The Government’s CPRS v the Coalition’s amendments — what the Liberals want:

Trade Exposed Industries

  • Amend the CPRS to provide a single level of assistance for emissions intensive trade exposed (EITE) industries at 94.5 per cent until 2015 and 90 per cent thereafter.
  • Lower the threshold for assistance from the CPRS proposal of 1000 tonnes of CO2 per $1 million of revenue to 850 tonnes of  CO2 per $1 million.
  • Continue to provide assistance to Australian EITE industries at 90 per cent until 80 per cent of their international competitors have also implemented carbon abatement measures.
  • Include primary food processing such as dairy and meat in the EITE scheme.
  • Allow industries that include a series of sequential or parallel production processes to have these assessed as a single activity in determining assistance.

The Government has proposed two tiers of compensation under the CPRS for big-polluting firms that are trade-exposed: for firms over 1,500t per $1m revenue, 94.5% of permits would be provided free; for firms over 1000t, 66%. The compensation rates will be tapered back by 1.3% a year until the early 2020s, unless an international agreement removes the need for protection of trade-exposed industries.

The Coalition’s amendments dramatically increase the level of compensation required, with firms in the 1000-1500t range like LNG and petrol refining receiving the maximum amount, and new industries like food processing moving from no compensation to receiving nearly all of their permits for free.

The Coalition will also stop tapering at 90% and leave firms on 90% of permits free indefinitely until 80% of their trading rivals are engaged in a carbon abatement scheme.

Estimated conservatively, this would cost $600m a year initially and increase rapidly to over $3b a year in 2018.

Agriculture

  • Permanently exclude agricultural emissions from the CPRS.
  • Obtain Government agreement to introduction of an agricultural offset scheme in line with similar offset schemes to be introduced in comparable economies such as the US and EU.

The Government has excluded agriculture from the scheme pending a review, and it won’t come in, if at all, until 2015. Expect the Government to compromise on this issue and leave agriculture out, subject to some sort of program encouraging on-farm emissions reductions. Agricultural offsets in areas such as biochar and other biosequestration initiatives are also currently under review.

Expect the Government and Liberals to reach some sort of arrangement on this.

Coal Mine Emissions

  • Exclude coal mine fugitive emissions from the CPRS.
  • Provide the Minister with authority to use regulation to control fugitive emissions with the objective of achieving a 30 per cent reduction by 2025 as technology and international best practice allow.

The Government believes coal has a totemic significance for the environmental movement and has been at pains to treat it separately from other polluters – thus its inclusion of coal mining as a non-EITE industry right from the outset. That has been the bone of contention between the Government and the coal industry ever since. But the complete exclusion of fugitive emissions will leave a gaping revenue hole in the CPRS.

The Government will probably be happy to deal on trying to curb fugitive emissions – as will the industry – but will insist on a far smaller compensation package for coal. This is a potentially significant stumbling block.

Lower Electricity Prices

  • The Coalition will continue to advocate an intensity-based cap-and-trade model for generators. This delivers the same emissions cuts as the CPRS but with a much smaller increase in electricity prices.
  • This would greatly reduce the burden on small and mid-sized businesses, which receive no compensation for higher power bills under Labor’s proposals.
  • Under the CPRS retail electricity prices will rise by close to 20 per cent in the first two years. Under an intensity approach, retail electricity prices would rise by less than 5 per cent in the first two years.
  • If the Government continues to refuse to consider the intensity model, the Coalition will negotiate for an alternative approach to cushion near-term electricity price increases for small businesses.

The last gasp of the Frontier Economics model – continuing Coalition “advocacy” of an intensity-based model for generators (meaning generators would only buy permits for emissions over a specified “best practice” level, resulting in lower price rises for electricity consumers). In effect, the intensity-based model recommended by Frontier Economics is dead, replaced with a Coalition insistence that small businesses be compensated to offset price rises.

This can be funded by reducing household compensation – small business won’t have to pass on big price rises, which is the goal (and pretty much the whole point) of the CPRS. Some sort of deal balancing small businesses price rises and compensation both for households and businesses should be achievable but if consumers see no price rises at all, there’ll be no price signal of any kind under the CPRS.

Compensation for Electricity Generators

  • Coal-fired generators must be better compensated for loss of value they experience from the CPRS, to ensure security of electricity supply and enable them to transition to lower emission energy sources.
  • The CPRS offers coal-fired generators 130 million permits over five years worth $3.6 billion. Yet three respected private sector analysts estimate their losses at $9–$11 billion.
  • Assistance should be increased to 390 million permits over 15 years (or about $10 billion). Assistance should be allocated to all generators in proportion to the losses they suffer.
  • In the absence of access to the Government’s secret Morgan Stanley report, this represents the Coalition’s best estimate of appropriate generator compensation given the available data.

Rather than halting compensation to the electricity generation sector after five years, as the Government proposes, the Coalition would just let it keep on going for another 10 years, ripping another $6b+ from the CPRS to give to foreign-owned power companies and power generation assets owned by the NSW and Queensland Governments.

It’s appalling policy – the foreign companies who own plants like Hazelwood have known for certain for three years, and should have known for over a decade, that a carbon price was coming – but given the financial impacts are off after 2016, the Government may be inclined to some sort of deal on this.

Energy Efficiency and Voluntary Action

  • The Coalition will negotiate for a national “white certificate” energy efficiency scheme so households and businesses earn credits for efficiency measures, and contribute to reducing national emissions.
  • Likewise, the Coalition supports creation of a voluntary offset market in advance of the introduction of the CPRS, and amending the CPRS to ensure voluntary abatement leads to a lower national level of emissions.

Both sides have been caught out by the argument, first pushed by Richard Denniss, that the CPRS takes no account of voluntary action. The Government has come up with a convoluted “Carbon Trust” to address this non-issue (if voluntary action was so widespread, we wouldn’t need a CPRS in the first place because there wouldn’t be a problem), and the Coalition has been advocating a “voluntary market” for some months.

A voluntary market could completely skew the CPRS unless kept rigidly confined to relatively small number of permits (for example, someone could buy up lots of cheap “voluntary permits” in the first year and horde them for a decade until they were worth tens of times their initial cost).

Again, there may be room for some sort of deal to better encompass what limited voluntary action will ever occur at the household and small business level.