Review of NSW climate change mitigation measures · 2011-07-21 · Review of NSW climate change...

Independent Pricing and Regulatory Tribunal

Review of NSW climate change

mitigation measures

Other Industries — Issues Paper

December 2008

Review of NSW climate change mitigation measures

Other Industries — Issues Paper December 2008

ii IPART Review of NSW climate change mitigation measures

© Independent Pricing and Regulatory Tribunal of New South Wales 2008

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-921328-75-6 DP109

The Tribunal members for this review are:

Dr Michael Keating, AC, Chairman

Mr James Cox, Chief Executive Officer and Full Time Member

Ms Sibylle Krieger, Part Time Member

Inquiries regarding this document should be directed to a staff member:

Angela Woo (02) 9290 8428

Eric Groom (02) 9290 8475

Steve Lyndon (02) 9290 8447

Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000

T (02) 9290 8400 F (02) 9290 2061

www.ipart.nsw.gov.au

Review of NSW climate change mitigation measures IPART iii

Invitation for submissions

IPART invites written comment on this document and encourages all interested parties to provide submissions addressing the matters discussed.

Submissions are due by 13 February 2009.

We would prefer to receive them by email <[email protected]>.

You can also send comments by fax to (02) 9290 2061, or by mail to:

Review of NSW’s climate change mitigation measures Independent Pricing and Regulatory Tribunal PO Box Q290 QVB Post Office NSW 1230

Our normal practice is to make submissions publicly available on our website <www.ipart.nsw.gov.au>. If you wish to view copies of submissions but do not have access to the website, you can make alternative arrangements by telephoning one of the staff members listed on the previous page.

We may choose not to publish a submission—for example, if it contains confidential or commercially sensitive information. If your submission contains information that you do not wish to be publicly disclosed, please indicate this clearly at the time of making the submission. IPART will then make every effort to protect that information, but it could be subject to appeal under freedom of information legislation.

If you would like further information on making a submission, IPART’s submission policy is available on our website.

Contents

Review of NSW climate change mitigation measures IPART v

Contents

Invitation for submissions iii

1 Introduction 1 1.1 Terms of reference for the review 1 1.2 Review process and timetable 2 1.3 Scope of the review 3 1.4 List of issues on which IPART seeks comment 4 1.5 Structure of issues paper 5

2 Carbon Pollution Reduction Scheme 6 2.1 Scheme will be a ‘cap and trade’ scheme 7 2.2 Scheme will encourage least-cost mitigation 9 2.3 Scheme will have maximum coverage 10 2.4 Scheme will enable international linkages 13 2.5 Scheme will address competitive challenges in emissions-intensive trade-

exposed industries 14 2.6 Measures will be developed to help other businesses and households adjust

to impacts of the scheme 14

3 Why might other measures be needed in addition to the CPRS? 16 3.1 CPRS is the primary measure for addressing this market failure 16 3.2 Other measures may be warranted to support the CPRS 17 3.3 All jurisdictions to review existing measures 18

4 IPART’s proposed approach to evaluating climate change measures 19 4.1 IPART’s preliminary views on potential need for additional measures in NSW 19 4.2 IPART’s proposed approach for assessing the need for and design of

additional measures 25 4.3 Building on this approach to develop final recommended framework 40

5 NSW climate change measures 42 5.1 Greenhouse Gas Reduction Scheme 43 5.2 Climate Change Fund 44 5.3 NSW Energy Efficiency Strategy 49 5.4 Building Sustainability Index 54 5.5 Biofuel (Ethanol Content) Act 2007 55 5.6 FleetWise Partnership 56

Contents

vi IPART Review of NSW climate change mitigation measures

5.7 Clean Coal Fund 57 5.8 Gas and electricity licence conditions 57 5.9 Energy efficiency programs directed at government operations 58

Appendices 61 A Glossary 63 B Terms of Reference 66 C COAG Complementarity Principles 69

1 Introduction

Review of NSW climate change mitigation measures IPART 1

1 Introduction

The Federal Government is introducing a national emissions trading scheme, to be known as the Carbon Pollution Reduction Scheme (CPRS). This scheme is expected to be in place by 2010 and will become Australia’s principal measure for reducing greenhouse gas (GHG) emissions to combat climate change. As a result, Federal, State and Territory governments are examining their existing climate change mitigation measures to determine how these measures can be streamlined once the national scheme is in place.

The NSW Government has asked the Independent Pricing and Regulatory Tribunal of NSW (IPART) to conduct a review of the existing climate change mitigation measures in this state. The findings and recommendations of this review will help the NSW Government in forming its part of a consolidated report to the Council of Australian Governments (COAG) in June 2009 on the streamlining actions to be taken by all jurisdictions.

The purpose of this paper is to explain to stakeholders the review process, IPART’s proposed approach and the key issues it will consider, to assist them in providing input to the review.

1.1 Terms of reference for the review

The review will be undertaken under Section 9 of the Independent Pricing and Regulatory Tribunal Act 1992 (IPART Act). The terms of reference require IPART to complete two main tasks:

develop a framework to guide the NSW Government’s decision-making on the need for, and design of, climate change mitigation measures to support the CPRS

use the above framework to assess the specific climate change mitigation measures nominated by the NSW Government, and make recommendations about continuing, re-designing or terminating these measures.

1 Introduction

2 IPART Review of NSW climate change mitigation measures

In undertaking its review, IPART is to have regard to a range of matters, including:

A Document of Shared Understanding to be developed by COAG. This document will set out principles in relation to the design of mitigation measures in addition to the CPRS (‘complementarity principles’) and minimum requirements for the conduct of governments’ reviews. At the time of publication, this document had not been publicly released.

The Federal Government’s green paper (the Green Paper) and white paper on the CPRS (the White Paper), and any related material as it becomes available.

Any additional measures being implemented by the Federal Government which may interact or overlap with NSW’s mitigation measures.

The scale and materiality of the mitigation measure being reviewed.

Any objectives a measure may have in addition to climate change mitigation.

Where available, any analytical frameworks employed by other jurisdictions, and the findings of other jurisdictions’ reviews.

In addition, IPART is required to provide early advice to the NSW Government on its ‘analytical approach’ to the review. This is to assist the Government in developing its new Climate Change Action Plan1 and engaging with other jurisdictions during the COAG process.

The terms of reference for the review are provided in full in Appendix B.

1.2 Review process and timetable

As part of the review, IPART will undertake public consultation. It invites all stakeholders to make submissions in response to this issues paper. It will also hold a public roundtable discussion. IPART will use the public roundtable to debate issues raised in submissions where it feels it needs more information to understand the views of stakeholders, and to seek feedback on its proposed recommendations. IPART will also consult with individual stakeholders.

After considering stakeholders’ views and undertaking its own analysis, IPART will prepare its final report and recommendations to the Premier. Under the initial terms of reference, IPART was required to provide this report by 27 March 2009. Under the revised terms of reference, which are in substantially the same form, IPART is now required to provide this report by 30 May 2009.

The proposed timetable for the review is shown in Table 1.1.

1 The Climate Change Action Plan is to “provide a (new) strategic framework for the State to

address both the challenge of reducing emissions, as well as adapting to the unavoidable impacts of climate change”. The plan will also reflect any re-alignment of State, Territory and Federal roles arising from the COAG process (letter from the former Premier, 2 September 2008, unpublished). The Climate Change Action Plan is to be released by mid 2009.

1 Introduction


Table 1.1 Indicative review timetable

Key tasks Date

Release issues paper and invite submissions December 2008

Receive all submissions 13 February 2009

Hold public roundtable Late March/Early April 2009

Provide final report to the Premier 30 May 2009

Details of how to make a submission can be found at the front of this issues paper (on page iii). Please note that the closing date for submissions is 13 February 2009. Submissions are most useful to IPART when they are detailed, provide evidence to support the views they express, and move beyond identifying problems to suggesting solutions.

1.3 Scope of the review

The NSW Government has nominated 12 existing climate change measures for IPART to review, based on its own assessment of whether measures are within the scope of the COAG agreement.

It is important to note that IPART has not been asked to review the rationale for a CPRS or the targets set by the Federal Government for reducing GHG emissions. Further, the scope of the review is limited to policy measures that have as their objective, or one of their objectives, the reduction of GHG emissions. IPART will not review:

policies that more broadly relate to the elimination of climate change impacts, such as measures for adapting to unavoidable climate change (ie, change that mitigation measures are unable to prevent)

policies or programs that may encourage the creation of, or result in increases in, GHG emissions, and

policies that are not directly related to climate change but may inhibit or assist the efficient operation of the CPRS, such as state taxation or price settings.

However, IPART recognises there is a degree of interaction between climate change policies and those not directly related to climate change. It will take this interaction into account in developing its decision making framework.

In addition, IPART notes that the Federal Government’s Future Tax System review will consider the interrelationships between the federal tax and transfer systems and the CPRS.2

2 Media Release, Australia’s Future Tax System, 13 May 2008.

(http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/036.htm&pageID=003&min=wms&Year=&DocType=0, accessed October 2008).

1 Introduction


1.4 List of issues on which IPART seeks comment

This issues paper provides a high-level outline of IPART’s proposed framework for assessing NSW climate change mitigation measures. Based on this framework, IPART seeks:

information and views as to the whether the measures under review are likely to be needed, efficient and effective once the CPRS is in place

comment on IPART’s proposed analytical approach, and

comment on the basis for ongoing appraisal of retained measures and the development of any new measures.

The specific matters on which IPART seeks comment are listed below:

1. Please provide comments on IPART’s preliminary views that: 24

– The threshold for justifying additional mitigation measures should be high. That is, measures should reduce the costs of meeting the national emissions reduction target by either: 1) cost-effectively meeting a gap in the CPRS’ coverage; or 2) cost-effectively correcting a market failure that prevents the CPRS from reducing emissions at least cost. 24

– The review should assume the CPRS will be generally capable of reducing emissions in the long term. 24

– Should there be design flaws in the CPRS that compromise its ability to reduce emissions efficiently, these would be better addressed by adjusting the scheme rather than introducing additional measures. 24

2. Please provide comments on IPART’s proposed criteria for assessing whether a measure may be warranted in the presence of the CPRS. 35

3. What gaps in the coverage of the CPRS need to, and can effectively, be addressed by additional mitigation measures? 35

4. Are there areas of market failure other than those described in the issues paper that are relevant to this review? 35

5. What particular areas of the emissions market are likely to be subject to market failure? What is the significance of these areas? 35

6. What areas are likely to require intervention by governments to assist groups adjust to the impacts of the CPRS? 35

7. Are the measures stakeholders have identified to address market failures, cover sector gaps or provide transition assistance likely to be best delivered at the state level? 35

1 Introduction


8. Please provide comment on what factors are the most important in considering whether measures are well designed and likely to be efficient and effective in the context of the CPRS. 39

9. Please provide qualitative and quantitative information to assist IPART in analysing the overall costs and benefits of NSW climate change measures nominated for review. 39

10. What matters should be taken into account in developing the framework for assessing the nominated existing NSW climate change mitigation measures and proposed new measures, to ensure their ongoing efficiency, effectiveness and complementarity to the CPRS? 41

11. What are the costs and benefits of each of the nominated measures? Who do they impact and how? 60

12. How do the measures compare against the assessment framework outlined in Chapter 4? 60

13. If it is considered that a measure can be better-designed to complement the CPRS or should be phased out (or, in relation to proposed measures, not pursued), why and what are your views on the best way of doing this? 60

1.5 Structure of issues paper

The following chapters provide more detailed information on the context for the review, IPART’s proposed approach and the measures that it is to review:

Chapter 2 provides an overview of the proposed CPRS, including its purpose, design and coverage

Chapter 3 explains why climate change mitigation measures in addition to the CPRS may be warranted

Chapter 4 explains IPART’s preliminary views on the scope for measures in addition to the CPRS and its proposed approach for evaluating the nominated NSW climate change measures

Chapter 5 lists these nominated measures and provides an overview of each.

