Carbon Pricing Mechanism - Industry Assistance

In order to ease the transition to carbon pricing, the Government has committed to provide assistance to:

• businesses that undertake emissions-intensive trade-exposed activities (under the Jobs and Competitiveness Program);
• certain emissions-intensive power generators (under the  Energy Security Fund);
• certain coal mining companies (under the Coal Sector Assistance Package); and
• certain steel manufacturers (under the Steel Transformation Plan).

Our comments on each of these assistance packages are set out below.

JOBS AND COMPETITIVENESS PROGRAM

The emissions-intensive trade-exposed support package that was negotiated under the CPRS has been essentially retained and repackaged as the Jobs and Competitiveness Program (the Program). 

Under the Program, free carbon units will be provided to businesses that undertake emissions-intensive activities that are exposed to international competition (an estimated $8.6 billion of assistance over the first three years of the CPM).  

Rates of assistance

Under the Program, there will be two rates of assistance:

• Highly emissions intensive activities will receive free units which are estimated to account for 94.5% of the industry’s average increase in direct and indirect costs due to the CPM.
• Moderately emissions intensive activities will receive free units which are estimated to account for 66% of the industry’s average increase in direct and indirect costs due to the CPM.

In addition, LNG projects will receive a supplementary allocation to ensure that they receive free units to cover 50% of all the emissions associated with the LNG production process each year.

It is interesting to note that as the number of free units that an eligible business is entitled to is calculated by reference to the industry average level of emissions per unit of production, a business that emits less greenhouse gases per unit of production than the industry average may be allocated more units than it requires.  During the fixed price period, the Government will offer a buy-back facility for surplus free units (at a price that reflects the present market value of the unit) and during the flexible price period the business will be able to sell surplus units on the secondary market.

What activities are eligible for assistance?

The two key tests for establishing the eligibility for assistance, and the level of assistance, are:

• the weighted average emissions per million dollars of revenue/value added (the emissions intensity test); and
• the trade share of the activity (the trade exposure test).

The Government has been assessing potentially eligible activities since 2009 and the first tranche of eligible activities (36 in total) has been set out in the Clean Energy Regulations 2011 (Cth). A list of these activities is set out below. [1]

This is not a closed list and the Government will continue to assess activities that may be eligible for assistance.

New entities conducting emissions-intensive trade-exposed activities will be entitled to the same level of assistance as existing entities conducting the same activities.  In all cases, the rate of assistance will be reduced by 1.3% each year.

Application process

Applications for assistance must be lodged with the Clean Energy Regulator by 31 October of the year to which the application relates (unless the Regulator has granted an extension to 31 December).  Applications must include an audit report and a statutory declaration.

Further details regarding the application process, including the requisite application form(s), have not yet been released. However, applications are expected to open on 1 July 2012. 

Review of the Program

The Productivity Commission will review the Program in 2014-15.  

The Government has flagged that it would implement the approach proposed by Professor Garnaut in the Garnaut Climate Change Review – Update 2011 if the Productivity Commission recommends it.  Professor Garnaut proposed a principled approach to the calculation of assistance, which would aim to keep sales prices for emissions-intensive goods lower than if all countries imposed similar carbon constraints to Australia.  It is anticipated that the adoption of this approach would significantly reduce the assistance provided to these industries.

The Program will not be scaled back or abolished before 1 July 2017 and industry must be given at least three years’ notice of any changes to the Program that will adversely affect it.

Further details

Further details on the Program are set out in the Clean Energy Regulations 2011 (Vic), including eligibility, how assistance is calculated and record-keeping requirements.

ENERGY SECURITY FUND

The creation of the Energy Security Fund is the Government's key initiative to move Australia away from emissions intensive electricity generation to cleaner generation.

The Energy Security Fund will comprise two elements:

• payments for the closure of one or more very highly emissions-intensive coal-fired generation facilities (Contracts for Closure); and
• limited transitional allocations of units and cash to assist highly emissions intensive coal-fired generators adjust to the introduction of a carbon price and compensate for asset value losses (Administrative Allocations).

