2. The Garnaut Climate Change Review:

The Garnaut Climate Change Review was commissioned in April 2007 by the then Opposition Leader Kevin Rudd.[1] The aim of the review was to analyse how global warming would affect Australia’s economy and recommend policies to “improve the prospects of sustainable prosperity.”[2] 

Key points from the review pointed to the need for Australia to encourage action on climate change within the international community.[3] The Copenhagen and Cancun agreements push for limiting any temperature increase to below 2 degrees Celsius above pre-industrial levels.[4] Currently there is no agreement for trading emissions entitlements on an international level, and the report states that Australia should work to secure such opportunities through "bilateral, regional and multilateral forums.

The report also backs a pricing of carbon as the centre piece to any environmental policies aimed at reducing emissions, and states that the pricing of carbon is the most cost effective way of achieving these reductions.{C}{C}[6]{C}{C} It states that; "the effect of a carbon price on the economy remains modest, and the impact on most industries small compared to other cost rises and fluctuations.”[7] Other programs to reduce emissions have a much larger difference between their cost and their environmental effectiveness, and a market-based system is better than regulatory interventions.

The report recommended pricing carbon, beginning as a fixed price, before moving to a floating price.[9] Beginning with a fixed price is designed to provide stability during the introduction of the carbon price, allowing affected industries to build "confidence and capability" in the system, also providing a more steady revenue stream for the government to put into compensation programs.

3. Clean Energy Future:

The Government is touting its 'Clean Energy Future' package as the Australian Governments plan to tackle climate change.[11] The legislative package was passed in November 2011,[12] and is underpinned by four separate areas of focus; those being the carbon price, renewable energy, energy efficiency, and land use.[13] This legislative package consists of 19 Acts.

Each of these areas of focus will now be examined in more detail. 

3.1 Carbon Price:

The Clean Energy Act 2011 establishes the carbon pricing mechanism and acts as the central piece of legislation in the Governments’ package.[15]  An environmental tax is best described as; "tax... imposed on an environmentally damaging activity, thereby raising the cost of that activity to reflect the cost to society of lost environmental benefits."

The taxing of carbon is a big change as up until this point emitting carbon has been free. The basic idea of putting a price on carbon emissions is to pressure businesses into 'cleaning up their act' and reducing their emissions.[17] Having to pay for emissions is a burden businesses will want to avoid so in theory they will find ways to reduce their emissions, thus saving money, while having a positive effect on the environment.[18] The pricing of carbon came into affect on July 1, 2012, and has been implemented in a two-stage approach.[19] Initially there will be a fixed price period in place where carbon is priced at $23 a tonne to begin with.[20] This fixed price period will apply for the first three years, before converting to a full emissions trading scheme on July 1, 2015, where the price per tonne will be determined by the market.

The imposition of this policy is backed up by the Australian Constitution using the taxation power "for the common welfare", which is the principle used for the taxation of tobacco, and applies because environmental sustainability is for the benefit or 'common welfare' of society.

An estimate contained in the Clean Energy Legislative Package claims that by 2020 Australia, under the scheme, will cut at least 159 million tonnes from its emissions, which equates to taking 45 million cars off the road.

The price on carbon will not apply to all industries to begin with, only applying to around 500 businesses in the following sectors; stationary energy, transport (certain areas only), industrial processes, non-legacy waste, and fugitive emissions.[24] While domestic aviation, domestic shipping, rail transport, and non-transport use of fuel, sectors can opt-in to the scheme.

A price ceiling will be put in place once trading begins that is $20 above the expected international price.[26] There was expected to be a floor price of $15, however the Government has since announced it will be eliminating this as part of changes to the system.

3.2 Updates to the Carbon Trading Policy:

On August 28, 2012 the Federal government announced a major change it intended to make to the carbon pricing mechanism.[28] The current legislation imposes a $15 floor price on carbon permits, however the government now plans to scrap this.[29] Climate Change Minister Greg Combet announced that instead of putting a floor price in place a limit will instead be placed on the amount United Nations backed permits Australian companies can buy.[30] The purpose of this limit is to prop up permit prices in Australia to maximise the effectiveness of pricing carbon.[31] Companies will be able to purchase up to 12.5% of their carbon liability in United Nations backed permits.

Further to this there are also plans to link Australia's scheme to the carbon-trading scheme that is already operating in Europe.{C}{C}[33]{C}{C} European permits are currently trading at $9.80, far cheaper than the $15 floor price that was originally proposed for Australia.

