THINK.CHANGE.DO

1. From Brave New World to Paradise Lost: The Demise of Australia’s Carbon Pollution Reduction Scheme Professor Natalie Stoianoff THINK.CHANGE.DO Faculty of Law, University of Technology, Sydney Professor Natalie Stoianoff

2. Introduction • 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 Professor Natalie Stoianoff

3. Strategies for Mitigation of Emissions • Educational or informational • Voluntary agreements • Command and control regulation • Market based instruments Professor Natalie Stoianoff

4. 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 Professor Natalie Stoianoff

5. 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. Professor Natalie Stoianoff

6. 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. Professor Natalie Stoianoff

7. 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. Professor Natalie Stoianoff

8. 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. Professor Natalie Stoianoff

9. 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” Professor Natalie Stoianoff

10. 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. Professor Natalie Stoianoff

11. 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. Professor Natalie Stoianoff

12. 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 Professor Natalie Stoianoff

13. 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) Professor Natalie Stoianoff

14. 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 Professor Natalie Stoianoff

15. 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. Professor Natalie Stoianoff

16. 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 Professor Natalie Stoianoff

17. 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 Professor Natalie Stoianoff

18. 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 Professor Natalie Stoianoff

19. 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 Professor Natalie Stoianoff

20. 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 Professor Natalie Stoianoff

21. 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. Professor Natalie Stoianoff

22. 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. Professor Natalie Stoianoff

23. 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. Professor Natalie Stoianoff

24. 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. Professor Natalie Stoianoff

25. 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. Professor Natalie Stoianoff

26. 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. Professor Natalie Stoianoff

27. 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. Professor Natalie Stoianoff

28. 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. Professor Natalie Stoianoff

29. 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 Professor Natalie Stoianoff

30. 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. Professor Natalie Stoianoff

31. 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 Professor Natalie Stoianoff

32. Opposition proposed amendments by industry • 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 Professor Natalie Stoianoff

33. 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% Professor Natalie Stoianoff

34. 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. Professor Natalie Stoianoff

35. 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? Professor Natalie Stoianoff