At the start of this week The Federal Government announced changes to Australia’s emissions trading scheme (ETS).  Set to replace the carbon tax in 2015, the new ETS will be heavily linked to it’s European counter-part.

The European ETS has been operating since 2005 and covers more than 11,000 factories, power stations etc.  By contrast, our ETS will apply to about 500 companies and is awaiting implementation.  So, what are the changes?

Changes for Polluters

Those Australia companies that must pay for their right to emit co2-e will no longer be able to offset half of their emissions.  Under the new system, cheap $5/tonne carbon offsets (generated, for example, by trees planted in China) can only be used to cover 12.5% of a companies emissions.  This means that the other 87.5% of emissions must be paid for with a ‘right to pollute’ certificate not a carbon offset.

These “right to pollute” certificates can come from two places: (1) The Australian Government’s ETS and (2) The European ETS.  The latter of these can only cover up to half of a liable entities pollution.  This means that no matter what the prices of international offsets or European permits, Australian companies must pay the Federal Government for at least half of their emissions.  This will most likely be an Auction system where companies pay between $20-$40 for the right to emit one tonne of co2-e.

By contrast, the same certificate from the EU-ETS currently costs around $10AUD/tonne and, as I mentioned, the price of an international carbon offset is about $5AUD/tonne.  Assuming that these prices hold, a rational company will purchase as much as possible of the relatively lower offsets (12.5%).  Next, they will purchase as much of the relatively cheaper EU permits as they can (37.5%).  Lastly, they will purchase the minimum required amount of Australian permits (50%).  The table below shows how this might look for a  company who emits 100,000 tonnes of co2-e a year is looking at a cost of:

Where is it all heading?

We currently have an interim agreement with our EU counterparts, with a firmer agreement expected to be signed shortly.  The thing to remember here is that the ultimate goal of this policy is to completely link the two schemes.  This means that our permit price should equalise with the EU permit price in the long run.  Of course this is all highly speculative (especially given the political uncertainty surrounding this policy).  Further, for simplicity I have not included how the CFI will affect the net cost of emissions.

 How is energy efficiency affected?

Investment in Energy Efficiency is predominantly motivated by savings on electricity costs, not the cost of emissions permits.    For instance, a project to install more energy efficient lighting across a company might save 500 tonnes of co2 a year – which could save the company about $9,700 a year in permit costs.  This might sound like a lot, but the same project will ALSO save over $50,000 in electricity costs each year!

Tackling your co2-e emissions with offsets, permits and even green energy production (where it is not used internally) all carry uncertainty, complexity and are a yearly ongoing concern.  In contrast to this, investing in energy efficiency will permanently and directly cut emissions and significantly lower electricity and gas costs.

Our view at CarbonetiX is that companies should become as energy efficient as is cost effective – no more, no less.  Only after cost-effectively minimising your actual co2-e emissions should one address the question of emissions reductions through offsets and permits.

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