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Carbon Conundrum

On July 1, Australia woke up to the reality of a Carbon tax. Whilst the sky did not fall in as some were predicting, it took only a few days for some of the expected (and unexpected) issues to emerge.

I have written about this tax before and the concerns about the impact on manufacturing industry and the paper industry in particular. At that time, not all of the aspects or impacts of the tax were identified. This is still probably the case, but one aspect that is becoming all too clear, is the size of the bureaucracy that will oversee the implementation and operation of the tax is so large that it is easy to suggest it will have a bigger impact on the environment than any potential benefits of the tax!

This tax is a direct result of an unexpectedly close outcome to the last Federal election in 2010, when the Labor Party did not receive a majority in its own right and has been forced to govern with the support of the Greens Party in both the House of Representatives and the Senate. Having promised in the election campaign that there would be no carbon tax, political reality dictated that a carbon tax would be the price paid to have the ongoing support of the Greens.

To minimize electoral backlash and engineer a bit of wealth transfer at the same time, the tax targets the 250 or so largest emitters of carbon dioxide and then overcompensates the lower income earners (who traditionally support Labor) to offset steep energy price increases that will occur. As of July 1, average electricity bills will increase by 15% on top of much larger increases over the past few years, mainly for infrastructure upgrades.

To avoid a decimation of large manufacturing industries, a complicated set of rebate structures has been agreed to phase in the impact of the tax. However, there have been significant impacts in areas that were overlooked, or most probably not highlighted. Municipal landfills are facing huge tax imposts due to methane emissions, which will impact householders (and industry) via municipal taxes. The price of refrigerants has reportedly ballooned by 400%.

The Australian Consumer and Competition Commission (ACCC) has signaled that it is watching very carefully for businesses making unsubstantiated claims for price increases and attributing them to the carbon tax. Companies successfully prosecuted by ACCC face consequences from reprimand to court action and, in extreme cases, court-imposed penalties up to $1.1 million for each offense. Businesses must be able to substantiate their claims.

The tax is intended to be a transitional arrangement with identified emitters paying a tax of A$23 for each tonne of carbon dioxide emitted (actually they buy a permit of that price), rising by 5% over each of the subsequent 2 years. The current plan is that from July 2015, there will be emissions trading with regular auctioning of pollution permits including provision to buy overseas emission reduction offsets.

Hard-line environmentalists criticize the tax because the compensation detracts from an incentive to fundamentally change activities. They also note that many significant carbon dioxide emitters are exempt from the tax. This includes the agriculture and domestic aviation sectors.

However, the tax may end up being repealed after the next Federal election due by the end of next year. If an election was to be held today, the Government would be swept away by a Tsunami wave of voters who are opposed to not only the carbon tax, but a whole range of other issues. The alternative Government in waiting has made the abolition of the carbon tax a centerpiece of its election campaign. An anticipated recovery of support for the Government when low income earners received their tax offset checks in the mail has failed to materialize.

In the meantime as the tax kicks in, what does it mean for the paper industry? For most businesses, the carbon price will be felt through the increased energy costs (mainly electricity, industrial heat and steam). 

Substantial assistance packages are available for those industries with substantial emissions in what are known as eligible emissions-intensive trade-exposed (EITE) industries and provides for assistance through allocation of ‘free’ permits to offset the majority of the tax impact. The intent is that such industries will be shielded from the requirement to make substantial emissions cuts until similar overseas industries are required to do so. 

Essentially, to be declared an EITE business, 2 criteria need to be met – emissions must be greater than 25,000 metric tons of equivalent CO2 per annum and must be emissions intensity based (revenue or value added).

Packaging and industrial paper manufacture is a prescribed EITE industry under the Jobs and Competitiveness Program. This entitles aspects of production to be allocated free permits depending on their eligibility.

For eligible companies (and this essentially means the key paper manufacturers) the compensation for their liabilities in the first year (reducing by 1.3% per annum in subsequent years) is determined by their level of emission. Large manufacturers (emissions intensity of at least 2,000t CO2-e/$m revenue or at least 6,000t CO2-e/$m value added) receive a rebate equal to 94.5% of the industry average baseline for emissions. 

For smaller companies (emissions intensity between 1,000t and 1,999t CO2-e/$m revenue or between 3,000t and 5,999t CO2-e/$m value added) the rebate is 66% of the industry average baseline for emissions. 

Downstream eligibility is far less clear-cut but industries specifically excluded or do not meet the threshold EITE emission criteria businesses are discouraged from seeking to make further submissions or pursue a formal assessment.  

Part of the income from the sale of permits will also go into a fund to be administered by the Clean Energy Finance Corporation to facilitate investment in clean energy technology. It will be supported by a raft of special programs that in effect will pay inefficient energy generators to shut down the least efficient of their generating plant plus training and compensation packages for displaced workers.

At the end of the day, the net outcome will make an insignificant difference to global warming. It is seen as a “moral imperative” that looks increasingly like a political millstone. 

While Australians are struggling with the most divisive political issue in living memory, New Zealand, the only country outside Europe with a comprehensive Emissions Trading Scheme (ETS) has just been quietly going about its business.

At about the same time as Australia commenced its new tax, the New Zealand Government announced amendments to its ETS, which basically has been tweaked to push out the dates and levels at which the country will face higher carbon costs under its ETS. 

Although the business community as a whole thought the ETS changes were reasonable, the forestry sector was less impressed by the Government’s decision to reject recommendations from the review committee to restrict the purchase of international carbon credits by New Zealand emitters.   

Apparently, European carbon credits have been flooding onto the New Zealand market. The forestry sector believes this is actively discouraging new investment in forests because the oversupply will likely keep international carbon emissions reduction units (CERs) cheaper than New Zealand-produced Units (NZUs) for the foreseeable future.

It is argued this discourages active involvement in the New Zealand carbon market by carbon-intensive industrial businesses and plantation foresters, at least until depressed global prices are revived.

Perhaps there are signs of such a revival. The World Bank reported recently Carbon Market trading reached a record value of $176-billion in 2011, up more than 10% percent. This was a somewhat contradictory situation in that permit prices were significantly lower but offset by a considerable increase in secondary trading volumes (total volume up by 17%) with the market for voluntary carbon offsets reaching a three-year high.

It seems that companies and governments are adopting emissions trading to comply with climate change legislation, particularly in the European Union due to its cap-and-trade scheme which began in 2005.

The latest “State of the Voluntary Carbon Markets” report (Forest Trends Ecosystem Marketplace/Bloomberg New Energy Finance) interestingly shows that there has been a significant increase in demand from buyers in the US, which has now become largest single-country buyer of voluntary offsets in the world even though there are no impending regulations that might have sparked such a demand. It is interesting to speculate what might be driving this situation.

Such is the complexity of this subject that it is compelling to retreat to the nostalgia of yesteryear when the priorities and necessities of business were so much more straightforward.

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