Please note that this issues paper is based on the information available at the time of publication. IPART will refine its framework for assessing NSW’s mitigation measures over the course of the review to take into account stakeholders’ comments, as well as relevant policy developments, including any additional national (eg, COAG) or Federal Government measures that interact or overlap with the operation of NSW measures.

2 Carbon Pollution Reduction Scheme



Most of the world’s scientific community agree that increases in GHG emissions from human activities have already resulted in substantial global warming. Continued growth in these emissions is expected to create a high risk of dangerous climate change.3 Global action to mitigate the growth of emissions is required to address this risk.

The Federal Government has announced a long-term target of reducing Australia’s GHG emissions by 60 per cent below 2000 levels by 2050.4 It has also announced a medium-term target range of reducing emissions by five to 15 per cent below 2000 levels by 2020.5 This range comprises:

a minimum commitment to reduce emissions to five per cent below 2000 levels by 2020, and

a commitment to reduce emissions by up to 15 per cent below 2000 levels by 2020, provided that a global agreement is reached under which:

– all major economies commit to substantially restrain their emissions, and

– all developed economies agree to take on emissions reductions comparable to Australia’s emissions reductions.6

To achieve these targets, the Federal Government will introduce a national emissions trading scheme – the CPRS – in 2010. COAG has agreed that the CPRS will be Australia’s principal measure for reducing GHG emissions, as part of a national approach to reducing the impacts of climate change.7

3 Garnaut Climate Change Review, Final Report, September 2008, p 23. 4 Department of Climate Change, Carbon Pollution Reduction Scheme, Australia’s Low Pollution

Future, White Paper, December 2008 (“DCC, White Paper, December 2008”), p 1-8. 5 DCC, White Paper, December 2008, p 10-16. 6 DCC, White Paper, December 2008, p 4-17 7 COAG Communiqué, 20 December 2007, p 7.



The Federal Government’s White Paper outlines the design framework for the CPRS. In particular:

The scheme will be a ‘cap and trade’ scheme.

The cap on the quantity of GHG that can be emitted will be set to place Australia on a low-emissions path in a way that best manages the economic costs of transition and provides incentives to develop and invest in low-emissions technologies while ensuring Australia’s ongoing economic prosperity.

The scheme will have maximum coverage of greenhouse gas emissions and industry sectors, to the extent that this is practical.

The scheme will be designed to enable international linkages while suiting Australian economic conditions.

The scheme will address the competitive challenges facing emissions-intensive trade-exposed industries in Australia.

The scheme will address the impact of emissions trading on strongly affected industries.

Measures will be developed to assist households (particularly low and middle income households) to adjust to the impact of carbon prices and to assist them to reduce their emissions.

The sections below discuss each of these features in more detail.

2.1 Scheme will be a ‘cap and trade’ scheme

The CPRS will be a ‘cap and trade’ scheme.8 An annual limit (ie, a cap) will be set on the quantity of GHG emissions that can be produced by all firms in the sectors covered by the CPRS. The Federal Government will issue ‘permits’ that entitle the holder to emit GHG emissions. The total number of permits available will be equal to the scheme cap. Firms in the sectors covered by the CPRS will be required to acquire and surrender a permit for each tonne of GHG emissions they produce during a year.

Setting scheme caps

The Federal Government will set scheme caps for a five-year period (or to the end of any international commitment period if longer).9 In addition, it will provide guidance on future scheme caps beyond the five-year period of known caps through the establishment of ‘gateways’ or ranges within which future caps will lie. The Government will provide up to 10 years of gateways, taking into account progress in international negotiations on a global emissions reduction agreement.10 Scheme caps

8 DCC, White Paper, December 2008, p 5-8. 9 DCC, White Paper, December 2008, p 10-7. 10 DCC, White Paper, December 2008, p lxvii.



will be extended by one year, each year, and selected from a point within the gateway range, so at any point in time the scheme caps will be known for at least the next five years.11

By using gateways, the Government will provide guidance on future emissions limits, but retain flexibility to take into account evolving international obligations.12 The Federal Government has proposed that gateways be extended by five years, every five years, as part of a strategic-level review.13

Scheme caps will be set to facilitate a national emissions trajectory that is consistent with the Federal Government’s medium-term target range of 5 to 15 per cent below 2000 levels by 2020. The indicative trajectory for the first three years of the scheme is:

109 per cent of 2000 levels in 2010/11

108 percent of 2000 levels in 2011/12, and

107 per cent of 2000 levels in 2012/13.14

In 2010, the Federal Government will announce a further two years of the trajectory up to and including 2014/15 (or to the end of any international commitment period, whichever is longer).15 Final scheme caps reflecting this trajectory will be announced in early 2010 prior to commencement of the scheme16. The Federal Government will also announce up to 10 years of scheme gateways beyond 2014/15.

Carbon prices

Setting a cap on GHG emissions means that the right to emit becomes scarce and therefore valuable. This scarcity creates a price for GHG emissions or a ‘carbon price’,17 which is represented by the price of permits. As permits will be tradeable, the price of permits (ie, the carbon price) will be determined by the market. The carbon price will reflect the market’s best estimates of the current and future costs of reducing emissions in accordance with the scheme cap.18

Subject to the impact of international linkages (see section 2.4), the quantity of emissions allowed under the scheme cap will affect the carbon price. In general, a lower scheme cap will result in a higher carbon price because there are fewer permits issued and hence less GHG allowed to be emitted.

11 DCC, White Paper, December 2008, p 10-13. 12 DCC, White Paper, December 2008, p 10-8. 13 DCC, White Paper, December 2008, p 10-14. 14 DCC, White Paper, December 2008, p 4-23. 15 DCC, White Paper, December 2008, p 4-21. 16 DCC, White Paper, December 2008, p 10-26. 17 Greenhouse gas emissions are predominantly carbon-based. In line with the convention

adopted by policy makers, all references to carbon emissions or carbon price in this issues paper have the same meaning as greenhouse gas emissions and price.

18 DCC, White Paper, December 2008, p 8-29.



Box 2.1 provides an overview of Federal Treasury’s modelling of carbon prices.

Box 2.1 Estimated carbon pricesa

The Federal Treasury’s modelling of carbon prices is based on the upper and lower ranges ofthe medium-term target and assumptions as to stabilisation of global GHG concentrations by2100.

It suggests that:

a five per cent medium-term target, with stabilisation at 550 parts per million CO2-e, requires a carbon price in 2010 of $20/tCO2-e (in 2005 dollars) or $23/tCO2-e (in nominal terms), and

a 15 per cent medium-term target, with stabilisation at 510 parts per million CO2-e, requires a carbon price in 2010 of $28/tCO2-e (in 2005 dollars) or $32/tCO2-e (in nominal terms).

In addition, the modelling suggests that the carbon price will rise to between $35 – $50/tCO2-e (in 2005 dollars) by 2020, depending on whether emissions reductions are tracking towards a five or 15 per cent medium-term target respectively.

a Commonwealth of Australia, Australia’s Low Pollution Future, The Economics of Climate Change Mitigation, Summary, October 2008, pp 17 & 19.

Creating a carbon price increases the relative prices of goods and services that have the most GHG emissions associated with their production and use. This will provide incentives for people and firms to reduce GHG emissions, choose less emissions-intensive goods, technologies and processes, and invest in low-emissions technologies.

2.2 Scheme will encourage least-cost mitigation

Any measure to reduce GHG emissions, whether through the CPRS or another mechanism, will entail costs. For example, the CPRS may give rise to costs associated with:

generating energy using low-emissions technologies that are more expensive than the main technologies currently used

adjusting to changed circumstances as industries and jobs are lost in particular regions and new opportunities arise elsewhere, and

complying with its reporting and administrative requirements.19

19 Adapted from Productivity Commission, What Role for Policies to Supplement an Emissions

Trading Scheme? Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p 6.



The CPRS aims to achieve Australia’s emissions reduction target at the lowest possible cost to the economy (ie, least-cost mitigation).20 Its key design features will enable the market to choose the most cost-effective way of reducing GHG emissions. For example, the scheme will place an overall cap on GHG emissions, rather than individual caps for each sector it covers.21 This means that if one sector has a lot of relatively low-cost abatement opportunities, these can be taken up before progressively higher cost abatement opportunities.

As another example, the scheme will allow trading in permits. This ensures that permits go to firms that value them most highly – ie, those that face higher relative costs from reducing their GHG emissions. It means firms covered by the scheme will have the following choice:

if undertaking effective abatement measures will cost less than the carbon price, they can choose to reduce their GHG emissions and thus the number of permits they need to purchase

if changing their operations to reduce their GHG emissions will cost more than the carbon price, they can choose to purchase permits.

The trading of permits will establish a forward path for emission prices (ie, an indication of what emissions prices are likely to be in the future). The credibility of the permit market and forward prices is considered to be of central importance to the cost-effectiveness of mitigation policy.22 If firms have a high degree of certainty about the prices that will prevail over the life of their investment, they will factor this into their decisions on investment in long-lived capital goods and research into low-emissions technologies.23 Investment in low-emissions capital goods and technologies will underpin structural change necessary for Australia to become a low-emissions economy.

2.3 Scheme will have maximum coverage

The Federal Government intends the CPRS to have maximum coverage of GHG emissions and industry sectors, to the extent that this is practical.24 Broad scheme coverage will lower the overall cost of the CPRS, as it will increase the number of opportunities for abatement. It will also improve the effectiveness of the scheme because not including some sectors may mean that relatively low-cost abatement opportunities in those sectors are not captured.

20 DCC, White Paper, December 2008, p 5-5. 21 DCC, White Paper, December 2008, p 5-10. 22 Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme?

Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p 11. 23 Ibid. 24 DCC, White Paper, December 2008, p 6-1.



The Federal Government proposes to cover all six GHGs listed under the Kyoto Protocol.25 Further, the CPRS will initially cover five of the seven sectors accounted for under the Kyoto Protocol: the stationary energy, transport, fugitive emissions, industrial processes and waste sectors.26 Table 2.1 sets out those seven sectors, and the proportion of GHG emissions they are responsible for in Australia.