Currently in Australia carbon is taxed at a fixed price of $23 a tonne, until July 1, 2015 when the mechanism moves to a floating-price emissions scheme.{C}{C}[35]{C}{C} The trading scheme in Europe is the largest in the world.{C}{C}[36]{C}{C} It is proposed that from 2018 Australian companies will be able to buy and sell permits in Europe and vice versa.{C}{C}[37]{C}{C} By allowing this interconnection between the two systems it is hoped that the free market economy will find the cheapest way to reduce carbon levels.

Dissolving the floor price is dangerous though because if the price falls too low then industries may simply absorb the cost, not seeing it as enough of a deterrent to curb their emissions, thus leading to a failure in the whole aim of the pricing mechanism.

3.3 A Shift In Policy:

Up until now the policy in Australia has been to implement positive environmental policies, that reward actions taken that have a positive environmental outcome, mainly through tax allowances.{C}{C}[40]{C}{C} For example under section 40-755 of the Income Tax Assessment Act 1997 (Cth) a taxpayer can claim a deduction for expenditure where it's dominant purpose is environmental protection activities.

The pricing of carbon represents a shift in policy whereby rather than providing a reward for positive environmental behaviour, a consequence is placed on failure to change current behaviour.[42] This model is more in line with that proposed by AC Pigou, which was the "full internalisation of external environmental costs," to maximise welfare. The current legislation follows this policy in the way it taxes those businesses causing a negative environmental impact and distributes the profits of this as welfare. This threat of penalty is a big shift in Australia's environmental policy, however it also provides for a greater certainty in results.

3.4 Benefits of Pricing Carbon:

Reports by the OECD point to there being advantages present in moving from a set price on carbon to a market based mechanism.{C}{C}[43]{C}{C} A key benefit of Australia's carbon policy once moved to a cap and trade mechanism is that a firm emissions reduction trajectory is set, whereby a limit is placed in the total number of carbon credits available and this number is slowly reduced to curb the total tonnage being released into the atmosphere.[44] The placement of a strict cap means that the total reduction in emissions is certain, whereby where a business misses its target, or allocation of credits, then it must purchase them from another business who has surplus credits available due to their emission reduction measures.

A cap on emissions will come into play from 2015 as the emissions trading scheme begins, with the default cap in the 2015-2016 financial year being 38,000,000 credits.

Australia's reduction targets under the 2010 international Cancun Agreements vary depending on international action.{C}{C}[47]{C}{C} If no international agreement is reached the Government has only pledged a reduction of 5% of 2000 levels by 2020, however if a global deal as set out in the Cancun Agreements is reached whereby emissions are stabilised at 450ppm of carbon dioxide equivalent or lower, then the government has pledged to reduce emissions by 25% of 2000 levels by 2020.

Emissions trading as a market-based system is the most cost effective mitigation option, as it is the cheapest policy to implement, provides flexibility, and also “upholds the polluter pays” principle of environmental law.{C}{C}[49]{C}{C} The emission of carbon becomes an expense for a business and with the market deciding the price then to avoid the extra cost a business has an incentive to reduce its emissions, where before there was no incentive.

The key to a healthy carbon market is a scarcity of available carbon credits, as this will ensure a higher price, which will in turn act as compelling reason for businesses to reduce their emissions.

3.5 Effect on Australia's Economy:

There is of course a downside to the imposition of a price on carbon and that comes by the way of affected businesses passing on the cost of the tax to the consumer, resulting in higher prices for many goods.

Figures from Treasury point to an increase to consumer prices of 0.7% over 2012-2013 as the carbon price comes into effect.[52] The government attempts to justify this by claiming there was a 2.5% increase from the introduction of the GST, and inflation figures of 2.9% in 2001-2002 and 2009-2010.

Estimates indicate an increase to the average electricity bill of $3.30 a week, with an overall increase of $9.90 to the average weekly household spending.[54] The Government claims that the average household will actually be better off, as this increase is offset by government assistance of $10.10 a week on average.[55] This is because the government has implemented the tax in a way that will deliver it a double dividend, in that as well as curbing emissions and the environmental benefits that will accompany this; the revenue from the tax is being used for other social purposes, such as compensation.[56] This compensation is being provided in the form of incomes tax cuts, as well as increases to government allowances and payments.

The Government has also allocated around 40% of the revenue that will be gathered from the carbon price to supporting industries affected.[58] The aim being to provide assistance to affected businesses to support jobs, while also creating incentives for them to invest in clean energy.

Placing a price on carbon while imposing a burden on businesses also has the possibility to have a positive effect on Australia's economy.

