Pricing Carbon in Australia

On this page

 

Current Government plans

As part of its strategy to address climate change, the Rudd Government proposed legislation to introduce a Carbon Pollution Reduction Scheme (CPRS) as Australia’s contribution to the international effort to reduce the emission of greenhouse gases. This legislation failed to pass the Australian Parliament but the basics of the CPRS have been incorporated into the Gillard Government’s proposal for a legislated price on carbon beginning July 1, 2012.

Under the proposed carbon price, around 500 of the biggest polluters in Australia will need to pay $23 (rising at 2.5 per cent a year plus inflation) for every tonne of carbon pollution they produce. For the first three years, the carbon price will be fixed like a tax, before moving to an emissions trading scheme in 2015. From 1 July 2015, the carbon price will be set by the market via a cap and trade system similar to the original CPRS. 

The carbon price paid by these 500 companies will flow through the economy, increasing prices relative to the amount of carbon pollution associated with the goods and services. There are many, many exclusions, adjustments and compensation payments – for full details, go to the website of the Department of Climate Change and Energy Efficiency

Though the second largest emitter in Australia, Agriculture was not included in the CPRS and has not been included in current plans to price carbon pollution for a number of reasons:  

• Measuring emissions is not currently possible at farm scale
• Estimating emissions is complex because of the diffuse nature and multiple sources
• The emissions on any farm are highly variable in response to management practices and climatic conditions;
• There are over 100,000 farming entities, compared to the 500 companies that will be involved in the scheme from 1 July 2012.

Instead of inclusion in the carbon pricing system, landholders are being offered incentives to either reduce their emissions, or to sequester carbon into forests or the soil via the Carbon Farming Initiative (link to that section of the toolkit). Landholders who receive carbon credits via the Carbon Farming Initiative will be able to sell them to those 500 companies that have to participate in the carbon pricing scheme, or to other companies involved in voluntary carbon pollution reduction activities.

Back to top

What are other countries doing?

Emissions reduction plans and/or emissions trading schemes are already operating in many other countries around the world – see table below – both to reduce emissions and to position themselves for a lower carbon future.

In the European Union, an Emissions Trading System has been in operation since 2005. Since 2008, it has applied not only to the 27 EU Member States but also to Norway, Iceland and Liechstenstein. In 2008, New Zealand passed legislation to implement its Emissions Trading Scheme. At this stage, New Zealand is the only country to include direct agricultural emissions in its trading scheme, but at this early stage, farmers receive free credits.

Figure 1 Implemented and planned climate change actions in major emitting economies (source, Dept of CC&EE website)

Back to top

What are Australia’s targets?

The Australian Government has set a long term target of an 80% reduction in greenhouse gas emissions from 2000 levels by the year 2050. In the medium term, the Government is aiming to reduce greenhouse gas emissions by 5% below 2000 levels by the year 2020, or more if there is a binding international agreement.

Australia aims honour its commitment to reducing emissions by 5% by 2020 irrespective of whether other countries also take action. While a 5% reduction seems modest, “business as usual” would deliver a 40% increase in greenhouse gas emissions by 2020. Larger reductions (up to 25%), on the other hand, will only occur, as the Government says: “…in the context of a global agreement where all major economies commit to substantially restrain emissions and all developed countries take on comparable reductions to that of Australia”.

 

Likely Impact on Dairy Farms

• Dairy farm (like all farms) emissions are excluded from the government plans to price carbon pollution – this does not mean that dairy farms will not be affected, with some of the impacts below being certain, while others are less so: 
• Electricity for on-farm use will rise in price for dairy farmers as for all other electricity users, though diesel fuel for farm use will not be affected; 
• Prices for some key farm inputs will also rise, depending on how much energy is used in their manufacture – eg N fertiliser is likely to rise in price; 
• It is also highly likely that dairy farmers will face significant, additional impacts due to the fact that dairy manufacturers will have to pay higher prices for energy, packaging etc. As the dairy industry is trade exposed, then some or all of these higher processing costs will come back to the farm as lower prices for milk. 
• The ADIC estimate that the impact per dairy farm could be as much as $5,000 to $7,000.

ADIC Fact Sheet 

Back to top

Options for reducing carbon pollution?

Though there are many variations around them, there are three basic options available to Governments for reducing carbon pollution – direct action, regulation and market mechanisms. A combination is the outcome most likely for Australia though Government and Opposition plans have different emphases.

Direct Action

Under this option, instead of forcing companies to pay for the carbon pollution they create, the Government provides incentive payments for companies and individuals to reduce their level of pollution or incentives to invest in less polluting processes. A good example of direct action would be if the Government decided to purchase and shut down high polluting power stations. The Carbon Farming Initiative (link to that section) has elements of ‘direct action’ but apart from some interim arrangements, the Government will not be purchasing the carbon credits, that will be done by the market.

Regulation

Under this option, the Government legislates required changes – such as removing incandescent light bulbs from sale, or setting mandatory clean energy targets. In its initial stages, the current Government plans are for a regulatory approach (Government setting a price on carbon pollution) that changes to a market mechanism in 2015. 
 

Market Mechanisms

The most likely market mechanism for reducing carbon pollution is a ‘cap and trade’ process where the Government sets the ‘cap’ and issues that number of permits, while allowing businesses to ‘trade’ the issued permits. More specifically:

• The number of permits issued by the Government each year will be limited in line with the 2020 reduction target – this is the ‘cap’ and each year there will be less permits issued, forcing more and more abatement across the economy or more and more purchasing of sequestration credits locally or internationally
• Permits will be auctioned, meaning firms that value the permits most highly, or that have few/no abatement options will be prepared to pay the most for them but for others, it will be cheaper to reduce emissions than to buy permits.
  

Back to top

References and resources

Check the current status of Australia’s plans to reduce carbon pollution at the Department of Climate Change website.

Garnaut Climate Change Review, 2008, Emissions Trading Scheme Discussion Paper – March 2008, electronic resource.

Back to top