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HG Alert: EITE assistance under the Federal Government’s CPRS - 16 Sep 2009

As Australia prepares to adopt the Federal Government’s Carbon Pollution Reduction Scheme and the associated cap and trade emissions trading mechanism, the Government is offering assistance to the eight specific industries most likely to be affected in the new carbon economy.

This article provides an overview of the Government’s emissions-intensive trade-exposed (EITE) assistance scheme, how it will operate and who will be affected.

Background

The Australian Government has committed to a five percent reduction in Australia’s carbon dioxide emissions (CO2e) from 2000 by the year 2020. As not all countries have adopted the same target, some Australian companies, particularly those who compete in the international market, may be disadvantaged by the Government’s adoption of what will be, in essence, a carbon tax.

The cap and trade scheme requires carbon dioxide emitters to buy permits for each tonne emitted. The cost to buy the permits (predicted to be $10 per permit per tonne of CO2 upon commencement in the 2011-2012 financial year) will add to the cost of production and the company’s bottom line. This means that Australian companies may have a higher cost of production than their international competitors, whose governments may not have adopted a similar scheme.

Accordingly, the Government is concerned about what it terms carbon leakage and in particular, two possible side effects from the emissions trading scheme. The first concern is that some companies may move off-shore to cheaper economies where emission trading schemes do not exist. The second concern is that Australian companies will be unable to compete with overseas competitors in both domestic and international trade as a result of an increase to their bottom line from the requirement to purchase emissions permits.

To reduce the risk of carbon leakage, the Federal Government proposes to provide assistance to the most emissions-intensive trade-exposed industries, by way of a yearly allocation of free emission permits to eligible companies.

What industries will be eligible?

The Federal Government has identified eight industries that will be eligible for EITE assistance:

Highly emissions-intensive

  • Production of bulk flat glass
  • Production of methanol
  • Production of carbon black
  • Production of silicon
  • Smelting zinc
  • Manufacture of newsprint

Moderately emissions-intensive

  • Production of glass containers
  • Production of white titanium dioxide pigment

Industries are classified as either highly or moderately emissions-intensive activities. The amount of assistance will be set at 90 percent for highly emission-intensive activities and 60 percent for moderately intensive activities.

However, for the first five years of the program, a global recession buffer of 4.5 percent and 6 percent respectively has been allowed for. Highly emissions-intensive activities will receive 94.5 percent assistance, and moderately intensive activities will receive 66 percent assistance.

The amount of assistance will reduce by 1.3 percent per year as companies adapt to the new regime.

Any eligible company will need to submit a new application for assistance by 31 October each year. This application will be based on the company’s emissions from the previous year. New or start up companies will be able to provide an estimate of their expected emissions in the coming year. For the first year of the scheme, companies will be able to look at their last three years of emissions in making their applications.

While only eight industries have been considered for the free allocation of emissions permits, it is expected that the scheme will be expanded to include agricultural industries such as beef cattle, sheep, dairy, pigs and sugar cane by the year 2015.

Calculating eligibility

To be eligible for free emissions permits, a company must be involved in one of the eight industries listed above, and must be trade-exposed and emissions-intensive.

A company will be trade-exposed if its ability to pass on the added costs of the carbon trading scheme are limited because it is in competition internationally with companies that are not affected by a similar emissions trading scheme - Australian companies that export, and domestic companies in competition with overseas companies who export to Australia and do not face a carbon tax.

A company will receive the maximum of 94.5 percent assistance if its emissions intensity is at least 2,000 tonnes of CO2 per $1 million of revenue or 6,000 tonnes of CO2 per $1 million of value added revenue.

The lower rate of assistance of 66 percent will apply to companies that have emissions intensity of between 1,000 and 1,999 tonnes of CO2 per $1 million of revenue, or between 3,000 and 5,999 tonnes of CO2 per $1 million of value added revenue.

The rate of assistance formula

A complex formula has been designed to calculate the number of free permits to be allocated to an eligible company in a given year. The formula reads as:

Kat (Ela x APiat) (Direct emissions) +
Kat (EPa x EAFit x APiat) (Electricity use) +
Kat (NGPa x NGAFit x APiat) (Natural gas as feedstock)

The three parts of the formula calculate the number of free permits to be allocated for direct emissions, electricity use and the use of natural gas as a feedstock. The formula for calculating natural gas as feedstock will vary depending on which State the company uses the natural gas as feedstock in.

Large electricity users

Large electricity users who are bound by long-term electricity contracts may receive a windfall if those contracts do not allow for the costs of emissions permits to be passed on. Large electricity users that use more than 2,000 gigawatt hours at a single facility per year, and who have entered into contracts before 3 June 2007 that will still be in force at 1 January 2010, will be required to provide documents to the regulator.

The regulator will issue a large electricity user certificate, which will reflect the difference in value between what would have been paid for electricity under the long-term contract before the emissions trading scheme, and what will be charged for electricity under the scheme. This will be used to calculate the rate of assistance under the formula above.

Relinquishing permits

Free permits will be allocated annually at the start of each financial year. Any free permits that remain unused will need to be relinquished at the end of each year. If a company ceases to operate or reduces its capacity for production, and so emissions, it must report the change in emissions accordingly, or face the prospect of a penalty.