One area where this will be felt is in the energy sector. Government estimates point to an investment of around $100 billion in renewable energy generation over the next 40 years, as the industry seeks to minimise its carbon liability.[60] This investment will be fostered by industry assistance packages such as the Clean Energy Finance Corporation, which will deliver $10 billion in investment to the commercialisation and deployment of clean energy technologies.

An example of business investing to benefit in a low emissions economy is recycling company VISY, which is currently investing around $500 million building clean energy plants in Australia, as it seeks to become a leader in electricity generation from waste.

3.6 European Union Emissions Trading System (EU ETS):

To properly analyse the impact and success of a carbon-trading scheme, it should be analysed against the European Union Emissions Trading Scheme, which is the “backbone” of the global carbon market; trading 80% of the world’s carbon permits.

Europe’s emission trading system was launched in 2005 and currently operates in 30 countries.[64] The trading system operates on a “cap and trade” principle, whereby the total amount of allowances is capped and if a business goes over its quota then it must buy extra allowances from another business as required.

The steady decline of available allowances will mean that by 2020 total carbon emissions will be 21% lower than they were in 2005.[66] The system currently covers carbon emissions from the largest polluters, including power stations, oil refineries and steel works, which together account for nearly half of the European Union’s carbon emissions.

There is stringent monitoring and reporting requirements under the system, with all reports by a business to be independently verified and also made public.[68] If a report is found to be unsatisfactory then the business is barred from selling its surplus allowances.

Australia’s planned linking with the EU ETS will not be as simple as it is for European Union nations, as international law enforcement does not carry with it the binding force of national law enforcement.[70] EU Member States are bound by EU Directives, meaning the system can be easily enforced within the member zone.

Currently the EU ETS operates in phases of 5 years, which has led to uncertainty in the market, with a many industry groups pushing for a 15 to 20 year period.[72] This combined with an excess in allowances has led to a collapse in the carbon price in recent years, with prices down 11% this year, and 75% since July 2008.[73] Part of the blame for this can be put on the contraction of Europe’s economy though, as big emitters have been operating at scaled back rates, reducing demand for allowances.[74] A lesson to be learned for the structuring of Australia’s carbon trading mechanism is that there must be “strict, clear and long-term” emission reduction policies in place, in order to provide predictability for growth, and also to act as an incentive for the development of clean energy technologies.

[1] Ross Garnaut, The Climate Change Review – Final Report (Cambridge University Press, 1st ed, 2008) xiii.

[2] Ibid xiii.

[3] Ross Garnaut, ‘Garnaut Climate Change Review – Update 2011, Update Paper 6: Carbon Pricing and Reducing Australia’s Emissions (2011) Garnaut Climate Change Review [2] < http://www.garnautreview.org.au/update-2011/update-papers/up6-carbon-pricing-and-reducing-australias-emissions.pdf>.

[4] John Taberner, ‘Climate Change Regulation in Australia’ (2011) 39 ABLR 121, 132.

[5] Garnaut, above n 22, 5.

[6] Ibid 2.

[7] Ibid 2.

[8] Ibid 2.

[9] Ibid 3.

[10] Ibid 3.

[11] Greg Combet, Securing a Clean Energy Future: Implementing the Australian Government’s Climate Change Plan (2012) 2.

[12] Ibid 1.

[13] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 1.

[14] Rosemary Lyster, ‘Australia’s Clean Energy Future Package: Are We There Yet?’ (2011) 28 EPLJ 446, 447.

[15] Clean Energy Act 2011 (Cth) s 4.

[16] Henry K, Harmer J, Piggott J, Ridout H and Smith G, Australia’s Future Tax System – Report to the Treasurer (Henry Review), (Canberra, 2009), 319.

[17] Combet, above n 30, 2.

[18] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 5.

[19] Celeste M Black, ‘Considering the Taxation Implications of Australia’s Carbon Pricing Mechanism’ (2012) 41 AT Rev 136, 136.

[20] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 2.

[21] Black, above n 38, 136.

[22] Simmons, above n 2, 370.

[23] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 5.

[24] Annabel Crabb, The Great Carbon Tax Secret: Who Are the Misfortune 500? (13 July 2011) The Drum [15] <http://www.abc.net.au/news/2011-07-12/the-great-carbon-tax-secret-who-are-the-misfortune/2790974>

[25] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 2.

[26] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 2.

[27] David Wroe, Government to Scrap Carbon Floor Price (28 August 2012) The Sydney Morning Herald [1] <http://www.smh.com.au/opinion/political-news/government-to-scrap-carbon-floor-price-20120828-24xuo.html>.

