The Australian Carbon Pollution Reduction Scheme (CPRS) is the proposed national emission trading mechanism. The objective of the CPRS is to meet Australia’s emission reduction targets in a cost effective and flexible way.

The CPRS underpins the three pillars of Australia’s climate change strategy:

• Reducing greenhouse gas emissions
• Adapting to unavoidable climate change impacts
• Helping to solve a global solution

The scheme is being designed to link with other schemes overseas to contribute to a global solution and ensure that Australian businesses have access to low-cost pollution reduction options.

On December 15, 2008 the Government released the White Paper outlining the final design of the CPRS and the medium-term, target range for reducing carbon pollution. This paper follows from the Green Paper, released in July 2008, which canvassed options on the design on the scheme.

Draft legislation for the CRPS is expected in late February 2009, with final legislation expected by May and a bill possibly passed by the end of June.

How the CPRS works

The proposed CPRS is based on a relatively simple cap and trade scheme. An aggregate cap on emissions is established and then the producers of these emissions are allowed to trade amongst themselves to determine which producers emit the total pollution load. The biggest example of a cap and trade emissions trading regime is currently the European Union Emissions Trading Scheme (EU ETS), which commenced operation in 2005.

There are two distinct features of a cap and trade system: the cap itself and the ability to trade. Establishing a cap on emission in effect establishes a price for carbon which can then be traded.

The cap will be set by the Australian government and according to the Department of Climate Change will be consistent with the government’s long term goal of reducing emissions to 60 percent of 1990 levels by 2050. There is, however, an ongoing and extensive debate over appropriate short and medium term emissions reduction targets for Australia that will have a direct impact on the final agreed cap.

After the cap is set, permits (also known as emission allowance units) will be issued equal to that cap. For example, if the government cap on emissions is set at 100 million tonnes of CO2-e for 2010 then 100 million permits would be issued for 2010.

Emitters of CO2-e are subsequently obliged to acquire and surrender a permit for each tonne of CO2-they produce. These permits can subsequently be traded between emitters, ensuring that the resulting permit price will be determined by the market.

If an emitter can undertake abatement at a more cost effective price than acquiring permits, it will have a more limited need for permits. But if the cost of abatement is higher than the cost of purchasing permits, then it will make more sense to purchase permits. Free trade in permits allows permits to be purchased by the firms that value than the most highly.

The initial release of permits will be either by auction of free allocation.

Who is affected?

The bulk of Australia’s CO2-e emissions come from the energy, transport and agriculture sectors. Thus, the government estimates that only about 1,000 firms will have direct compliance obligations.

However, through the creation of a carbon price, the cost of production in carbon intensive industry will increase, which in turn will impact on the price of associated products and services. This means that the CPRS will have an impact across the entire economy, presenting significant commercial challenges and risk to companies regardless of whether they have direct compliance obligations.

Like the final cap on emissions, the final decision on sectors that will be directly covered by the CPRS is subject of ongoing consultation. As of late 2008, the government proposed that the following sectors be covered:

• Transport
• Stationary energy
• Fugitive emissions (from black coal mining and oil and gas extraction)
• Industrial processes
• Waste management
• Forestry

Agriculture is not included in current coverage plans. According to the Department of Climate Change, the earliest date for inclusion of the agriculture sector in the scheme would be 2015.

CPRS timeline

A general timetable of CPRS roll out and implementation follows. For more details, visit the appropriate webpage within the Department of Climate Change website.

Transitional government assistance

The government is setting up a Climate Change Action Fund (CCAF) to assist business to transition to a cleaner economy, by providing several types of funding:

• Capital investment in innovative new low emission processes
• Industrial energy efficiency projects with long payback periods
• Dissemination of best practice among small and medium size firms

Funding arrangements will be finalised as the CRPS itself is finalised, in the spring of 2009. Click here to read more about the CCAF.