The Carbon Price - Impacts on Australia's mining industry
On 10 July 2011 the Australian Government announced its intention to introduce a price of AUD$23 for each tonne of carbon pollution released into the atmosphere (Carbon Price).
The Carbon Price is scheduled to commence on 1 July 2012, and will only directly apply to Australia’s largest polluters. This is likely to include coal and gas fired power stations, other large industrial emitters of greenhouse gases, gas retailers and coal mines.
The Carbon Price is also likely to have indirect flow-on effects for exploration and ‘non-coal’ mining activities in Australia in the form of increased costs for fuel, electricity and other goods and services.
This article contains a brief summary of the Australian Government’s Carbon Price scheme, and its likely impacts on the Australian mining industry. Full details of the Carbon Price scheme will only become available when detailed legislation is released later this year.
Which greenhouse gases will the Carbon Price apply to?
The Carbon Price will apply to four of the six greenhouse gases counted under the Kyoto Protocol. They are carbon dioxide, methane, nitrous oxide and perfluorocarbon emissions from the aluminium sector.
Who will be liable to pay the Carbon Price?
- any party that has operational control of a facility which directly releases more than 25,000 tonnes of carbon dioxide equivalents (CO2-e) in a year, and
- large suppliers of natural gas,
will be liable to pay the Carbon Price for each tonne of pollution. The Australian Government has estimated that around 500 of Australia’s largest polluters will be liable to pay the Carbon Price on their emissions.
Companies engaged in coal mining will likely fall within the Carbon Price scheme because fugitive emissions (that is, methane and carbon dioxide released into the atmosphere during coal mining) and the running of diesel generators on a mine site are recorded as carbon pollution under the scheme.
The Australian Government has estimated that the average impact of the Carbon Price on coal mines will be approximately AUD$1.80 for each tonne of coal produced. However this amount is likely to be much higher for coal mines which have higher than normal volumes of fugitive gas emissions.
Even if a mining or exploration company does not directly fall within the Carbon Price scheme, and is therefore not directly liable to pay the Carbon Price on their CO2-e emissions, there will still be an impact on their cost of carrying out mining and exploration activities due to general cost increases likely to be caused by the introduction of the Carbon Price scheme.
For example, the Australian Government has estimated that under the Carbon Price scheme the price of electricity will increase by 10% in 2012 to 2013, while general inflation is expected to increase by 0.7% above non-Carbon Price inflation levels in the same period. The price of diesel fuel will also increase as a result of a reduction in fuel tax credits associated with the introduction of the Carbon Price.
What is the price of carbon pollution?
The Carbon Price will start at a fixed price of AUD$23 per tonne on 1 July 2012. After 1 July 2012 there will be a two-staged approach to the Carbon Price.
During the first stage (from 1 July 2012 to 30 June 2015), the Carbon Price will be a fixed amount for each tonne of pollution – similar to a tax.
During the second stage (from 1 July 2015 onwards), the Carbon Price will be determined by a flexible or market price.
Fixed price – 1 July 2012 to 30 June 2015
The Carbon Price per tonne will start at AUD$23 per tonne for the 2012 / 2013 year. It will then increase each year by a percentage equal to 2.5% plus the underlying rate of inflation. For example, if inflation is itself 2.5%, then the Carbon Price will increase by 5%.
Assuming an underlying rate of inflation of 2.5%, the Carbon Price will increase to AUD$24.15 per tonne for the 2013 / 2014 year, and AUD$25.40 per tonne for the 2014 / 2015 year.
Flexible or market price – from 1 July 2015 onwards
From 1 July 2015 the price for each tonne of carbon pollution will be determined by the market and will no longer be fixed.
However, during the first three years of the market price period (that is, from 1 July 2015 to 30 June 2018) there will be a price ceiling and a price floor.
The price ceiling will be the amount that is AUD$20 per tonne above the expected international carbon price for 2015 / 2016, and increasing each year by a percentage equal to 5% plus the underlying rate of inflation.
The price floor will be AUD$15 per tonne in 2015 / 2016, and increasing each year by a percentage equal to 4% plus the underlying rate of inflation.
How will it work?
The Australian Government will issue permits which each represent one tonne of greenhouse gas emissions (Carbon Permits). Parties who have operational control of facilities that fall within the Carbon Price scheme will comply with their obligations by surrendering a Carbon Permit (or another eligible emissions unit during the market price period) for each tonne of emissions for which they are liable during a year.
During the fixed price period parties will be able to buy an unlimited amount of Carbon Permits from the Australian Government at the fixed price – up to the number of their emissions for each compliance year. Some permits may also be issued by the Government for free.
For each year of the market price period the Australian Government will set annual caps on pollution. The number of Carbon Permits issued for a year will be fixed to the cap on annual pollution for that year. Carbon Permits will be allocated by auction. There will be advance auctions of flexible or market price Carbon Permits during the fixed price period. Fixed price Carbon Permits cannot be surrendered after the end of the fixed price period.
The annual caps on pollution will be set five years in advance, and will be at least consistent with reducing Australia’s pollution by 5% below the year 2000 levels by 2020. The longer term target is to reduce Australia’s pollution by 80% below the year 2000 levels by 2050.
Until 2020, as an alternative to the Australian Government issued Carbon Permits, parties will be permitted to use international permits from certain international carbon markets to satisfy up to 50% of their obligations under the Carbon Price scheme. Parties may also buy credits from farmers and land managers who reduce or store carbon on their land to satisfy up to 5% of their obligations.
What emissions are measured, and how?
The direct emission of carbon dioxide, methane, nitrous oxide and perfluorocarbon emissions from the aluminium sector will be covered by the Carbon Price scheme.
Since 1 July 2008 there has been an obligation on large emitters of greenhouse gases to monitor and report their emissions under the National Greenhouse Gas Reporting System (NGERS). It is expected that the monitoring and measuring obligations under the NGERS will be consistent with the measurement of emissions under the Carbon Price scheme.
Industry assistance for existing coal mines
Due to the potentially high impact of the Carbon Price scheme on coal mining, the Australian Government has announced that it will provide a AUD$1.2 billion assistance package (Coal Sector Jobs Package) over six years to reward certain coal mines that reduce their emissions based on their historical emissions intensity. The assistance package will only apply to existing coal mines which had high fugitive emissions (at least 0.1 tonne of carbon dioxide equivalent per tonne of saleable coal) in 2008 / 2009.
New coal mines, or expansions of production at existing coal mines, will not receive assistance under the Coal Sector Jobs Package. As a result, any proposed investment in, or development of, a coal mine will need to take into account the full impact on the cost of producing coal where the Carbon Price applies to that mine.
The Australian Government has also announced that it will provide a AUD$70 million Coal Mining Abatement Technology Support Package over six years to support the coal industry to implement carbon abatement policies.