Thursday, 22 October 2009
Carbon Pollution Reduction Scheme Bill 2009 [No. 2]
That this bill be now read a second time.
The need for action on climate change
The government is committed to taking action on climate change.
We accept the consensus view of scientists that global warming is unequivocal and human activities are very likely responsible for most of the observed warming over the last 50 years.
Climate change is real and there will be serious consequences if greenhouse gas emissions are not restrained.
Australia is highly exposed to the impacts of climate change. The effects on Australia’s environment—and economy—will be serious. The health of our population, the security of our water and energy supplies, and impacts on coastal communities and infrastructure all face unprecedented tests.
Acting on climate change is squarely in Australia’s national interest.
If we do not act, average temperatures across Australia are expected to rise by over five degrees Celsius (compared to 1990) by 2100. To put this in perspective, a one-degree Celsius rise in temperature risks a 15 per cent reduction in stream flow in the Murray-Darling Basin, Australia’s biggest river system.
Under a worst case scenario, irrigated agriculture in the Murray-Darling Basin would virtually disappear by 2100.
Bushfires are expected to become more intense, and the interval between them will shorten. The megafires in Victoria in 2009 and Canberra in 2003 are consistent with these expected changes in fire regimes.
The business community in Australia is calling for investment certainty so that they can commit the necessary investment to start to move the Australian economy to a low-carbon future.
As Heather Ridout from the Australian Industry Group said in a speech on 15 October 2009, ‘Many of our members are telling us that they are holding off making investments until there is a greater degree of clarity around domestic climate change legislation.’
Coupled with the Renewable Energy Target of 20 per cent of electricity from renewable sources by 2020, the Carbon Pollution Reduction Scheme (CPRS) will drive around $19 billion in investment in renewables in the period to 2020.
This demonstrates that Australia can take action against climate change whilst continuing to grow and prosper. In fact, modelling done by the Australian Treasury shows we can create 1.7 million jobs to 2020, while reducing carbon pollution.
And from an employment perspective, all major sectors—including the coalmining sector and electricity generation overall—grow over the years to 2020, delivering substantial increases in employment from today’s levels.
As the world prepares to gather in Copenhagen to strive towards an international deal, what each country does at home matters. All nations need to keep moving forward, and it is squarely in Australia’s national interest to show up at the negotiating table in Copenhagen with a plan to deliver our targets.
It maximises our chance of playing a constructive role in negotiations and sealing the deal we know the world needs, and it provides certainty that the targets we sign up for internationally will be achieved at the lowest possible overall cost.
To major developing countries, it would send the signal that Australia is serious about delivering the emissions reductions to which we have committed—and therefore encourage action from them.
For all nations, it will help build confidence that, even in one of the world’s most resource intensive economies, we can start to reduce our emissions while continuing to grow our economy.
I would like to address at the outset some of the major arguments of those who oppose action on climate change.
It is sometimes said that because Australia is responsible for a small proportion of global greenhouse gas emissions, we should not be ‘acting ahead of the rest of the world’ by unilaterally committing to reduce our emissions—that this would impose costs on Australia without solving the global warming problem.
And there is no need to wait until after Copenhagen as there is nothing in the Bill which makes its passage contingent on Copenhagen outcomes.
The CPRS establishes the framework under which Australia’s emissions reduction targets will be achieved and it has been designed for Australia’s national circumstances. The CPRS has also been designed to be sufficiently flexible to accommodate the range of possible outcomes from Copenhagen, so important details such as the scheme caps will not be set until after Copenhagen.
And finally, the Liberal Party have endorsed the government’s emissions targets for 2020, including a commitment to reduce emissions by at least five per cent compared to 2000 levels, irrespective of commitments by other countries. That is an important commitment across the political divide.
This is an ambitious commitment. It is important for the community to know how this will be achieved so that everyone—including business and households—can start down the path of reducing emissions.
So the debate over whether Australia should wait is over. In fact, it should have been over since 2007, when the Howard government endorsed the findings of its Task Group on Emissions Trading, which recommended that the then government announce an emissions target ahead of a post-Kyoto agreement and recommended the adoption of an emissions trading scheme to achieve those targets.
