The CPRS legislation is yet to be drafted and many matters affecting pipeliners have been resolved during the past year of negotiations. Nevertheless, the matters of cost passthrough and the definition of operational control (and, therefore, responsibility for emissions) remain to be resolved. The Government has, so far, shied away from making clear decisions in these areas and this reticence could cost the industry dearly.
In December last year, the Commonwealth Government released its White Paper, setting out the mechanics for emissions trading and an emissions reduction target for 2020. The broad detail of the CPRS includes:
* A commitment to reduce emissions to 5 per cent lower than 2000 emission levels by 2020; the White Paper notes that this would actually be a 27 per cent reduction in per capita terms; * A 15 per cent or higher reduction in emissions from 2000 levels by 2020 may be committed to if an international agreement is achieved; * Emitters will be required to purchase and surrender a permit for every tonne of greenhouse gas emitted; * A 5 per cent reduction in emission levels should result in an initial permit price of $23; and, * The price of permits will be capped at $40 inflation for the first five years.
The White Paper forecasts, based on a $25 carbon price, that the CPRS will result in a 1.1 per cent increase in the cost of living, with the average household’s electricity bill raising $4 per week and gas bill $2 per week.Article continues below…
This means that gas transmission pipelines, with annual emissions above 25,000 tonnes of carbon dioxide equivalent (the standard measure of greenhouse gases), will be required to surrender permits for emissions. Emissions from pipelines below the 25,000 tonnes of carbon dioxide equivalent threshold will be the responsibility of the entity that supplies the fuel for these pipelines.
The impact of the CPRS on the gas industry
Australia is an energy intensive economy. The CPRS places an economic value on carbon emissions and a cap on the total amount of emissions allowed in the Australian economy. The most efficient CPRS, to a large extent, would allow the market to determine the best way to reduce emissions, thus leaving it to the entities that create emissions to determine the most efficient way of reducing their emissions.
This should be good news for the gas industry as gas offers an efficient, available and relatively clean way to produce electricity. The CPRS would be expected to lead to a slow shift away from coal and toward gas as the fuel of choice of electricity generation. The Australian Bureau of Agricultural and Resource Economics (ABARE) estimates that the CPRS would see natural gas as the fastest growing energy source to 2029/30, almost doubling from its 2006/07 consumption of 1,158 PJ/a to 2,000 PJ/a in 2029/30. ABARE attributes the majority of this growth to an increase in gas-fired electricity generation.
The Renewable Energy Target
The national Renewable Energy Target (RET) mandates that 20 per cent of Australia’s electricity must be provided by renewable sources by 2020. This will require a legislated increase of renewable electricity generation to 45,000 gigawatt hours (GWh) in 2020.
Currently, renewable energy is significantly more expensive than alternative, low emission electricity generation options, such as natural gas. By its nature, the RET will not necessarily accelerate Australia’s carbon emissions reduction, but it will certainly increase the use of renewable energy sources. The CPRS is the mechanism by which the Australian Government will limit Australia’s emissions.
In mandating the use of expensive, renewable electricity generation through the RET, the national level of emissions saved through renewable energy used will remain available to other emission intensive industries.
The RET forces the electricity industry to significantly contribute to national emissions reduction through a more expensive option, and allows other industries and sectors to have a lesser share of the financial burden in reducing emissions. Because of the expense of renewable technology, the electricity generation industry will also look to the least expensive method of generation for the remaining 80 per cent of its output, which could lead to less use of natural gas. With the RET at 20 per cent, it has been calculated that gas consumption in the electricity sector could actually fall to 13 per cent below 2006/07 levels by 2020 (CRA International). Through the RET, government is forcing the electricity sector away from low cost, reliable generation options and toward expensive, intermittent options that mean the sector is shouldering more than its share of the total emissions reduction. This is despite the fact that there are many other lower cost means of improving efficiency and reducing emissions across the economy.
Specific issues in the CPRS White Paper for pipeliners
Operational control of a facility and liability for emissions from that facility is a matter that APIA is following up for members. In the CPRS Green Paper it was not clear which party would ultimately be responsible for the emissions generated from a pipeline, the owner (having financial control) or the operator (having operational control). APIA’s submission to the CPRS Green Paper sought clarification regarding this issue. Now, according to the White Paper, responsibility lies with the entity that has operational control, subject to a similar test to determine operational control as per the National Greenhouse and Energy Reporting Scheme (NGERS) framework. However, this responsibility can be transferred to the entity that has financial control, provided both parties agree.
There are several conditions as part of this allowance, one being that the party liable for emissions is also responsible for NGERS reporting. This enables pipeline owners to assume liability for the emissions if this is appropriate, otherwise liability will lie with pipeline operators.
Carbon cost pass-through
As the gas industry is based on long term contracts, many contracts do not have provisions dealing with costs associated with an emissions trading scheme. This means these costs, for the most part incurred in acquiring permits, may not be able to be passed through the supply chain to the consumer, which is the ultimate aim of the CPRS.
The Government has acknowledged in its White Paper that this is an issue but will not implement a statutory override of existing contracts to enable pass-through of emissions costs where contracts do not have the necessary provisions.
Basically, the Government has declined to offer any solution, stating it will continue to monitor the situation. The Government says it expects that the release of the draft legislation should help clarify some matters. The White Paper also states that the Government expects that many companies will simply renegotiate contracts. This position ignores the commercial reality that companies may be unwilling to accept any new costs. The Government cannot continue to ignore this issue. On the positive side, APIA members are not alone, with the Coal Association, Energy Networks Association, Asciano, Babcock & Brown and Wesfarmers also making submissions on the matter.
Where to from here?
The Government made an election commitment in 2007 to have an emissions trading scheme up and running by 1 July 2010, and has staked considerable political credibility on this commitment.
The release of the exposure draft of the legislation for the CPRS will provide a further level of detail regarding the mechanics of the scheme. The CPRS is a broad, economy-changing policy, and the legislation will need to be reviewed in detail to ensure it fully accommodates the nuances of every industry that will be impacted by the scheme.