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The Govermnet has released a green paper in which it proposes a cap and trade scheme and commits to reducing Australia’s greenhouse gas emissions by 60% below 2000 levels by 2050.

At the heart of the Scheme is emissions trading, in which the Government sets a limit on how much carbon pollution industry can produce, and then the Government sells permits up to that limit, creating an incentive to look for cleaner energy options. Companies can buy and sell permits from each other depending on how much they value them.

See our earlier post for details of how a general emissions trading scheme works

The Government intends that revenue raised from the selling of permits will be used to help households and business (see below).

Compensatory changes

The Government announced a range of compensatory arrangements and transitional measures:

· To offset the initial price impact on fuel associated with the introduction of the Scheme, the Government said it would cut fuel taxes on a cent-for-cent basis (this will include fuel used by heavy vehicle road users). The Government will review this measure after one year.

· For rural and regional areas, a rebate will be provided equivalent to the excise cut for businesses in the agricultural and fishing industries for three years.

· Transitional assistance will be provided in the form of a share of free permits to the most emissions-intensive trade-exposed activities.

· The Government also proposes to provide a limited amount of direct assistance to existing coal-fired electricity generators.

· Payments will be increased, above automatic indexation, to people in receipt of pensioner, carer, senior and allowance benefits and to provide other assistance to meet the overall increase in the cost of living flowing from the Scheme.

· Assistance will be increased to other low-income households through the tax and payment system to meet the overall increase in the cost of living flowing from the Scheme.

· ‘Middle-income households’ will also get assistance to help them meet any overall increase in the cost of living flowing from the scheme.

Tax and accounting aspects

The Green Paper says ‘discrete provisions of the income tax law’ would be developed to provide generally the same tax treatment to permits purchased by taxpayers who are carrying on a business or other income-earning activity as would occur under existing legislation. Other tax aspects include:

· the cost of acquiring a permit would be deductible at the time the permit is acquired. If the permit is banked, the effect of the deduction would be deferred until the time the permit is surrendered or sold;

· any proceeds received on the sale of a permit would be treated as assessable income;

· the value of free permits would be included in the taxpayer’s assessable income in the year the permits are received; and

· Scheme transactions would be treated under the normal GST rules.

An emission trading scheme typically works in this way:

1. The government sets emission reduction targets in line with their protocol and other commitments.
2. Businesses in sectors covered by the emissions trading scheme, whose greenhouse gas emissions are above
   a threshold, report those emissions to the government.
3. The government uses its own short-term and long-term emission reduction targets, and emissions data from
   business, to allocate free emission permits and / or auction emission permits to businesses whose greenhouse gas emissions are above a threshold (known as scheme participants). Emission permits represent a right for the holder of the permit to emit a specified amount of greenhouse gas emissions during a specified period of time. The limit or cap on the number of permits allocated creates the scarcity needed for a trading market to emerge.
4. If a scheme participant’s net emissions (gross emissions less activity that reduces emissions, such as the purchase of approved carbon offsets) at the end of a year is likely to be less than that allowed by the permits they hold, the participant can sell their excess permits to other scheme participants, or bank them for future use.

If the net emissions are likely to be more than the emission permits allow, a participant can: attempt to purchase approved carbon offsets; and / or reduce their emissions, for example by deploying more energy efficient technology; and / or attempt to purchase unused emission permits from other scheme participants.

If the participant is still unable to reduce their net emissions to equal the emissions allowed by the permits they hold, then the participant will have to pay an emissions fee to the government.

Example

Companies A and B both emit 100,000 tonnes of CO2 per year. The government allocates companies A and B emission permits that allow them to emit 95,000 tonnes a year each. Both companies must find ways of reducing their CO2 emissions by 5000 tonnes to meet the permit allocations.

Each permit represents a right to emit one tonne of CO2. The market price for each permit is $10.00. Company A calculates that if it invests in more efficient means of production the cost of reducing its emissions is only $5.00 per tonne, which will reduce its emissions by 10,000 tonnes. As reducing emissions is $5.00 per tonne cheaper than purchasing emissions permits from other scheme participants, company A decides to invest in improving its efficiency and reduce its emissions to 100,000 tonnes. This leaves company A with 5000 excess emission permits for the year that it can either sell to other scheme participants or bank for future use.

Company B is in a different situation as it has already done a lot to reduce its emissions by investing in low emissions technology. It has worked out that the cost to further reduce its emission is $15.00 per tonne. As the cost of reducing its emissions to 95,000 tonnes is greater than the cost of buying 5,000 emission permits, company B decides to purchase 5,000 permits from another scheme participant, so that it holds sufficient permits to cover its emissions for the year (100,000 tonnes).

Company A sells its 5,000 excess permits to company B for at the market price of $10.00 per tonne. For company A, it has spent $50,000 to reduce 10,000 tonnes of emissions and has made a gain of $50,000 on the sale of 5,000 excess permits to company B. Company B has saved $25,000 on what it would have had to otherwise spend, but for the emissions trading scheme.

The total emissions from company A and company B has reduced from 200,000 tonnes of CO2 to 190,000 tonnes.

From the CPA Australia publication EMISSIONS TRADING AND THER RELATED POLICY INITIATIVES