Within the covered sectors, the Federal Government has set an emissions threshold so that scheme obligations generally only apply to entities with a facility emitting 25,000 tonnes of CO2-e a year or more.27 Its aim is to ensure the emissions target is high enough to exclude those emitters that would not be cost-effective to include, but low enough to capture most of the emissions from any given source.28

The Federal Government recognises the difficulties associated with covering some emissions from the waste sector, particularly emissions from past waste streams (‘legacy emissions’). As such, while the waste sector will be included in the CPRS, legacy emissions will be excluded until 2018.29

The Federal Government does not consider it practical to include the agriculture sector in the initial CPRS. In its view, 2015 would be the earliest that this sector could be covered by the scheme. The timing will depend on when it can resolve difficulties such as developing reliable methods of estimating agricultural emissions. A final decision on including or excluding agriculture will be made in 2013.30

The Federal Government will include the reforestation component of the land use, land use change and forestry sector on a voluntary basis.31 That is, the CPRS may include GHG emissions (or removal of GHG emissions) from forests established after 1 January 1990 on previously cleared land.32 However, it does not consider it practical to include deforestation due to difficulties such as the potential imposition of liabilities on thousands of small land holders. The Federal Government considers there is potential to reduce deforestation at low-cost, and so will investigate mechanisms to further reduce emissions.33

The Federal Government considers that the costs of achieving emissions reductions should be shared across all of the economy. All sectors should be subject to equivalent carbon costs and have incentives to reduce emissions.34 Therefore, it

25 These gases are Carbon Dioxide, Methane, Nitrous Oxide, Hydrofluorocarbons,

Perfluorocarbons and Sulphur Hexafluoride: DCC, White Paper, December 2008, p 6-4. 26 DCC, White Paper, December 2008, pp 6-9, 6-12, 6-30, 6-32 & 6-34 – 6-39. 27 DCC, White Paper, December 2008, p 6-8. In relation to the waste sector, to avoid waste being

displaced from covered to uncovered facilities, the Federal Government will apply a lower emissions threshold of 10, 000 tonnes of CO2-e a year or more to landfill facilities operating near other landfill facilities: DCC, White Paper, December 2008, p 6-37.

28 DCC, White Paper, December 2008, p 6-6. 29 DCC, White Paper, December 2008, p 6-34. 30 DCC, White Paper, December 2008, p 6-46. 31 DCC, White Paper, December 2008, p 6-50 32 DCC, White Paper, December 2008, p 6-46. 33 DCC, White Paper, December 2008, p 6-61. 34 DCC, White Paper, December 2008, p 6-45.



considers that alternative mitigation measures that result in costs similar to that under the CPRS should, where practical, apply to uncovered sectors.35

As the CPRS will not cover all sources of emissions, the scheme cap and Australia’s total national emissions target will be different. The Federal Government proposes to reconcile the difference by notionally allocating permits for sources of emissions not covered by the scheme and retiring these each year on behalf of the uncovered sectors.36

Table 2.1 Australia’s GHG emissions by sector in 2006

Sector Share of emissions in 2006

Main sources of emissions

Stationary energy

49.9% Energy industries – electricity generation, petroleum refining, gas processing and solid fuel manufacturing

Manufacturing industries and construction – includes direct emissions from combustion of fuel to provide energy used in manufacturing (eg, steel, paper and food processing)

Other sectors – includes energy use by the commercial, institutional, residential sectors

Transport 13.7% Road transport – passenger vehicles, light commercial vehicles, trucks, buses and motorcycles

Domestic air transport – commercial passenger and light aircraft on domestic routes

Coastal shipping – domestic shipping and small craft Rail transport

Fugitive emissions

6.0% Coal mining and handling Oil and natural gas production, processing and transportation

Industrial processes

4.9% Mineral, metals and chemical production – includes limestone production, aluminium smelting and ammonia production

Halocarbons consumption – includes halocarbon consumption from refrigeration and air-conditioning

Agriculture 15.6% Livestock and crops Agricultural soils – includes cultivating soils through applying

fertilisers Agricultural burning – includes prescribed burning of savannas

Waste 2.9% Solid waste Wastewater Incineration

Land use, land use change and forestry

6.9% Land use changes leading to deforestation – includes conversion of forests to grassland and cropland

Carbon dioxide removed from reforestation

Note: Share of emissions does not add to 100% due to rounding. Source: Australian Government, Department of Climate Change, National Greenhouse Gas Inventory 2006, June 2008, pp 1, 6 -15.

35 DCC, White Paper, December 2008, pp 6-45 & 10-16. 36 DCC, White Paper, December 2008, p 10-18.



2.4 Scheme will enable international linkages

An effective global carbon market will reduce abatement costs by ensuring that the cheapest abatement opportunities are pursued, regardless of where they occur.37 The CPRS is designed to link with international emissions trading markets and schemes, both in view of the importance of coordinated action to reduce the risks of climate change and the role that access to other markets could play in reducing the overall costs of Australia’s (and other countries’) mitigation efforts.

The Federal Government will allow entities to import an unlimited quantity of eligible international units (certain types of units issued under the Kyoto Protocol).38 Liable entities will be able to surrender imported units for compliance with the CPRS and these units will therefore be counted as contributing to meeting the national emissions reduction target. However, in order to facilitate an orderly start to the scheme, entities will not be allowed to export Australian permits to international markets in the initial years of the CPRS.39

The White Paper notes that international linkages will impact on the price of Australian permits and overall scheme cost.40 Without international linkages, the Australian permit price will be determined by demand and supply conditions in the Australian market. By allowing imports of eligible international units, the permit price will also be strongly influenced by demand and supply conditions in international carbon markets.41 Therefore, the scheme cap, which primarily determines the supply of Australian permits, will no longer be a significant determinant of the permit price.42

As an example, if the Australian permit price is greater than the price for international units (ie, the international carbon price), entities will have an incentive to import these international units. This reduces their demand for Australian permits. As a result, the Australian permit price will decrease until it converges with the international carbon price.43

The Federal Government envisages that international linkages will reduce the overall scheme cost, through broadening the range of available abatement opportunities. If international abatement opportunities are cheaper than domestic opportunities, entities can pursue the less expensive opportunities first. The global environmental outcome is unchanged.44

37 DCC, White Paper, December 2008, p 11-2. 38 DCC, White Paper, December 2008, p 11-9. 39 DCC, White Paper, December 2008, p 11-28. 40 DCC, White Paper, December 2008, p 11-1. 41 Ibid. 42 DCC, White Paper, December 2008, p 10-2. 43 Ibid. 44 DCC, White Paper, December 2008, p 11-3.



2.5 Scheme will address competitive challenges in emissions-intensive trade-exposed industries

The Federal Government will provide assistance to firms operating in emissions-intensive trade-exposed industries.45 This will take the form of allocating free permits to the most emissions-intensive trade-exposed activities.

For firms in this category, prices for their products are set in international markets, and so they may not be able to pass on carbon costs. Further, they are competing against firms which are not yet subject to comparable limits on their GHG emissions. In the absence of assistance, these firms may relocate elsewhere. If this occurs, with no global reduction in GHG emissions, it results in ‘carbon leakage’.46

2.6 Measures will be developed to help other businesses and households adjust to impacts of the scheme

The Federal Government will introduce a number of assistance measures which limit the impact of the CPRS, especially in its initial stages. The key aim of these measures is to assist firms and individuals with the transition to a fully functioning CPRS.

Measures will be developed to assist households (particularly low and middle income households) adjust to the impact of carbon prices and to help them reduce their emissions.47 For example, in the first three years of the CPRS, fuel taxes will be reduced to offset the impact on fuel prices.48

A Climate Change Action Fund will be set up to assist businesses, community sector organisations, workers, regions and communities adjust to a lower emissions economy.49 Types of activities which may be funded include investment in new low emissions processes and industrial energy efficiency projects.50

Limited assistance will be provided to firms in strongly affected industries, namely coal-fired electricity generators, to help them make structural adjustments.51

45 DCC, White Paper, December 2008, p 12-1. 46 DCC, White Paper, December 2008, p 12-4. 47 DCC, White Paper, December 2008, pp 17-9 & 17-19. 48 DCC, White Paper, December 2008, p 17-16. 49 DCC, White Paper, December 2008, p 18-3 50 DCC, White Paper, December 2008, p 18-12. 51 DCC, White Paper, December 2008, p 13-6.



The Federal Government will place a cap on the price that entities would be required to pay for permits from 2010/11 to 2014/15, which will reduce the up-side price risk for individual firms and cap the costs of the scheme overall.52 It is aiming to set the price cap above the estimated market price for GHG emissions, so that it is only used in exceptional circumstances. As the estimated carbon price in 2010 is between $23 – $32/tCO2-e in nominal terms (see Box 2.1), the Federal Government has decided to set a price cap for five years of $40/tCO2-e in nominal terms at scheme commencement, rising in real terms by five per cent a year.53

In addition, COAG has agreed to develop a National Strategy for Energy Efficiency, to accelerate energy efficiency efforts across all governments and to help households and businesses prepare for the introduction of the CPRS.54

52 DCC, White Paper, December 2008, p 8-34. 53 DCC, White Paper, December 2008, pp 8-37 – 8-38. 54 COAG Communiqué, 2 October 2008, p 5.

3 Why might other measures be needed in addition to the CPRS?



Climate change risks arise from what has been described as “the greatest example of market failure we have ever seen”.55 That is, the market has failed to properly take into account the environmental costs of GHG emissions and the associated risk of dangerous climate change. Until something is done to correct this market failure, society as a whole bears these costs instead of only the firms and individuals producing the GHG emissions. Such costs are known as ‘negative externalities’. From an economic perspective, they lead to firms and individuals producing more than the socially optimal level of GHG emissions.

GHG emissions are a particularly complex type of negative externality, because they have global and inter-generational effects. GHG emissions contribute to climate change regardless of where they are emitted. Further, climate change is caused by GHG emissions accumulating in the atmosphere over time, rather than by the quantity of GHG emissions produced in any given year (although this quantity contributes to the accumulation). As GHG emissions can remain in the atmosphere for up to 100 years, producing GHG emissions now can have a long-term influence on climate change.56

The CPRS is the preferred option of Australian governments for correcting this market failure. While there still may be a need for additional measures to support or supplement the CPRS, it is likely that its introduction will make many existing measures redundant. All jurisdictions have agreed to review their existing measures to ensure they support the CPRS in a coherent and streamlined way.

3.1 CPRS is the primary measure for addressing this market failure

Ideally, the market failure associated with GHG emissions would be resolved by deriving a social cost of carbon and imposing it on individuals and firms that produce GHG emissions. This would provide them with the incentive to produce the socially optimal level of GHG emissions.

55 Stern Review, The Economics of Climate Change, October 2006, p 1. 56 Stern Review, The Economics of Climate Change, October 2006, p 25.



In theory, the social cost of carbon would be the point where the marginal cost of abating GHG emissions equals the marginal benefit of avoided climate change. However, the global and inter-generational dimensions associated with GHG emissions may make it difficult to derive this social cost of carbon in practice.

The CPRS is governments’ preferred policy instrument for correcting the market failure associated with GHG emissions, and in turn resolving the difficulty involved with deriving a social cost for carbon. As Chapter 2 discussed, the scheme will establish a market price for GHG emissions for a given target reduction in emissions set by the Federal Government.

3.2 Other measures may be warranted to support the CPRS

COAG has agreed to take a national approach to climate change mitigation and to adopt the CPRS as the principal measure for reducing GHG emissions. As noted in the White Paper, putting a national market price on GHG emissions is a fundamental shift in Australia’s response to climate change. An equal shift is necessary in governments’ approach to climate change issues.57

The Federal Government’s climate change strategy is based on three pillars:

1. reducing Australia’s emissions, using the CPRS as the principal means for reducing emissions at lowest possible cost over the long term

2. adapting to the impacts of climate change that cannot be avoided, and

3. helping to shape a global solution.58

In respect of GHG reduction (pillar 1), policy measures that seek to address the same market failure as the CPRS are likely to no longer be necessary. However, other measures may be warranted to assist transition to a carbon-constrained economy.

For example, the White Paper notes that additional measures will be needed to:

build Australia’s capacity to respond to a carbon price

address market failures that a carbon price alone cannot overcome, and

deal with the distributional consequences of the CPRS.59

57 DCC, White Paper, December 2008, p 19-1. 58 DCC, White Paper, December 2008 pp 1-7 – 1-13 59 DCC, White Paper, December 2008, p 19-3.