Development of the Carbon Pollution Reduction Scheme
Numerous reviews have found that an emissions trading scheme is the best and most efficient tool to achieve emissions reductions—including the former Prime Minister Howard’s Task Group on Emissions Trading and the Garnaut review.
Both of these reviews concluded that market based approaches that deliver a price on carbon will reduce greenhouse gases at least cost, and that an emissions trading scheme is the best market based approach.
This is why both major political parties went to the last election committing to establish an emissions trading scheme—and why the Rudd government has developed the Carbon Pollution Reduction Scheme.
Since the election of the Rudd government, there has been an extensive process to develop the CPRS.
The core principles of the scheme were clearly articulated as long ago as February 2008.
The government’s CPRS green paper was released for public consultation in June 2008. The Department of Climate Change undertook extensive stakeholder consultation in developing the green paper, including meetings and the release of 16 papers on different aspects of scheme design.
Final policy positions were set out in the CPRS white paper, released in December last year. In developing these policy positions, the government considered 1,026 submissions on the green paper, the final report of the Garnaut climate change review, the results of the Australian Treasury’s comprehensive modelling exercise, feedback from meetings, consultations, workshops and one-on-one stakeholder consultation and outcomes from a number of industry workshops.
In March and April 2009, the government released for consultation draft legislation to implement the CPRS. A number of changes were made to the legislation in light of that consultation.
From this brief history it is clear, I submit, that the CPRS has been subject to a great degree of public scrutiny. It has also had a great deal of parliamentary scrutiny. Three Senate committees considered and reported on the CPRS bills, and there was extensive parliamentary debate on those bills between April and August of this year.
We have conducted a thorough, consultative and transparent policy process over the last two years to reach this important final stage.
It is pleasing that the coalition has now finally come forward with proposals to amend the CPRS and the government is certainly looking forward to negotiating in good faith with all parties.
I now turn to consider some of the major elements of the CPRS Bill.
Emissions-intensive trade-exposed industries
The government recognises that the introduction of a carbon price ahead of effective international action may provide incentives for some trade exposed industries to relocate or source production offshore—a concept known as carbon leakage.
That is why the CPRS Bill provides for a program to support businesses producing internationally traded goods which face the most significant exposure to the carbon price.
The features of that program have been clearly stated by the government.
Assistance, in the form of administrative allocations of permits, will be provided to new and existing firms engaged in emissions-intensive trade-exposed—so called EITE—activities.
Assistance will be targeted to the most emissions-intensive trade-exposed activities. From the first year of the CPRS, highly emissions intensive activities will have an effective rate of assistance of almost 95 per cent, and less emissions intensive activities will have an effective rate of assistance of 66 per cent—rates of assistance endorsed by the opposition through their support for similar arrangements under the government’s renewable energy target legislation, although of course I recognise that in the proposals that have been advanced by the opposition in relation to this legislation they seek some changes.
Unlike the European Union scheme or the schemes proposed in the US Waxman-Markey and Kerry-Boxer bills there is no overall cap on free permit allocations. And as assistance will be directly linked to output, this means that if production doubles the allocation of permits also doubles. That is an important distinction with the propositions that are being advanced in North America. This is an important thing to cater for the expansion of Australian industry, and is the key reason why the Australian arrangements are, the government submits, more generous than the European Union and proposed US schemes.
Notwithstanding these arrangements, the design of the emissions-intensive trade-exposed program ensures that even these firms face the full carbon price and have the same incentives as all other industries to find opportunities to reduce their emissions. Assistance is calculated based on historical, industry baselines of greenhouse intensity and assistance reduces by 1.3 per cent per year. This ensures that the most efficient producers in an industry, and the producers that become more efficient over time, are rewarded for their efforts.
The government is confident that its EITE program reduces the risk of carbon leakage, while promoting efficient production decisions and ensuring that all industries make a contribution to the national effort to reduce carbon emissions, without risking jobs.
In order to provide clear and detailed rules about how much assistance will be provided, the detail of activity definitions, rates of assistance and other matters will be set out in regulations, many of which are in draft form and available.
A significant proportion of the relevant regulations, as I have observed, have already been tabled. It is, of course, unusual that draft regulations be released for public comment ahead of the passage of legislation. The government has taken this extra step to make available as much information as possible to parliament when considering the CPRS bills.