[28] Ibid 1.

[29] Malcom Farr, Carbon Backflip: Govt Scraps $15 Carbon Floor Price (28 August 2012) news.com.au [2] < http://www.news.com.au/business/carbon-backflip-govt-scraps-15-carbon-floor-price/story-e6frfm1i-1226460077067>.

[30] Wroe, above n 46, 3.

[31] Ibid 3.

[32] Simon Butler, Global Carbon Trade Collapses into Hot Air (20 September 2012) Green Left [12] < http://www.greenleft.org.au/node/52285>.

[33] Farr, above n 38, 7.

[34] Wroe, above n 46, 4.

[35] Ibid 4.

[36] Annabel Hepworth, $2.5bn Windfall for Power and Coal After Carbon Floor Price Scrapped (5 September 2012) The Australian [7] < http://www.theaustralian.com.au/national-affairs/bn-windfall-for-power-and-coal-after-carbon-floor-price-scrapped/story-fn59niix-1226465094051>.

[37] Wroe, above n 46, 7.

[38] Albert Yu, Carbon Floor Price Scrapped: Good News or Bad? (29 August 2012) Renew Economy [7] < http://reneweconomy.com.au/2012/carbon-floor-price-scrapped-good-news-or-bad-73565>.

[39] Simmons, above n 2, 372.

[40] M McKerchar and A Hansford, ‘Environmental Tax Policies in Australia and the UK: Can it Only be a Carrot or Stick Approach?’ (2007) 3 Journal of the Asia Pacific Centre for Environment Accountability 3, 4.

[41] Income Tax Assessment Act 1997 (Cth), s 40-755.

[42] Simmons, above n 2, 370.

[43] OECD, Implementation Strategies for Environmental Taxes (1996) 11.

[44] Lyster, above n 33, 446.

[45] European Commission, Green Paper on Greenhouse Gas Emissions Trading Within the EU (Brussels, 8.3.2000) COM(2000) 87 final at [8].

[46] Lyster, above n 33, 447.

[47] Ibid 447.

[48] Ibid 447.

[49] Caroline Haywood, ‘The European Union’s Emissions Trading Scheme: International Emissions Trading Lessons for the Copenhagen Protocol and Implications for Australia?’ (2009) 26 EPLJ 310, 311.

[50] Ibid 312.

[51] Simmons, above n 2, 374.

[52] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 6.

[53] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 6.

[54] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 6.

[55] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 6.

[56] Black, above n 38, 136.

[57] Ibid 136.

[58] Ibid 136.

[59] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 7.

[60] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 8.

[61] Explanatory Memorandum, Clean Energy Legislative Package 2012 (Cth), 8.

[62] Bruno Zeller, ‘Carbon Reduction Schemes and the Energy Sector: A Bottom Up Approach?’ (2011) 28 EPLJ 332, 333.

[63] Haywood, above n 68, 312.

[64] European Commission, Emissions Trading System (EU ETS) (15 November 2010) European Comission [4] < http://ec.europa.eu/clima/policies/ets/index_en.htm>.

[65] Shol Blustein, ‘Carbon Financing and the Australian Emissions Trading Scheme: Less Emissions, More Opportunities?’ (2009) 20 JBFLP 191, 1999.

[66] European Commission, Emissions Trading System (EU ETS) (15 November 2010) European Comission [3] < http://ec.europa.eu/clima/policies/ets/index_en.htm>.

[67] European Commission, Emissions Trading System (EU ETS) (15 November 2010) European Comission [5] < http://ec.europa.eu/clima/policies/ets/index_en.htm>.

[68] Directive 2007/589/EC Establishing Guidelines for the Monitoring and Reporting of Greenhouse Gas Emissions Pursuant to Directive 2003/87/EC of the European Parliament and of the Council [2007] OJ L 229.

[69] Haywood, above n 68, 314.

[70] M Grubb, International Emissions Trading Under the Kyoto Protocol: Core Issues in Implementation (1998) 17(2) RECIEL 140, 143.

[71] Haywood, above n 68, 315.

[72] House of Commons Environmental Audit Committee, The EU Emissions Trading Scheme: Lessons for the Future (Second Report of Session 2006-2007, 2007), 90.

[73] Selina Williams and Alessandro Torello, As Carbon Prices Sink, Unease Rises (4 April 2012) The Wall Street Journal [1] < http://online.wsj.com/article/SB10001424052702304072004577323890893009020.html>.

[74] Ibid 7.

[75] Haywood, above n 68, 316.