The Garnaut Climate Change Review60 notes that additional measures may be warranted to correct market failures that potentially raise the cost of structurally adjusting to a low-carbon economy, and to ensure that mitigation occurs in sectors not covered by the scheme.61 IPART’s proposed approach to determining whether additional measures might be needed is discussed in Chapter 4.

3.3 All jurisdictions to review existing measures

COAG has agreed that all governments will review their existing mitigation measures. The aim is to ensure that the CPRS is supported by a “coherent and streamlined” set of policies across jurisdictions.62

COAG has developed a set of principles in relation to the design of mitigation measures in addition to the CPRS (‘complementarity principles’) to guide these reviews (see Appendix C). These principles recognise that additional climate change mitigation measures may be appropriate in certain circumstances to assist with the transition to a low-emissions economy – for example, if a market failure exists that prevents the take-up of cost-effective abatement opportunities, and where there are adverse distributional consequences arising from reform.

The framework IPART will develop for evaluating NSW’s mitigation measures will address the complementarity principles agreed by COAG. IPART will also consider the views expressed in the White Paper and Garnaut Climate Change Review on additional mitigation measures.

60 The Garnaut Climate Change Review is an independent review of the impacts of climate change

on the Australian economy. It reported to the Federal, State and Territory governments in September 2008. This will inform the Federal Government’s policy responses to climate change, including the design of the CPRS (http://www.garnautreview.org.au/CA25734E0016A131/pages/about, accessed October 2008).

61 Garnaut Climate Change Review, Final Report, September 2008, p 318. 62 COAG Communiqué, 20 December 2007, p 5.

4 IPART’s proposed approach to evaluating climate change measures



IPART has formed some preliminary views about the potential need for additional climate change mitigation measures, once the CPRS is in place. It has also developed a proposed approach for assessing the need for, and design of, such measures both current and for the future. The sections below set out these preliminary views and proposed approach, and outline how IPART intends to build on the proposed approach to develop the final assessment framework.

4.1 IPART’s preliminary views on potential need for additional measures in NSW

In IPART’s view, COAG’s agreement to take a national approach to climate change mitigation and adopt the CPRS as the principal measure for reducing emissions indicates that all governments are or should be working towards the same objectives – the foremost of which is reducing Australia’s emissions in the most efficient way possible. In addition, the Federal Government’s intention to introduce a scheme that has the maximum practical coverage of emissions and sectors (discussed in Chapter 2) suggests that governments should rely on the CPRS as the means to achieve least-cost mitigation unless there are compelling reasons to indicate other supporting measures are required.

Given this, IPART’s preliminary views going into this review include:

the threshold for justifying additional measures aimed at reducing GHG emissions (ie, mitigation measures) should be high

while there are many economic, scientific and geopolitical uncertainties about climate change, the review should assume that the CPRS, as a policy instrument, will be generally capable of reducing emissions in the long term

if there prove to be scheme design flaws that compromise the ability of the CPRS to reduce emissions efficiently, these will be better addressed by adjusting the scheme than introducing additional measures.

Each of these views is discussed below.



4.1.1 The threshold for justifying additional abatement measures should be high

The CPRS’ objective is to: meet Australia’s emissions reduction targets in the most flexible and cost-effective way; support an effective global response to climate change; and to provide transitional assistance for the most affected parties.63

An emissions trading scheme will target the policy outcome of lower emissions directly – by capping the total quantity of GHG emissions that can be produced– and will leave the market to determine precisely how that cap will be met.64 Once such a scheme is in place, measures that seek to reduce emissions in sectors covered by the scheme should no longer be necessary (Box 4.1).

Box 4.1 Why additional mitigation measures are unlikely to be necessary for emissions sources covered by the CPRS

Under an emissions trading scheme, the quantum of allowable emissions will be fixed. The limit on emissions will apply to all emissions sources covered by the scheme. Additional measures to reduce emissions in sectors covered by the scheme would not result in an increase in emissions abatement – under the global cap, the emissions avoided through undertaking an additional measure would result in an equivalent increase in emissions elsewhere. How and/or where emissions are reduced changes, not the amount.

Under a well-functioning emissions trading scheme, additional measures to reduce emissionswould lead to the displacement of abatement that would otherwise have occurred more efficiently under the scheme, and alter associated changes to economic activity. This could add to the costs of adjustment (reform to a low-carbon economy) and increase the costs of achieving the emissions target.

If additional measures cannot alter the quantity of emissions that are reduced in covered sectors, the objective of any additional measures should, in principle, be to lower the costs of achieving the cap (ie, achieving the emissions reduction target for sectors covered by the scheme).

The long-term damaging effects of GHG emissions occur regardless of which state or country the emissions come from. Similarly, the abatement of emissions by one tonne has the same environmental benefit whether it occurs in Australia or another country. Action by all the major GHG emitters will therefore be necessary to stabilise and reduce GHG emissions.

63 DCC, White Paper, December 2008, p 5-5. 64 Gans, J and Quiggin, J, The Practicalities of Emissions Treading, Submission to the Garnaut

Climate Change Review on the Emissions Trading Scheme Discussion Paper, 16 April 2008, p 3.



As Australia is a relatively small contributor to global emissions65 and action by it alone will be of small consequence to climate change impacts, the design of the scheme and national emissions targets will be highly connected to international negotiations on a global regime. The hope is that Australia’s action will add to momentum for other nations to participate in an effective global solution.66

As the CPRS will be the primary means by which Australia will meet its obligations to reduce emissions, an important consideration for any additional mitigation measures is whether they are consistent with the national climate change strategy.

The link with international effort also implies that there is likely to be little case on either economic or environmental grounds for a state or territory to set a separate target or to seek to go beyond the national target for emissions reduction.

For example, if national targets were perceived as too low, the adoption of more stringent targets by individual state and territory governments (or other parties) would be unlikely to materially affect climate outcomes. However, they may distort the composition of abatement by directing abatement activity away from where it would be undertaken most efficiently (whether in Australia or elsewhere in the world as permitted under international agreements) to the geographic location of that party, leading to higher costs in meeting Australia’s targets, and undermine the CPRS. It would be more efficient to make adjustments to the national target to get closer to a socially optimal amount of GHG reduction, if this was warranted by a global agreement.67

In addition, the retention (or introduction) of measures that have the same goals as the CPRS could undermine the scheme. For example, it could lead to duplication, complexity and wasted resources. Further, it could signal that governments do not have confidence in the CPRS, or may not rely on the CPRS in future to achieve emissions reductions, which would damage the credibility of the scheme.

65 Australia generated around 1.5 percent of global GHG emissions in 2005. Its proportion of

global emissions is expected to fall to 1.1 per cent in 2030 and 1.0 per cent in 2100 (DCC, White Paper, December 2008, p 1-13).

66 The Garnaut Climate Change Review notes that “the entire purpose of Australian mitigation policy is to support the emergence of an effective global effort”: Final Report, September 2008, p 307.

67 In this regard, IPART notes that the Federal Government has indicated that, in the event that a comprehensive global agreement was to emerge involving commitments that were consistent with long-term stabilisation of atmospheric concentrations of GHG emissions at 450 parts per million of CO2-e or lower (requiring emissions to be reduced by more than the government’s target of 60 percent below 2000 levels by 2050), it would be prepared to revise its post-2020 targets to ensure that Australia makes its full contribution to more ambitious global action (DCC, White Paper, December 2008, p 4-17).



Given the above, IPART considers that the threshold for justifying an additional mitigation measure should be high, and the objective of any additional mitigation measure should be to reduce the costs of achieving the national emissions reduction targets set by the Federal Government. IPART considers this might be possible where:

The measure addresses a gap in the CPRS’ coverage (eg, it targets a sector not covered by the scheme) and is cost-effective. If an excluded sector is not required to contribute towards meeting the national emissions reduction target, the costs of achieving the target are likely to be higher than they need to be. This is because low-cost abatement opportunities in the excluded sectors are not taken up and must be substituted by higher-cost options in the covered sectors.68

The measure addresses a market failure other than the lack of a price for GHG emissions that reduces the CPRS’ chances of achieving its goal (ie, reducing target emissions at least-cost to the community) and is cost-effective and would lead to lower average abatement costs over time.

4.1.2 The review should assume the CPRS will be capable of efficiently delivering emissions reductions in the long term

The Garnaut Climate Change Review notes that there are “innumerable scientific, geopolitical and economic uncertainties” about climate change. These include the impact of policy responses to climate change in Australia and elsewhere, the strength of growth in global emissions, and the development and cost of low-emissions technologies. The Review further notes that, although making policy decisions in the face of uncertainty is not new, the range of possible outcomes under climate change is wider than for many other challenges.69

How successful the CPRS is in delivering emissions reductions at least cost will depend in part on the Federal Government getting the mechanics of scheme design ‘right’. For example, CPRS will need to promote long-term confidence while allowing for flexibility in response to new information (eg, advances in climate science or international developments). Successful reform will also depend on there being appropriate institutional settings (including laws, policies and knowledge and expertise) to support the long-term economic management of emissions.

IPART recognises that it is difficult to judge ex ante precisely how well the CPRS will operate. However, on the basis of known parameters, IPART will assume in undertaking its review that the CPRS will be generally capable of efficiently delivering emissions reductions in the long term.

68 Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme?

Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p XVIII. 69 Garnaut Climate Change Review, Final Report, September 2008, pp 300 -301.



One of the advantages of emissions trading is that it provides more opportunity than other policy responses to respond flexibly to uncertainty.70 For example, it provides greater flexibility in that it allows the market to re-adjust should more efficient ways of dealing with emissions present themselves. The Federal Treasury’s modelling report of the economics of climate change mitigation notes that it is impossible to predict what mix of changes in supply and demand across sectors (ie, mitigation opportunities) will be the most cost-effective. This is considered to underscore the importance of policies that create incentives for mitigation broadly across the economy but do not mandate where mitigation should occur (such as the CPRS).71

If a well-functioning carbon market is in place, the most significant policy-related scheme variable over time will be the emissions limits set by the Federal Government. As uncertainty is resolved regarding policy targets, households, businesses and public authorities will be in a position to adjust their expectations to meet these targets.72 It is important that additional policy interventions not compromise the ability of the CPRS to deal with uncertainty and change in an efficient manner.

4.1.3 Flaws in the design of the CPRS will be better addressed by adjusting the scheme than introducing additional measures

If the design of the CPRS proves to be flawed in ways that compromise its efficient operation, IPART considers it will be more efficient and effective to address these by adjusting the CPRS, rather than by introducing supplementary policies.

Some proposed features of the CPRS appear on their face to be inconsistent with the objective of the CPRS to reduce emissions at least cost. For example, the Federal Government has committed to offset the price impacts on fuel so as to provide households and businesses time to adjust to the scheme73 and to institute a ‘safety valve’ price to place an upper limit on scheme compliance costs during the implementation phase.74 The CPRS may not operate as efficiently as it might under an unconstrained carbon price and if the price was not suppressed for some groups.

IPART notes that, while the market will deliver economically efficient outcomes, it will not necessarily deliver equitable outcomes or orderly adjustment to reform. It is part of government’s role to balance competing objectives in making policy decisions. The redistribution of the costs and benefits of reform may, in this context, be legitimately ‘built in’ to the scheme.