Coverage of the CPRS
One important design principle that the government has adopted in developing the CPRS is breadth of coverage.
The CPRS has broad coverage, as it applies to approximately 75 per cent of Australia’s emissions.
This is consistent with the approach of former Prime Minister Howard’s task group on emissions trading, which said:
The efficiency and fairness of a national abatement effort will be increased to the extent that all sectors contribute to greenhouse gas reductions. The broader the opportunity to identify and implement abatement opportunities, the lower will be the costs to the economy of meeting any given abatement task. In addition to achieving abatement efficiently, comprehensive coverage has an important equity dimension: it ensures the abatement task is shared broadly across sectors of the economy …
For these reasons, any proposal to exclude or carve out sectors from the CPRS must be examined very carefully indeed. Any benefits have to be weighed up against the increased burden on other industry sectors, the loss of opportunities for low-cost emissions reductions, and the possible loss of permit revenue to assist households.
Agriculture is not currently in the CPRS, but the government has not ruled out including it in the future—from 2015 at the earliest.
The CPRS bill does, however, provide for domestic offsets for reforestation.
This is a crediting mechanism to encourage reductions in carbon pollution before the scheme starts. So that can be achieved, proponents of approved reforestation projects will be eligible to receive emission units for increases in carbon sequestration taking place from 1 July 2010.
These emissions units will then be available for purchase by liable entities—the large emitters and fuel suppliers—as an alternative to reducing their emissions or purchasing emissions units from other sources.
Given that there has been some discussion about including additional offsets in the CPRS, the government believes it is important to keep in mind the following points.
First, offsets should only be available for sectors that are outside the CPRS. There would be double counting if offsets are provided for abatement that would also be recognised through reductions in CPRS obligations.
Second, offsets should count towards Australia’s international commitments. Otherwise, Australia would need to tighten its scheme cap, with a cost to industry and consumers, or purchase Kyoto units on the international market, costing taxpayers.
Third, practical issues of measurement and administration have to be considered in detail. Some of these are as yet insufficiently defined.
Electricity Sector Adjustment Scheme
Free permits will also be issued, on a once-off basis over the first five years of the CPRS, to investors who purchased or constructed coal fired generation assets prior to the Commonwealth government’s announcement of its support for an emissions trading scheme.
While such a policy change could have been foreseen prior to this announcement, the government considers it appropriate to partially recognise significant losses of asset value experienced by investors that were committed to such investments prior to a clear announcement by the Commonwealth government of its support for such a scheme.
It is estimated that the free permits to be provided to generators will be worth approximately $3.8 billion. This assistance is focused on the most emissions intensive generators as these generators are likely to experience the largest losses in asset value.
While individual electricity generators argue for increased assistance, what the whole electricity sector requires is certainty around the regulatory environment. It is only once they have that certainty, through the passage of this legislation, that they can make the necessary investments in lower emissions technologies.
This is another reason why the government considers we must act now.
Assistance for the Coal Sector
The government recognises that emissions intensive coalmines do need transitional assistance to adjust to the introduction of the Carbon Pollution Reduction Scheme.
The government has said it will target assistance to the most gassy mines—those which are the most methane intensive—and has on the table a $750m package to assist these mines to investigate and implement abatement opportunities and ease their transition to the introduction of a carbon price.
The government believes this formulation will allow the coal sector to play its part in emissions reductions whilst providing assistance for the mines most affected by the introduction of a carbon price.
Those are some of the key issues contained within the legislation that I wish to address in this second reading speech.
Australians have made it clear they want action taken by the government on climate change.
The Australian government believes it is critical to take action on climate change now.
Business want the certainty that will allow them to invest.
And on the eve of the Copenhagen conference, the world is watching what Australia does in this regard.
The time has come, after 12 years of inaction, to provide business certainty and to act on the challenge of climate change.
The government is determined to meet this challenge and make this important reform.
The government welcomes the opposition’s proposals and looks forward to negotiating in good faith with all parties.
It is now incumbent upon the Leader of the Opposition to show how his proposals are environmentally credible and fiscally responsible and to commit to voting on the CPRS legislation this year.
Debate (on motion by Mr Coulton) adjourned.