Contracts for Closure

The Contracts for Closure Program seeks to facilitate the closure of around 2,000 megawatts of highly emissions intensive generation capacity in Australia by 2020.  

The aim is that the Program will deliver concrete closure outcomes and provide clear signals to potential investors in low emissions generation.

Under the Program, the Government proposes to contract with one or more generators for the closure of part or all of the generator’s capacity.  Closure will be conditional on power system reliability requirements, payment of workers’ entitlements and arrangements for the appropriate remediation of the site (and a related coal mine where appropriate).

On 30 September 2011, the Government invited Expressions of Interest from highly emissions intensive power generators to participate in the Program.  Five generators have been invited to proceed to the negotiation stage: 

• Playford Power Station;
• Energy Brix;
• Hazelwood Power Station;
• Collinsville Power Station; and
• Yallourn Power Station.

Each participating generator was required to provide a detailed closure proposal, which will be evaluated according to five evaluation criteria: emissions intensity; timing; energy security; value for money; and contractual terms.

The Government is aiming to enter into closure contracts by 30 June 2012.   Its preferred closure timeframe is between 1 July 2016 and 30 June 2020, but it has indicated that proposals for earlier closures may also be considered.

As the Program is subject to negotiation with the short-listed generators and Government 'value for money' requirements, it's not clear whether contracts will be entered into for the closure of any or all of the hoped-for 2,000 megawatt capacity.

Administrative Allocations

Only generators with an emissions intensity greater than 1.0 tCO2-e per MWh of electricity on an ‘as generated’ basis will be entitled to this assistance (precluding most black coal fired generators), and eligibility is conditional on meeting the following two conditions:

• In order to address energy security concerns, generators must comply with power system reliability requirements. Generators may exit the market and still receive their administrative allocations as long as there is alternative capacity in the market available to meet demand or they have invested in new lower-emissions replacement capacity.
• The generator must develop and publish a Clean Energy Investment Plan.

Cash payments will be made in the financial year 2011-12 and eligible generators will share in allocations of free carbon units over four years, commencing in 2013-14.

Applications for the provision of free units under this scheme have now closed.

Also, the Government will be a lender of last resort for generators and may provide transitional loans to emissions intensive generators for the purchase at auction of carbon units. However, these loans will be priced on terms that will encourage generators to seek private finance first.

COAL SECTOR ASSISTANCE PACKAGE

The Coal Sector Assistance package comprises of:

• the Coal Sector Jobs Package; and
• the Coal Mining Abatement Technology Support Package.

Coal Sector Jobs Package

This package is to assist coal mining companies who operate mines that have high volumes of fugitive emissions.  Up to $1.257 billion has been allocated to this program to provide assistance over six years.

Coal mines will be eligible if they had a fugitive emissions intensity in 2008-9 of at least 0.1 tCO2-e per tonne of saleable coal produced (expected to include around 25 mines). Payments will be up to a maximum of 80% of the extent to which fugitive emission intensity is above the 0.1CO2-e per tonne threshold.

Notably, assistance will not be available for new mines or expansions of production at existing mines.

This program is now closed for applications.

Coal Mining Abatement Technology Support Package

Under this package, the Government will provide $70 million over 5 years to support the development and pilot deployment of innovation technologies to reduce fugitive emissions from coal mines, develop safe abatement practices, and assist smaller operators to develop mine emissions abatement plans.

STEEL TRANSFORMATION PLAN

The Steel Transformation Plan will provide assistance over five years to encourage investment and innovation in the Australian steel manufacturing industry. It will be complemented by a small increase in free carbon unit allocation for the steel industry from 2016-17.

The Plan contains the following two elements –

• a $300 million entitlement scheme that will operate over five payment years from 2012-13; and
• competitiveness assistance advance payments up to the value of $164 million in 2011-12. 

The Government has announced that it will provide competitive assistance advance payments under the Plan to BlueScope Steel ($100 million) and OneSteel ($64 million).

This funding will be in addition to the assistance that steel makers are entitled to under the Jobs and Competitiveness Program.

[1] Additional Notes:

Activities eligible for assistance under the jobs and competitiveness program