70 Gans, J and Quiggin, J, The Practicalities of Emissions Treading, Submission to the Garnaut

Climate Change Review on the Emissions Trading Scheme Discussion Paper, 16 April 2008, p 2. 71 Commonwealth of Australia, Australia’s Low Pollution Future, The Economics of Climate Change

Mitigation, Summary, October 2008, p 40. 72 Gans, J and Quiggin, J, The Practicalities of Emissions Treading, Submission to the Garnaut

Climate Change Review on the Emissions Trading Scheme Discussion Paper, 16 April 2008, p 4. 73 DCC, White Paper, December 2008, p 6-13. 74 DCC, White Paper, December 2008, p 8-34.



Having said this, it is important to recognise the potential for different policy imperatives to be in conflict, and to understand and take account of the costs associated with trade-offs in decision making. For example, the provision of assistance that has the effect of suppressing the carbon price signal is less desirable than, say, enhancing the ability of target beneficiaries to make informed decisions in the face of higher prices (given that the establishment of a price signal is an essential element of the CPRS). This is because such assistance may reduce the ability of those groups to adjust to emissions constraints, potentially making the overall task of achieving a given level of abatement harder in the long term.

The Federal Government has indicated that its decisions on emissions targets and the design of the CPRS, as well as accompanying measures to support households and businesses adjust to the CPRS, will be based on its judgement of the right balance between:

the costs associated with these decisions

the risks of doing nothing, and

the need to support the emergence of an effective global effort to reduce climate change.75

The link between the CPRS and the Federal Government’s broader climate change and economic policies suggests that there should be careful consideration of the need for, and design of, any new emissions reduction measures. As poorly conceived or designed policies will unnecessarily increase the costs of achieving emissions reduction targets, there would appear to be a case for considering additional mitigation measures only where significant gaps exist.

IPART seeks comments on the following:

1. Please provide comments on IPART’s preliminary views that:

– The threshold for justifying additional mitigation measures should be high. That is, measures should reduce the costs of meeting the national emissions reduction target by either: 1) cost-effectively meeting a gap in the CPRS’ coverage; or 2) cost-effectively correcting a market failure that prevents the CPRS from reducing emissions at least cost.

– The review should assume the CPRS will be generally capable of reducing emissions in the long term.

– Should there be design flaws in the CPRS that compromise its ability to reduce emissions efficiently, these would be better addressed by adjusting the scheme rather than introducing additional measures.

75 DCC, White Paper, December 2008, pp xxi -- xxv.



4.2 IPART’s proposed approach for assessing the need for and design of additional measures

IPART intends to base its recommended framework for assessing the need for, and design of, the climate change measures nominated by the NSW Government on:

the objectives for climate change policy articulated by the Federal Government and COAG, and

the key proposed design features of the CPRS.

At this stage, IPART has developed a high-level analytical approach that reflects these objectives and design features, and the preliminary views outlined in section 4.1 above. IPART has grouped the potential measures according to their aim. These groups include:

mitigation measures that aim to directly reduce or assist the CPRS to reduce GHG emissions

non-mitigation measures that aim to minimise the adverse effects of reform on the economy and community or to assist transition to a low-carbon economy

measures with multiple policy objectives where mitigation is a secondary objective or an ancillary benefit.

IPART intends to review each nominated measure to identify (or clarify) its aim. It will then determine whether there is a potential case for retaining the measure by assessing it against criteria that are relevant to its aim. If this assessment indicates the measure may be justified, IPART will undertake a more detailed assessment of whether it is well-designed and likely to be efficient and effective in the context of the CPRS. This will involve assessing the measure against a set of best-practice regulatory principles.

Box 4.2 provides an overview of the steps in the proposed analytical approach.



Box 4.2 Steps in IPART’s proposed analytical approach

1. Identify measures to be reviewed (to be undertaken by the NSW Government)

2. Review measure to identify or clarify aim

If the aim is abatement by addressing gaps in the CPRS;

– Is the cost of abatement equal to or lower than that achieved under the CPRS, ordoes the measure facilitate inclusion of the uncovered sector in the CPRS?

– Is the measure best undertaken at state or local level?

If the aim is abatement by addressing market failures other than the lack of a carbon price

– What is the market failure and its significance?

– Is market failure amenable to government intervention?

– Is the measure tightly targeted to the market failure?

– Is measure best undertaken at state or local level?

If the aim is to assist transition to a carbon-constrained environment

– Will it distort carbon adjustment and reduce the effectiveness of the CPRS?

– Is measure best undertaken at state or local level?

If the measure has multiple objectives and abatement is a secondary objective or ancillary benefit

– Will it distort carbon adjustment and reduce the effectiveness of the CPRS?

3. Where the above assessment indicates there is a potential case for the measure, assess inmore detail against best-practice regulatory principles (in particular, is the measure cost-effective?)

4. Make recommendation:

that the measure be retained in its current form because it complements the CPRS or isan effective means of achieving other objectives of government, or

that the measure be redesigned to better complement the CPRS, or

that the measure be considered transitional in nature; or

that the measure be terminated.

The sections below discuss IPART’s proposed analytical approach, and outline how IPART intends to build on this approach to develop its final recommended framework for assessing NSW climate change mitigation measures. It is noted that some decisions on the CPRS, including firm scheme caps for the first five years of the scheme (or to the end of any new international commitment period), the scope for domestic offsets and coverage of agricultural emissions will be determined after IPART has completed its review. IPART considers that the criteria and principles proposed in this paper are sufficiently generic to provide an ongoing framework for considering the need for, and design of, additional measures to support the CPRS.



4.2.1 Proposed criteria for assessing whether measures are justified

As noted above, IPART has grouped the potential measures into three groups, based on their aim. IPART’s proposed criteria for assessing measures to determine whether there is a potential case for their retention once the CPRS is in place are shown in Table 4.1.

Table 4.1 Proposed criteria for determining whether measures are likely to be justified in presence of CPRS

Type of measure Proposed criteria

Mitigation measures 1. Either the measure

a) reduces emissions in a sector not covered by the scheme at a cost equal to or less than the carbon price and/or facilitates coverage of an uncovered sector in future

b) reduces mitigation costs by correcting a market failure other than the lack of a carbon price, and the measure is tightly targeted to the market failure

2. The measure is best undertaken at the state or local level

Non-mitigation measures

1. The measure assists transition by targeting areas where prices may not be a significant driver of decision making or by managing the costs and distributional consequences of reform

2. The measure is best undertaken at the state or local level

Measures with multiple objectives

1. The measure has policy objectives other than mitigation and remains a cost-effective way of meeting those objectives

Each of these criteria is discussed below.

Mitigation measures criterion 1 a)

The measure reduces emissions in a sector not covered by the scheme at a cost equal to or less than the carbon price and/or facilitates future coverage of an uncovered sector.

The first of the proposed criteria for assessing mitigation measures reflects IPART’s preliminary views that the threshold for justifying such measures should be high, and that their objective should be to reduce the costs of achieving the emissions reduction target set by the Federal Government.

Part a) of this criterion would be used to assess measures that address a gap in the coverage of the CPRS. The Federal Government’s policy is that the CPRS will have the maximum possible coverage. However, for practical reasons, not all sectors of the economy responsible for emissions will be covered when the scheme commences (these include agriculture and part of the land use, land use change and forestry sectors – see section 2.3). Further, not all entities in covered sectors will emit more than the threshold amount for participation in the scheme (for most sectors, the



threshold will be 25,000 tonnes of CO2-e a year). The emissions sources that will not be covered are responsible for around 25 per cent of Australia’s emissions.76

The Federal Government has indicated that additional mitigation measures should be considered for uncovered sectors, to ensure they contribute towards the costs of meeting Australia’s emissions reduction target and have incentives to undertake abatement.77 Therefore, there is potential scope for measures in uncovered sectors:

when such sectors offer opportunities to reduce emissions at an equivalent or lower cost than reducing emissions under the CPRS, or

to assist these sectors to transition to the CPRS.

Where there are opportunities to reduce emissions at an equivalent or lower cost than the CPRS, the marginal cost of reducing GHG emissions by one tonne through the measure should be equivalent to or less than the price of one emissions permit under the CPRS. If this cost is higher than the price of a permit, it would be inconsistent with the objective of achieving emissions reductions at least cost to the economy.

The carbon price provides a transparent benchmark against which to assess additional government action on greenhouse gas reduction. Comparisons of the cost of abatement would be an important threshold consideration in evaluating the overall merits of an additional mitigation measure. Other matters for consideration in evaluating measures are discussed in section 4.2.2.

The main reason a sector might not be initially covered by the CPRS is because it is difficult to measure and account for its emissions. This may also mean it is difficult to design an additional measure that seeks to impose an equivalent carbon price on the sector.78 If a sector is a likely candidate for inclusion in the CPRS in the future, it may be preferable to introduce measures to facilitate this inclusion rather than attempting to impose an equivalent carbon price.

If a sector appears not amenable to a mitigation policy (eg, there are relatively few low-cost abatement opportunities and the policy-related costs of implementing a separate scheme is high), decisions regarding the contribution uncovered sectors make towards reaching national emissions reduction targets should also be assessed alongside a range of alternative policy options, including doing nothing.79

The existence of a price cap on permits over the period 2010/11 to 2014/15 (see section 2.6) has implications for assessing whether additional mitigation measures are justified. Should a price cap come into operation (because the market permit

76 DCC, White Paper, December 2008, p 6-1. 77 DCC, White Paper, December 2008, pp 6-45 & 10-16. 78 However, this may not always be the case. For example, it can be difficult to measure total

methane emissions from a waste site, but it is easier to measure the amount of methane captured and burnt to reduce GHG emissions.

79 Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme? Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p 45.



price exceeds a pre-determined level), the focus of government control will shift from the quantity of emissions to the price of emissions. This will create a risk that emissions will exceed the target set for the scheme. This is because some firms may choose to pay the ‘safety valve’ price cap and emit in excess of their permit holding rather than abate. If the price cap is used, there will effectively no longer be a mandatory scheme cap.80

In such a scenario, additional mitigation policies could result in extra abatement in covered sectors. However, a measure that produces additional emissions reductions at a unit cost above the ‘safety valve’ price would not be justified, as it would defeat the intent of capping the overall cost of the scheme.81 The proposed imposition of a price cap reflects the Federal Government’s position that it will not enforce compliance with scheme caps at any cost. The level of the cap on permit prices will reflect the Federal Government’s judgement, as scheme operator, on the maximum cost that should be imposed on liable parties as a result of the scheme.82 IPART’s view is that the state government does not need to second guess this judgement.

Given this, IPART considers that either the market price or the ’safety valve’ price, whichever prevails, should be used as the appropriate point of comparison when considering the cost-effectiveness of short-term measures. For longer-term measures that have a life beyond the period of the price cap, it would be appropriate to factor in the expected level of carbon prices over the life of the measure in assessing whether a measure is likely to be cost-effective.

Mitigation measures: criterion 1 b)

The measure reduces mitigation costs by correcting a market failure other than the lack of a carbon price and is tightly targeted to the market failure

Part b) of the first criterion for mitigation measures would be used to assess measures intended to correct market failures that are reducing the ability of the CPRS to achieve its intended outcomes. ‘Market failure’ refers to a situation when a market, left to itself, does not allocate resources efficiently. Where significant, demonstrated market failures other than the lack of a carbon price exist, there is a potential role for government to improve outcomes for the community, the environment, businesses and the economy.83 Whether there is, in fact, a role for government to play will depend on whether the underlying problem is amenable to being resolved through government intervention.

