CLEAN ENERGY BILL 2011 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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CLEAN ENERGY BILL 2011

2010-2011 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA SENATE CLEAN ENERGY BILL 2011 REVISED EXPLANATORY MEMORANDUM (Circulated by the authority of the Minister for Climate Change and Energy Efficiency, the Honourable Greg Combet AM MP) THIS EXPLANATORY MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Clean Energy Bill 2011 Table of contents Glossary .................................................................................................. 5 Policy context .......................................................................................... 9 Outline of the Clean Energy Bill 2011 ................................................... 27 Part 1 Design of the carbon pricing mechanism ................... 43 Chapter 1 Liable entities and covered emissions ......................... 45 Chapter 2 Pollution caps ............................................................ 101 Chapter 3 Emissions units .......................................................... 111 Chapter 4 Assessing and meeting liabilities ............................... 131 Part 2 Industry assistance .................................................. 149 Chapter 5 Jobs and Competitiveness Program .......................... 151 Chapter 6 Energy security .......................................................... 171 Part 3 Administration .......................................................... 209 Chapter 7 Compliance and enforcement .................................... 211 Chapter 8 The Regulator's decisions and review of decisions ................................................................... 241 Chapter 9 Public information ...................................................... 247 Chapter 10 Independent reviews.................................................. 255 Chapter 11 Administrative and miscellaneous provisions ............ 261 Index ................................................................................................... 271 4

Glossary The following abbreviations and acronyms are used in this explanatory memorandum. Abbreviation Definition ACCC Australian Competition and Consumer Commission ACCU Australian carbon credit unit ANREU Act Australian National Registry of Emissions Units Act 2011 ASIC Australian Securities and Investments Commission Austrac Australian Transaction Reports and Analysis Centre Authority Climate Change Authority Authority bill Climate Change Authority Bill 2011 bill or main bill Clean Energy Bill 2011 carbon pricing mechanism The carbon pricing mechanism set up by or mechanism the Clean Energy Bill 2011 CEI plan Clean Energy Investment Plan CFI Carbon Farming Initiative CFI Act Carbon Credits (Carbon Farming Initiative) Act 2011 Charges bills The Clean Energy (Unit Shortfall Charge--General) Bill 2011; Clean Energy (Unit Issue Charges - Fixed Charge) Bill 2011, Clean Energy (Unit Issue Charges - Auctions) Bill 2011, Clean Energy (Charges--Excise) Bill 2011, Clean Energy (Charges-- Customs) Bill 2011 Clean Energy (International Unit Surrender Charge) Bill 2011. Clean Energy Legislative The Clean Energy Bill 2011 and related Package legislation 5

Clean Energy Bill 2011 Abbreviation Definition CO2 Carbon dioxide CO2-e Carbon dioxide equivalence Consequential The Clean Energy (Consequential Amendments bill Amendments) Bill 2011 CPRS Carbon Pollution Reduction Scheme Database Liable Entities Public Information Database DCCEE or Department Department of Climate Change and Energy Efficiency EN Emissions number Eligible emissions unit A carbon unit, an eligible international emissions unit or an eligible ACCU Eligible international Defined in section 4 of the ANREU Act emissions unit as a certified emission reduction (other than a temporary certified emission reduction or a long-term certified emission reduction); or an emission reduction unit; or a removal unit; or a prescribed unit issued in accordance with the Kyoto rules; or a non-Kyoto international emissions unit. It is immaterial whether a unit covered by paragraph 4(d) was issued in or outside Australia. Fixed charge period The financial years 2012-13, 2013-14 and 2014-15, being `fixed charge years' Fund The Energy Security Fund in Part 8 of the bill Garnaut Review R Garnaut (2008) The Garnaut Climate Change Review: Final Report, Commonwealth of Australia, Cambridge University Press, Melbourne Garnaut Review Update R Garnaut (2011) The Garnaut Review 2011 2011: Australia in the Global Response to Climate Change, Commonwealth of Australia, Cambridge University Press, Melbourne Green Paper Carbon Pollution Reduction Scheme Green Paper, July 2008 GW Gigawatt GWh Gigawatt hour 6

