that avoids dangerous climate change, fossil fuel reserves need to left where they are. The Grantham Research Institute on Climate Change at the London School of Economics estimates that only 20-40% of oil, gas and coal reserves held by the 200 largest energy companies can be exploited if we are to avoid dangerous climate change. Yet the market valuation of these “unburnable carbon” reserves is over $4tn, to which can be added $1.5tn in company debt. The misalignment between our planet’s ecological boundaries and energy markets is set to worsen. High energy prices and concerns over power shortages in emerging markets are fuelling a global scramble for carbon assets. Collectively, the 200 largest energy companies invested $674bn (£441.4m) on the development of new fossil fuel reserves in 2012. If financial markets are mispricing risk, governments around the world have yet to recognise some basic cost-benefits realities. Companies investing in Arctic oil and gas exploration stand to gain revenue streams that will be counted in billions of dollars. But as highlighted in a recent Cambridge University study, the rapid melting of Arctic sea ice and permafrost threatens to unlock methane emissions that will generate costs of up to $60tn, much of it associated with the impact of floods, droughts and storms in developing countries. In effect these companies are taking what they see as a one-way bet on governments failing to tackle climate change. It’s a dangerous play. If governments fail to act on their climate change commitments, financial exposure to fossil fuel assets could become a systemically destabilising liability. Five of the 10 top companies listed on London’s FTSE 100, accounting for a quarter of the indexes’ capitalisation, are almost exclusively high carbon. The Australian Securities Exchange has a recklessly high exposure to coal. The New York exchange is also sitting on a large carbon bubble. Energy companies are exposing institutional investors, mutual funds and banks to dangerously mispriced assets, yet current regulatory frameworks are failing to address the systemic threat. Unfortunately, governments are actively encouraging energy companies to bet on dangerous climate change. The European Union has driven the world’s largest carbon market into freefall by oversupplying permits, undercutting incentives for investment in renewable energy in the process. As a group, rich countries spend over $800bn annually actively subsiding fossil fuels , creating markets for oil, gas and coal companies. Britain’s recent decision to grant tax concessions to companies involved in fracking is a recent example of a wider failure to align fiscal policy with climate commitments. For every $1 invested in renewable energy support in the OECD another $7 is spent on carbon-intensive fuels. From a climate change perspective, this is the policy equivalent of a government running an antismoking campaign while removing the tax on tobacco and subsidising cigarette consumption. Developing countries are also trapped in a cycle of policy-induced carbon-intensive growth. Currently, they are spending over $1tn annually to subsidise fossil fuel use, according to the IMF. These transfers often dwarf budgets for health and education. As research at the Overseas Development Institute has highlighted, most of the benefits go to industry, large-scale agriculture and middle-class consumers. Eliminating subsidies for fossil fuels could open the door to a win-win scenario. It would cut energy-related CO2 emissions by 13%, slowing the drift towards the dangerous climate-change cliff. Coupled with signals to indicate that carbon prices will rise and early investment in renewables, it would unlock the private investment and spur the technological breakthroughs needed to drive a low-carbon transition. Diverting fossil fuel subsidies into low-carbon energy cooperation would also generate wider benefits. Developing countries such as India and China are already investing heavily in wind and solar power. But if emerging markets are to break their dangerous addiction to coal and other fossil fuels, they need financial support to phase out their carbon-intensive stock. Providing that support through the reallocation of fossil fuel subsidies would help create markets for low-carbon investors – and it would go a long way towards building trust in international climate negotiations that are too important to fail. •Kevin Watkins is executive director of the Overseas Development Institute, a UK development think tank. Continue reading