The CPRS will address the primary market failure associated with GHG emissions – the externalities resulting from the lack of a carbon price. However, as both the White Paper and Garnaut Climate Change Review point out, there may be other

80 DCC, White Paper, December 2008, p 8-30. 81 Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme?

Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p 13. 82 DCC, White Paper, December 2008, p 8-30. 83 NSW Better Regulation Office, Guide to Better Regulation, April 2008, Appendix A.



market failures that distort the mix of carbon reduction responses to the price signal provided by the CPRS, and thus prevent the adoption of least-cost mitigation measures. Box 4.3 outlines the main types of market failure and provides examples of each in the context of the CPRS.

IPART notes that, as the CPRS will mean that the price of GHG emissions is included in the price of goods and services, the more cost-effective measures to address market failures may be undertaken without the need for additional policies. This will reduce the potential savings from additional measures, and increase the ‘overhead’ costs of developing and implementing them relative to the savings achieved.

Box 4.3 What types of market failure might occur?

The main types of market failure and an example of how it might occur in the context of the CPRS are outlined below.a

Externalities

Externalities are costs or benefits arising from a transaction received by parties not involved in the transaction. Externalities can be either positive (external benefit) or negative (external cost). Greenhouse gases are a negative externality, because they impose a cost on everyone, not just those who are directly or indirectly (through their consumption patterns) responsible for producing them.

As noted in section 3.1, the CPRS will address the primary market failure associated with GHG emissions – the externalities resulting from the lack of a carbon price. However, other externalities may need to be addressed to help ensure the scheme’s success. For example, investment in low-emissions technologies may result in positive externalities, if it is not possible for firms that invest in and use such technologies to capture all the value of the resulting social benefits of their investment in their prices. The inability to capture all benefits from an investment may lead to under investment in, and use of, low-emissions technologies. While the CPRS will stimulate firms to invest in such technologies, the existence of positive externalities may mean the quantity of investment is not optimal from the perspective of society as a whole. Government intervention could help firms better ‘internalise’ the value of the social benefits derived from their investment in low-emissions technologies.b

Public goods

Public goods are a type of positive externality. They refer to goods that are not supplied by the market because there are difficulties in restricting consumption of the good (that is, it is ‘non-excludable’) and consumption by one individual does not diminish the amount or quality available for others (a property described as ‘non-rival’). ‘Free-riding’ makes it impossible to recoup the costs of provision from users, and therefore may not be provided by the market. Investment in basic research and development (the accumulation of new fundamental knowledge with no specific application) is usually undertaken with public funding by public institutions, such as universities and scientific research bodies.c



Split incentives

‘Split incentives’ or ‘principal-agent’ problems are a further type of externality. These refer to the potential difficulties that arise when two parties engaged in a contract have different goals. For example, a landlord-tenant problem may occur when the landlord provides energy-using appliances (such as a refrigerator or lighting systems), but the tenant pays the electricity bill.d In this situation, there may be little incentive for the landlord to choose the most energy-efficient appliance or to invest in the immediate replacement of energy-inefficient appliances because all the benefits of that investment will not go to the landlord. The problem of split incentives may be a bigger one for small customers (eg, individuals) than large customers, as small customers are less likely to be able to negotiate contract changes or enter into separate transactions to offset the cost of an investment.

Measures that reduce energy consumption can reduce the cost impact on individual consumers of energy price increases driven by the CPRS. These measures may also reduce overall electricity sector emissions and therefore demand for emissions permits. This can have the effect of lowering emissions permit prices across the economy and therefore the overall cost to the economy of meeting the emissions cap. However, lowering the overall cost to the economy can only occur if the full cost of additional measures aimed at reducing demand for permits is less than the cost of reducing emissions by the equivalent amount under the CPRS.

Information failures

Information failures occur when one party to a transaction has more or better information than the other, or both parties have incomplete information. Information failures can prevent parties from making fully informed decisions. The CPRS will be a far-reaching economic reform, and for it to succeed the community and parties affected by the scheme will need to know how the scheme works and its likely effects, and be aware of alternative options that will enable them to reduce their exposure to the carbon price. Information should be relevant and convenient to use. In the context of the CPRS, insufficient information could act as a barrier to the take-up of cost-effective abatement opportunities.

Barriers to effective competition

Barriers to effective competition can include the existence of market power, where buyers or sellers in a market have the ability to influence the quality, quantity or price of goods or services traded, or other factors that restrict market entry, such as economies of scale.

In the context of emissions trading, Tietenberg notes that the incentive for any firm with market power to invest in innovative equipment to control GHG emissions would be a function of both the returns to the firm and the price effects of its investment on other parties. For example, in the permit market, when a firm invests in capital that causes a fall in the permit price, the lower price would affect the firm’s rivals and benefit those that are buying permits and disadvantage those that are selling. In the output market, the lower permit price would lower competitors’ costs and allow them to expand their output. Anticipating these decisions allows firms to act strategically in making investments - this affects the incentives to innovate.e

Notes:

a Adapted from the NSW Better Regulation Office’s Guide to Better Regulation, Appendix A, April 2008.

b Research and development of low-emissions technologies may also be under-provided by the private sector because of discrepancies in discount rates used to value projects (ie, social versus private time preference rates).



c Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme? Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p 22.

d International Energy Agency, The IEA Urges Governments to Mind the Energy Efficiency Gap, press release, 15 October 2007 http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=237, accessed October 2008.

e Tietenberg, T.H. 2008, Emissions Trading: Principles and Practice, Resources for the Future 2nd Edition, Washington D.C., p 44.

In assessing measures intended to address market failure, IPART considers it is important to establish whether there is a valid case for government intervention. In particular, it must be clearly shown that:

a significant market failure exists, and

the proposed government intervention is tightly targeted to the market failure in question.

For example, if a mitigation measure that ought to be viable is not taken up, it will be important to accurately diagnose the reasons why this is the case – it may or may not be due to market (or regulatory) failure. An accurate diagnosis is essential for the design of policy and regulation. In turn, judgements on the nature of the market for a particular form of abatement are integral to the assessment of possible market or regulatory failures.

In addition, it will be important to recognise that government intervention is not warranted in every instance of market failure. As noted above, the underlying problem should be amenable to being resolved through government intervention. In some cases, the private sector can find alternative solutions.

Failure to recognise this could result in ’government failure‘: when intervention leads to a worse outcome than would occur without the intervention. The Productivity Commission has noted that the limited information and instruments available to policy makers creates a risk that measures designed to support the CPRS will change the composition of abatement for the worse.84

Existing government policy settings may also prevent the development of a well-functioning carbon market (eg, regulatory approaches that set prices for carbon-intensive goods and services below their market value, which offset the carbon price signal). In this instance, the appropriate policy response would be to remove price barriers rather than introduce additional mitigation policies.

Although the review of non-climate change measures is not within the scope of this review, IPART considers it important that future reviews by the NSW Government identify perverse incentives that might inhibit investment in low-emissions technologies or promote activities associated with high emissions.

84 Productivity Commission, What Role for Policies to Supplement an Emissions Trading

Scheme?: Productivity Submission to the Garnaut Climate Change Review, May 2008, p XV.



Mitigation measures: criterion 2

The measure is best undertaken at the state or local level.

The Federal Government will be responsible for setting national limits on emissions and for implementing the CPRS. This places the primary responsibility for taking action to produce least-cost mitigation at the federal rather than state or territory level. Given this, IPART considers that the assessment framework should include whether the state is best placed to intervene to address a specific gap in the coverage of the CPRS or correct a specific market failure. This may be the case where the issue the measure is intended to address is dispersed or differs substantially across regions.

Non-mitigation measures: criterion 1

The measure assists transition by targeting areas where prices may not be a significant driver of decision making or by managing the costs and distributional consequences of reform.

As the COAG complementarity principles recognise, there may be a need for non-mitigation measures to assist transition to a carbon-constrained environment. Such measures appear to generally fall into two categories:

they assist transition by targeting areas where prices may not be a significant driver of decision making, or

they manage the costs and distributional consequences of reform.

The COAG principles note that areas where prices are not a significant driver of decision making might include urban design, health care and education. They suggest that there may be a role for government action in these areas to assist the community to make a cost-effective adjustment to a low-carbon economy. For example, it may be appropriate for governments to build skills and capacity by ensuring adequate training opportunities and changes in curriculum design to support expertise in energy management. Such programs, along with a general increase in business and community interest in improving energy, may help to grow the energy services sector in the long term.85

In relation to managing the costs and distributional consequences of reform, the introduction of the CPRS is expected to involve economic costs and may result in adverse distributional impacts for some sectors, regions and socio-economic groups. Where this is the case, measures may be necessary to assist adjustment.

As Chapter 2 discussed, the Federal Government proposes to assist households (especially low-income households) to adjust to the impact of carbon prices and reduce emissions. It also proposes to assist business, including those in strongly affected industries, and those operating in emissions-intensive, trade-exposed

85 These can be seen as examples of non-market failure.



industries. The provision of this transitional assistance is not intended to be inconsistent with the longer term objective of meeting Australia’s emissions reduction targets in the most flexible and cost-effective way.

IPART considers that in assessing whether additional support measures are needed, consideration should be given to whether such measures will affect the efficient operation of the CPRS.

Non-mitigation measures: criterion 2

The measure is best undertaken at the state or local level.

As for mitigation measures, IPART considers that the framework for assessing whether non-mitigation measures are warranted should include whether the state is best placed to provide assistance to groups in transitioning to a carbon-constrained environment.

IPART notes that, as the CPRS is the Federal Government’s scheme, responsibility for taking action to manage the distributional impacts of the CPRS would primarily rest at the federal, rather than state or territory levels.

Measures with multiple objectives: criterion 1

The measure has policy objectives other than mitigation and remains a cost-effective way of meeting those objectives.

IPART notes that there may be policies that have GHG mitigation as an ancillary objective or a by-product (eg, in the area of natural resource management).

To assess these measures, consideration should be given to whether they are a cost-effective way of meeting their primary objectives. That is, they should be assessed against standard principles for good policy and regulatory practice (discussed in section 4.2.2 below).

If GHG reduction is an outcome of a measure and there is potential for it to displace abatement that would otherwise occur under the CPRS, the marginal cost of abatement implicit in the measure (the cost per tonne of carbon saved or avoided through the measure) should be considered as part of a broader evaluation of its cost-effectiveness.

It will be important that the objectives and impacts of measures with multiple objectives are clearly articulated and understood. As for measures with non-mitigation objectives, consideration should be given to whether these measures will affect the efficient operation of the CPRS.



IPART seeks comments on the following issues:

2. Please provide comments on IPART’s proposed criteria for assessing whether a measure may be warranted in the presence of the CPRS.

3. What gaps in the coverage of the CPRS need to, and can effectively, be addressed by additional mitigation measures?

4. Are there areas of market failure other than those described in the issues paper that are relevant to this review?

5. What particular areas of the emissions market are likely to be subject to market failure? What is the significance of these areas?

6. What areas are likely to require intervention by governments to assist groups adjust to the impacts of the CPRS?

7. Are the measures stakeholders have identified to address market failures, cover sector gaps or provide transition assistance likely to be best delivered at the state level?

4.2.2 Proposed principles for assessing whether measures are likely to be effective and efficient in the context of the CPRS

After a measure has been assessed against the relevant criteria to determine whether it is likely to be justified in the presence of the CPRS, and a potential case for retaining the measure has been established, IPART proposes to undertake a more detailed assessment of whether the measure is well designed and likely to be efficient and effective in the context of the CPRS. Based on this assessment, it will recommend whether the measure should be terminated, considered transitional in nature, redesigned to complement the CPRS, or retained in its current form because it is complementary to the CPRS or an effective means of achieving other objectives of government.