Abbreviation Definition IPCC Intergovernmental Panel on Climate Change JV Joint venture Kyoto rules This term is defined in section 5. In brief, it includes the Kyoto Protocol, decisions of the Meeting of the Kyoto Parties, certain standards adopted by such a Meeting and prescribed instruments Kyoto units An assigned amount unit, a certified emission reduction, an emission reduction unit, a removal unit or a prescribed unit issued in accordance with the Kyoto rules LI Act Legislative Instruments Act 2003 LETI Low Emissions Transition Incentive LTC Liability transfer certificate MW Megawatt MWh Megawatt hour MPCCC Multi-Party Climate Change Committee NGER Act National Greenhouse and Energy Reporting Act 2007 Non-Kyoto international A prescribed unit issued in accordance emissions units with an international agreement (other than the Kyoto Protocol) or a prescribed unit issued outside Australia under a law of a foreign country Opt-in Scheme The Opt-in Scheme set out in Part 3, Division 7 of the bill OTN Obligation transfer number Ozone Act Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 PC Act Productivity Commission Act 1998 PEN Provisional emissions number Program The Jobs and Competitiveness Program in Part 7 of the bill Registry Australian National Registry of Emissions Units Regulator Clean Energy Regulator 7

Clean Energy Bill 2011 Abbreviation Definition Regulator bill Clean Energy Regulator Bill 2011 White Paper Carbon Pollution Reduction Scheme: Australia's Low Pollution Future, White Paper, December 2008 8

Policy context THE GOVERNMENT'S CLIMATE CHANGE PLAN On 10 July 2011, the Government released Securing a clean energy future: The Australian Government's climate change plan1, which explains the policy basis for the introduction of the carbon pricing mechanism (the mechanism) and related measures. The need for action The evidence that the world is getting warmer is unequivocal. In Australia and around the globe, 2001 to 2010 was the warmest decade on record. In Australia, each decade since the 1940s has been warmer than the last. If we do not reduce carbon pollution, the world risks serious effects from climate change. Global average temperatures could increase by up to 6.4 degrees Celsius above 1990 temperatures by 2100. Sea levels are estimated to rise by between 0.5 and 1 metre by 2100 from 2000 levels and the acidity of the world's oceans to increase significantly. Cyclones, storms, floods and other extreme weather events are likely to increase in severity or frequency and rainfall patterns around the world to change, making some places drier and other places wetter. Australia is a hot and dry continent. This means that among the world's developed countries, Australia faces acute risks. Studies indicate that warming of more than 2 degrees Celsius will overwhelm the capacity of many of our natural ecosystems to adapt. With that level of warming, for instance, the survival of the Great Barrier Reef will be in jeopardy as higher ocean temperatures and acidity levels cause major changes to coral reefs. Climate change will not just damage the natural environment. Left unchecked, it also poses risks to Australia's economic prosperity. Climate change will impose economic costs on our society. These costs can be reduced and managed if the world takes action to reduce carbon pollution. But the longer action is delayed, the more it will cost and the worse the impacts will be. 1 Australian Government (2011) Securing a clean energy future: the Australian Government's clean energy plan Canberra. 9

Clean Energy Bill 2011 How high temperatures might rise in coming decades will depend on how much carbon pollution increases. Governments around the world have agreed to limit carbon pollution so that average global temperature rise can be held below 2 degrees Celsius above preindustrial levels. If the global 2 degree goal is achieved, Australia will still face some impacts. However, our communities and environment will be better able to cope. It is in our national interest to do our fair share. The task of reducing carbon pollution is achievable. Economies can be retooled so that growth and rising prosperity are decoupled from growth in carbon pollution. This will require changes to the way we live and the way we do business, especially to the ways we produce and use energy. Studies in Australia and around the world have demonstrated that, with known technologies, pollution can be reduced while maintaining economic growth. Indeed, the retooling of our economy will deliver new technologies, new jobs and new opportunities. Australia's carbon pollution levels are very high given our population size and our economy is heavily dependent on emissions-intensive energy sources. To maintain our international competitiveness in the future as more countries take action on climate change, we need to reduce our carbon pollution and concentrate on cleaner pathways to economic growth. Australia's carbon pollution represents 1.5 per cent of global emissions of greenhouse gases. That makes us one of the top 20 polluting countries in the world. Our annual carbon pollution is roughly the same as that of countries like Spain, France, Italy, South Korea and the United Kingdom. All of those countries have populations two to three times larger than Australia. In fact, Australia produces more carbon pollution per head of population than any developed country in the world, more even than the world's biggest economy, the United States. Reflecting the availability of cheap and abundant coal, electricity generation is Australia's largest source of carbon pollution. Electricity generation is responsible for just over a third of Australia's total carbon pollution. Direct fuel combustion--reflecting the use of gas and other fuels in industry and homes--accounts for another 15 per cent. Transport and agriculture each contribute around another 15 per cent. The remaining sources are `fugitive' emissions--mainly the methane and carbon dioxide which escapes into the atmosphere when coal is mined and gas is extracted--along with pollution from industrial processes and decomposition of waste in landfills and elsewhere. Trees absorb carbon dioxide, so when land is cleared there is an increase in carbon pollution and when vegetation grows there is a decrease. The net impact of these 10