As with all areas of policy, climate change measures should conform to best practice principles for regulation and policy design. Therefore, IPART proposes that this more detailed assessment be based on the following principles:

the measure should be efficient, effective, equitable, administratively simple, transparent and subject to regular review, and

the measure should be the best option of all available options for achieving its intended aims.86

In evaluating measures against the above principles, IPART will need to examine their impacts on particular groups as well as on the economy as a whole. Both direct and indirect impacts of measures will need to be considered, where possible. Indirect impacts are incidental to the main purpose of the measure and may affect parties other than those targeted. 86 These proposed principles are in line with the NSW Better Regulation Office’s ‘better regulation

principles’, which should be followed in the development of all regulatory proposals: Guide to Better Regulation, April 2008.



Efficient

Efficiency compares what is actually produced or performed with what can be achieved with the same consumption of resources. If a measure is efficient, it allocates society’s scarce resources to their highest value use.

In the context of emissions mitigation, the CPRS and supplementary policy measures should ideally provide the means for Australia to achieve its emissions reduction targets at least cost to the economy. For this to occur:

measures aimed at reducing emissions or correcting market failures should generally reduce the costs of achieving Australia’s emissions reduction targets (as discussed in section 4.1.1)

non-mitigation measures should achieve their objectives at least cost relative to other viable options, and

additional policy measures should not interfere with, but rather enhance, the efficient operation of the CPRS (including its ability to deal with the uncertainty of climate change).

Benefits outweigh costs

If possible, the expected costs and benefits of a measure need to be quantified over the life of the measure. Whether a measure is efficient is usually determined by estimating the annual costs and benefits of an option over a period, and then discounting the stream of future benefits and costs (or ratio of benefits to costs) to its present value. A positive net present value (NPV) would indicate that a measure is economically efficient.

The costs and benefits of policy measures or options can include:

compliance and administrative costs

economic impacts, which affect the allocation of resources, productivity, competition and innovation

social impacts, such as impacts on quality of life, and

environmental impacts.87

All government interventions will involve costs, including opportunity costs of alternate uses for funds expended. A challenge for public policy is to target activity that would not otherwise have taken place (ie, is additional to private sector or government activity that would have occurred anyway) and generates total returns that exceed the costs associated with the policy measures.88 Otherwise, there will be

87 NSW Better Regulation Office, Guide to Better Regulation, April 2008, p 14. 88 Productivity Commission, What Role for Policies to Supplement an Emissions Trading

Scheme?: Productivity Submission to the Garnaut Climate Change Review, May 2008, p 28. The submission includes a discussion of “additionality” in the context of research and development of low-emissions technologies.



no net increase in activity, but the costs of the activity will be higher to the economy as a whole.

Intervention should also avoid unintended consequences. For example, the provision of assistance might create dependence on government assistance rather than increasing a party’s capacity to adjust to emissions constraints, potentially making the overall abatement task more difficult to achieve.

The NSW Better Regulation Guide (2008) requires that the impact of government action be properly understood by considering the benefits and costs of a range of options, including that of taking no action. A balance between the level of risk associated with a problem and the impact of government action needs to be achieved.89

As section 4.1.2 discussed, there is considerable uncertainty about the impact of policy responses on climate outcomes, and the mix of changes in supply and demand across sectors (ie, mitigation opportunities) that will be the most cost-effective. The timeframes for return on some climate change measures may be very long term.

Given this uncertainty, and the timeframe for the review, IPART will be able to identify a measure’s relationship with the CPRS and the potential implications, but may not be able to undertake a cost-benefit analysis of it. IPART will seek to broadly assess the relative merits of each measure.

IPART particularly seeks qualitative and quantitative information to assist in its analysis of the overall costs and benefits of NSW climate change measures nominated for review.

This includes views on the appropriate rate that should be used to discount the value of future costs and benefits. IPART notes that NSW Treasury policy requires an annual real discount rate of 7 per cent in real terms, using sensitivity analysis at 4 per cent and 10 per cent90. IPART observes that there is debate as to how to account for mitigation policies given the long time frames involved in climate change.91

Estimating the carbon price

The Federal Government has announced the medium-term target range and an indicative emissions reduction trajectory for 2010/11 to 2012/13. The abatement targets set out in the White Paper allow ’ballpark’ estimates of the carbon price range to be made, which can be used to compare the merits of other abatement policy measures.

89 NSW Better Regulation Office, Guide to Better Regulation, April 2008. 90 NSW Treasury, Guidelines for Economic Appraisal, Policy and Guidelines Paper, July 2007, p 18. 91 As noted, for example, in the Garnaut Review, Targets and Trajectories, Supplementary Draft

Report, September 2008 and Commonwealth of Australia, Australia’s Low Pollution Future, The Economics of Climate Change Mitigation, October 2008.



The White Paper gives indications of carbon prices at scheme commencement and at 2020 based on modelling by the Federal Treasury (see Box 2.1 for details). IPART will take into consideration the indicative carbon prices provided by the Federal Government and other studies, as appropriate.

Effective

To assess the effectiveness of a measure, IPART would need to evaluate how well it achieves its intended objectives – that is, whether:

a mitigation measure directly reduces or assists the CPRS to reduce GHG emissions

a non-mitigation measure minimises the adverse effects of reform on the economy and community

a measure with multiple policy objectives (and mitigation is a secondary objective or an ancillary benefit) achieves its primary objectives.

Clear and meaningful indicators of effectiveness, as well as evidence of the performance of measures, will be required for both IPART’s review of nominated measures as well as to support future reviews by the NSW Government.

Equitable

Policy objectives related to equity involve decisions about the distribution of the costs and benefits of a government action. Cost-benefit analysis (see above) can identify the impacts of proposed policies on different groups, and assist decision makers to take these into account when designing policies.

IPART will evaluate NSW measures against any stated equity objectives. In the absence of these, IPART will consider whether affected parties are generally dealt with fairly and impartially.

Administratively simple, transparent and subject to regular review

The NSW Better Regulation Office notes that regulation should achieve its objectives without imposing unnecessary costs, either on the government or on compliance parties92. Costs are likely to be minimised if administrative arrangements for policies are simple and transparent, and their objectives and terms are subject to regular review to ensure that the policies are needed and, if so, remain efficient and effective.

92 NSW Better Regulation Office, Guide to Better Regulation, April 2008, p 19.



Best available option

The most efficient policy option would generally be the one with the largest NPV. Given that NPVs are predicted values, analyses of alternative options should clearly show how their costs and benefits were estimated, and the assumptions made.

As the Federal Government’s White Paper notes, once a carbon price becomes integrated into the economy, it will be necessary to ensure that policies are designed for an environment shaped by the price of carbon.93

Measures will need to be assessed specifically with regard to the CPRS – including its design parameters and anticipated impacts -- and the broader objectives of the national climate change strategy. This may entail greater weighting to factors that affect the operation of the CPRS or preferences being expressed on policy design. For example:

that consideration be given to what the measure will do for the net incentives groups may face for adjusting their behaviour (eg, assistance measures should not suppress carbon price signals)

given the Federal Government’s aim that the CPRS will have the broadest practical coverage, consideration should be given to designing any additional GHG mitigation measures for uncovered sectors in a way that would minimise distortions between sectors within and outside of the scheme and, if possible, facilitates eventual coverage of the sector

given the national character of abatement policy, that consideration be given to whether the measure should be nationally consistent and/or coordinated to minimise market distortions and administrative and compliance costs.

COAG has specified that the outcome of reviews should be a ‘coherent and streamlined’ set of measures to complement the Federal Government’s CPRS.94 This implies that where measures are retained, they collectively make up a logical and efficient approach. It also implies that governments use similar approaches to ensuring that measures remain coherent and streamlined in future.

IPART will consider any measures implemented by the Federal Government or other state and territory governments which may interact or overlap with NSW measures, as well as their respective frameworks for review.


8. Please provide comment on what factors are the most important in considering whether measures are well designed and likely to be efficient and effective in the context of the CPRS.

9. Please provide qualitative and quantitative information to assist IPART in analysing the overall costs and benefits of NSW climate change measures nominated for review.

93 DCC, White Paper, December 2008, p 19-3. 94 COAG Communiqué, 20 December 2007, p 7.



4.3 Building on this approach to develop final recommended framework

IPART envisages that its final recommended framework for assessing NSW climate change mitigation measures will build on the high level analytical approach outlined in the sections above.

Reviewing policies with the explicit objective of greenhouse gas reduction to ensure complementarity with the CPRS is an important part of ensuring the effectiveness of the CPRS. However, IPART notes that the introduction of the CPRS will necessitate substantial structural change in the economy. Hence, the appropriateness of other policy settings (eg, regulation of energy prices) and the effectiveness of a wide range of government policies in facilitating structural change will also be an important element in the effectiveness and cost of the CPRS.

The Garnaut Review’s final report similarly noted:

For the emissions trading scheme to have the desired effect of driving new consumption behaviour and investment decisions, it must be well integrated within the broader economy. Barriers to change must be removed or minimised in order that there may be an efficient economic response to the ever diminishing supply of permits.95

Although broader policy settings are outside of the scope of this review, it would be prudent for governments to:

consider the potential for other policies to help or hinder the ability of the CPRS to achieve least-cost abatement

identify perverse incentives that might inhibit investment in low-emissions technologies or promote activities associated with high emissions.

In recommending a framework to the NSW Government, IPART will need to consider intergovernmental arrangements to support confidence in the carbon market, and the interaction between climate change goals and policy in other areas. For example, as noted previously, establishing the credibility of the forward path for emissions prices is widely seen to be of central importance to the cost-effectiveness of mitigation policy.96 If the CPRS is credible, firms will factor the anticipated carbon price into their decisions on investment in long-lived capital goods and research into low-emissions technologies. Without clear commitment to the scheme by all governments, and certainty about future decision-making that may affect the efficiency of the scheme, there is a risk that the required investments in low-emissions capital technologies will not take place.

95 Garnaut Climate Change Review, Final Report, September 2008, pp 317-318. 96 Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme?

Productivity Commission Submission to the Garnaut Climate Change Review, May 2008, p 11.




10. What matters should be taken into account in developing the framework for assessing the nominated existing NSW climate change mitigation measures and proposed new measures, to ensure their ongoing efficiency, effectiveness and complementarity to the CPRS?

5 NSW climate change measures



In June 2005, the NSW Government committed to reduce GHG emissions to year 2000 levels by 2025 (a reduction of 155.5 million tonnes) and to reduce emissions by 60 per cent by 2050.97 NSW Government climate change policies are driven by this state-wide emissions reduction target.

In November 2005, the Government released a NSW Greenhouse Plan, which outlines a range of initiatives to reduce GHG emissions in NSW. The NSW Department of Environment and Climate Change (DECC) is the agency primarily responsible for ensuring that New South Wales’ GHG reduction targets are achieved.

The Government is currently in the process of preparing a new ‘Climate Change Action Plan’, which will set out its strategic direction on climate change for the next five years. The plan is to be released by mid 2009 and will replace the NSW Greenhouse Plan. It is anticipated that the results of IPART’s review will be taken into account in developing the new plan.

The NSW Government has nominated 12 climate change mitigation measures to be reviewed using IPART’s final recommended framework. These measures include:

the Greenhouse Gas Reduction Scheme (GGAS)

the Climate Change Fund

the NSW Energy Efficiency Strategy

the Building Sustainability Index

the Biofuel (Ethanol Content) Act 2007

the FleetWise Partnership

the Clean Coal Fund

gas and electricity licence conditions

energy efficiency programs directed at NSW Government operations (four measures).

The sections below provide an overview of each measure, including its intended aim, when it was introduced, and any publicly available data on its effectiveness.