Policy context sources--deforestation, reforestation and afforestation--contributes 3 per cent of Australia's total carbon pollution. Australia's emissions are projected to continue to grow by almost 2 per cent a year without action to put a price on carbon. Even taking into account existing climate change policies such as the Renewable Energy Target and the CFI, our emissions are expected to be around 22 per cent higher than 2000 levels in 2020. The Government has committed to reduce carbon pollution by 5 per cent from 2000 levels by 2020 irrespective of what other countries do, and by up to 15 or 25 per cent depending on the scale of global action. These targets will require cutting pollution in 2020 by at least 23 per cent from the level it would otherwise be expected to be. The Government has also committed to a new 2050 target to reduce emissions by 80 per cent compared with 2000 levels, in line with targets announced by the United Kingdom and Germany. Australia's targets represent a fair contribution from Australia, and provide guidance and confidence to investors working to achieve our clean energy future. The carbon pricing mechanism A broad-based carbon price is the most environmentally effective and cheapest way to reduce pollution. A carbon price puts a price tag on carbon pollution. Under the mechanism, around 500 of the country's biggest polluters will be required to pay for each tonne of pollution they release into the atmosphere. This will have two effects. It creates a powerful incentive for all businesses to cut their pollution by investing in clean technology or finding more efficient ways of operating. A price on carbon will also create economic incentives to reduce pollution in the cheapest possible ways, rather than relying on more costly approaches such as government regulation and direct subsidies. These incentives will flow through the economy. The carbon price will make lower-polluting technologies, especially clean energy technologies, more competitive and will boost investment in these technologies. In this way, introducing a price on carbon will trigger the transformation of the economy towards a clean energy future. Our economy has successfully handled comparable structural changes over its history. In fact, transformative changes--new products and technologies, and the integration of our economy into the global economy set in train by the reforms of the 1980s and 1990s--have underpinned rising prosperity and sustainable growth in Australia. 11

Clean Energy Bill 2011 Table I: Key elements of the carbon pricing mechanism Price A two stage approach: Fixed price period The mechanism will commence on 1 July 2012, with a price that will be fixed for the first three years. The price will start at $23 per tonne and will rise at 2.5 per cent per annum in real terms. Emissions trading On 1 July 2015, the carbon price will transition to a fully scheme flexible price under an emissions trading scheme, with the price determined by the market. Coverage Broad coverage from commencement, encompassing the stationary energy sector, industrial processes, nonlegacy waste, and fugitive emissions (other than from decommissioned coal mines). Treatment of fuel Transport fuels comprising liquid petroleum fuels, liquid and transport petroleum gas, liquefied natural gas and compressed natural gas will be excluded from the mechanism. However, an equivalent carbon price will be applied to some business transport emissions and non-transport uses of these fuels through changes in fuel tax credits or fuel excise. Users of specified fuels can choose to opt into the mechanism instead of paying the equivalent carbon price through the fuel tax system. International International linking to credible international carbon linking markets and emissions trading schemes will be allowed from the commencement of the flexible price period. At least half of a liable entity's compliance obligation must be met through the use of domestic units or credits. Price ceiling and A price ceiling and floor will apply for the first three years floor of the flexible price period. The price ceiling will be set at $20 above the expected international price and will rise by 5 per cent in real terms each year. The price floor will be $15, rising annually by 4 per cent in real terms. Carbon Farming Kyoto-compliant credits created under the CFI can be used Initiative for compliance under the mechanism subject to a 5 per cent limit in the fixed charge period. 12

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