97 DECC, NSW Emissions Targets,

(http://www.environment.nsw.gov.au/climateChange/targets.htm, accessed October 2008).



5.1 Greenhouse Gas Reduction Scheme

GGAS98 is an emissions trading scheme that commenced on 1 January 2003 in NSW. The objectives of GGAS are to reduce GHG emissions associated with the production and use of electricity, and to develop and encourage activities to offset the production of GHG emissions.

GGAS requires NSW electricity retailers and certain other parties to meet mandatory targets (‘benchmarks’) for reducing or offsetting the GHG emissions from the production of the electricity they supply or use. The benchmark has progressively tightened since the scheme commenced from 8.65 tonnes of carbon dioxide equivalent (CO2-e) per capita in 2003 to 7.27 tonnes in 2007. The per capita amount continues at this level until the cessation of the scheme.

Benchmark participants can reduce the average emissions intensity of the electricity they supply or use by creating or purchasing abatement certificates. Each certificate represents one tonne of GHG abated. Abatement certificates can be created by: reducing the GHG intensity of electricity generation; generating low emissions-intensity electricity; reducing consumption or increasing the efficiency of the consumption of electricity; or managing forests so as to capture and retain carbon from the atmosphere.99 To date, most abatement has come from generation activities, although energy efficiency activities have steadily increased over time.100

Since GGAS began in 2003, GGAS participants have created over 68.9 million abatement certificates.101 A total of 42 million abatement certificates have been surrendered by benchmark participants.102

IPART administers and monitors compliance with the GGAS scheme. As scheme administrator, it is responsible for accrediting abatement certificate providers, administering an online registry of abatement certificate providers and abatement certificates and auditing GHG abatement activities. As compliance regulator, it monitors and reports to the Minister on the compliance of abatement certificate providers with relevant laws/rules and conditions of accreditation.103

98 This section adapted from: IPART, Introduction to the Greenhouse Gas Reduction Scheme,

(http://www.greenhousegas.nsw.gov.au/documents/Intro-GGAS.pdf, accessed 4 November 2008); and IPART, Scheme Overview, (http://www.greenhousegas.nsw.gov.au/overview/scheme_overview/overview.asp, accessed 4 November 2008).

99 GGAS also allows some large electricity customers to claim credit for reducing on-site emissions of GHGs from non-electricity related industrial processes at sites which they own and control.

100 IPART, Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2007, Report to Minister, July 2008, p 16.



103 IPART, GGAS Fact Sheet, Summary of the Scheme, August 2007, p 3.



GGAS was originally intended to end on 31 December 2012. In 2006, the NSW Government extended the life of GGAS to 2021 or until the establishment of a national scheme for reducing GHG emissions.104 Accordingly, GGAS is intended to end when the CPRS starts in 2010.105

The Federal Government’s White Paper notes that, whilst the NSW Government (as scheme owner) is responsible for establishing transitional arrangements for GGAS, it has an interest in ensuring that transition does not impose unnecessary additional compliance costs or diminish efficiency (eg, by increasing implementation risks for the CPRS or reducing the Federal Government’s policy flexibility). The Federal Government will work with the NSW Government on arrangements for the termination of GGAS, including by contributing, if necessary, to a financial package for those adversely affected by GGAS’ termination.106

As the NSW Government has already committed to abolish GGAS on commencement of the CPRS and transition arrangements are subject to negotiations between governments, IPART expects that this measure will require minimal review.

Although GGAS will be abolished, the NSW Government intends to continue policy support for the energy efficiency component of GGAS through the introduction of a new NSW Energy Efficiency Target (NEET) Scheme (see below).

5.2 Climate Change Fund

The Climate Change Fund (the Fund) was created in July 2007 under the Energy and Utilities Administration Act 1987 (the Act). Its purpose is to provide funding to:

a) reduce greenhouse gas emissions and the impacts of climate change associated with water and energy activities

b) encourage water and energy savings and the recycling of water

c) reduce the demand for water and energy, including addressing peak demand for energy

d) stimulate investment in innovative water and energy savings measures

e) increase public awareness and acceptance of the importance of climate change and water and energy savings measures

f) contribute funds for the purposes of national energy regulation.107

It seeks to achieve these objectives through funding a range of programs including:

climate change programs ($340 million) announced in 2007, which include residential rebates, schools programs and contestable grants for business, public facilities and renewable energy development

104 Section 97KB, Electricity Supply Act 1995. 105 NSW Government, NSW Government legislates for new energy efficiency scheme, press release, 28

November 2008. 106 DCC, White Paper, December 2008, pp 15-8 -- 15-9. 107 Section 34F, Energy and Utilities Administration Act 1987.



energy efficiency programs ($137.5 million) announced in 2008 under the NSW Energy Efficiency Strategy; and

previous and ongoing commitments from the former Water and Energy Savings Funds.

Under the Act, the Minister for Climate Change and the Environment may require any one or more state water agencies or electricity distribution network service providers to make contributions to the Fund108 In respect of electricity, annual contributions are based on each distributor’s per capita contribution to the NSW GHG benchmark under GGAS. In 2008/09, this is anticipated to amount to $40 million.109 The costs of distributors’ contributions are passed on to electricity customers.

Total expenses on Fund programs for 2008/09 are estimated at $102.9 million.110 Monies for the Fund in 2008/09 are predominantly from the electricity distributors and water utilities, with some funding from the Greenhouse Innovation Fund and the Environmental Trust.111

The climate change-relevant programs under the Fund include:

the Residential Rebate Program for hot water systems and insulation

the NSW Green Business Program

the Public Facilities Program

the Schools Energy Efficiency Program, and

the Renewable Energy Development Program.112

5.2.1 Residential Rebate Program (hot water systems and ceiling insulation)

The Residential Rebate Program is one of the largest single components of the Fund, with estimated expenditure of $100 million over the period 2007-2012. The program provides rebates for hot water systems, insulation, rainwater tanks and washing machines to help households save money, water and energy. The NSW Government has asked IPART to review the rebates for hot water systems and insulation.

The hot water system rebate applies to solar, heat pump, and gas (with a five star rating) hot water systems. The rebate for gas hot water systems is $300, while the rebate for solar and heat pump systems is up to $1,200, based on the amount of GHG saved. To be eligible for the rebate, the new hot water system must:

replace an existing electric hot water system 108 Section 34J, Energy and Utilities Administration Act 1987. 109 Advice from DECC. 110 Ibid. 111 Advice from DECC. 112 DECC, Climate Change Fund, (http://www.environment.nsw.gov.au/grants/ccfund.htm,

accessed October 2008).



be for residential properties in NSW only, and

be purchased in full and installed between October 1, 2007 and June 30, 2009.113

Hot water systems installed in new homes or as part of major renovations to comply with BASIX are not eligible for rebates. As at August 2008, the Government had distributed $4.9 million in rebates. This is estimated to save 18,000 tonnes of GHG emissions per year.114

The NSW ceiling insulation rebate provides half the cost of installing any type of thermal insulation material for ceiling insulation, up to a maximum of $300. To be eligible for a rebate, the insulation must meet minimum thermal efficiency standards for the local government area in which the property is located and cover the entire ceiling area. Insulation installed to comply with BASIX for new homes or major renovations is not eligible for a rebate. As at August 2008, the Government had distributed $1.3 million, which is estimated to save 4,500 tonnes of GHG emissions each year.115

5.2.2 NSW Green Business Program

The NSW Green Business Program provides grants for projects that aim to save water and energy in business operations in NSW. The NSW Government has allocated $30 million to this program over the period 2007 - 2012. The objective of the program is to help businesses save water and energy in their operations, either through:

market transformation – for projects which stimulate lasting structural and behavioural changes in businesses, or

direct measures – for projects which deliver immediate water and energy savings at a site or group of sites, but which needs funding support to be implemented.116

Activities eligible for funding under the Green Business Program include, but are not limited to:

education and technology trial activities which increase the adoption of efficient technologies and practices

projects which improve the efficiency of buildings, appliances and industrial processes

projects which reduce peak electricity demand, and

113 DECC, NSW Hot Water System Rebate,

(http://www.environment.nsw.gov.au/rebates/ccfhws.htm, accessed October 2008). 114 Advice from DECC. 115 Advice from DECC. 116 DECC, NSW Climate Change Fund, Green Business Program: Guide for Applicants, October 2007,

p 4.



projects which reduce the demand for electricity or water supplied from electricity or water supply networks (eg, cogeneration, fuel switching, water recycling, stormwater harvesting).117

The Green Business Program is expected to deliver annual savings of 3.5 billion litres of water, 65,000 MWh of electricity savings, 13 MW of peak electricity demand reduction, and 70,000 tonnes of GHG emissions.118 Round 1 of the Green Business Program, which closed in December 2007, allocated $11.7 million to 24 water and energy projects, saving an estimated 36,000 tonnes of GHG emissions a year.119

5.2.3 Public Facilities Program

The Public Facilities Program was originally introduced in 2006 under the Energy Savings Fund to support energy savings. In 2007, it was expanded under the Climate Change Fund to include water savings projects, and is now estimated to cost $30 million over five years.120

The Public Facilities Program provides funding for water and energy saving projects in facilities that are open to, and frequently accessed by, the public, including schools, community buildings, sporting facilities, museums and art galleries. Similar to the NSW Green Business Program, activities eligible for funding under the Program include, but are not limited to:

education activities which have the potential to increase the adoption of efficient technologies and practices

projects which improve the efficiency of buildings and appliances

projects which reduce peak electricity demand, and

projects which reduce the demand for electricity or water supplied from electricity or water supply networks (eg, cogeneration, fuel switching, water recycling, stormwater harvesting).121

The Public Facilities Program is expected to deliver annual savings of 2.2 billion litres of water, 40,000 MWh of electricity, 12 MW of peak electricity demand, and 36,000 tonnes of greenhouse gas emissions.122 Round 1 of the Program allocated $10.4 million to 49 projects, which is estimated to save 171 million litres of water and 9,491 tonnes of GHG emissions a year.123

117 Ibid. 118 Ibid. 119 DECC, Green Business Program, (http://www.environment.nsw.gov.au/grants/ccfgbp.htm,

accessed October 2008). 120 DECC, NSW Climate Change Fund, Public Facilities Program: Guide for Applicants, December 2007,

p 3. 121 DECC, NSW Climate Change Fund, Public Facilities Program: Guide for Applicants, December 2007,

p 4. 122 Ibid. 123 DECC, Public Facilities Program, (http://www.environment.nsw.gov.au/grants/ccfpfpR1.htm,

accessed October 2008).



5.2.4 Schools Energy Efficiency Program

The Schools Energy Efficiency Program provides subsidies and grants to assist schools to save energy and to teach students about sustainability, as related to energy efficiency and reducing greenhouse gases. The NSW Government has allocated $20 million over the period 2007-2012 to retrofit energy efficient lights in up to 150 public high schools.124

The lighting retrofits are expected to save around 6,000 tonnes of GHG emissions a year. Further savings are expected through the education of over 150,000 students in schools with lighting retrofits, and from the student-initiated projects across NSW.125

5.2.5 Renewable Energy Development Program

The objective of the Renewable Energy Development Program is to support the demonstration and early commercialisation of proven renewable energy technologies. The Program is expected to cost $40 million over the period 2007-2012 and deliver annual savings of 125,000 MWh electricity generated, 134,000 of direct annual GHG emission reductions, and 35 MW of electricity generation.126 At the time of publication, the results of the first funding round had not been announced.

Funding is not provided for projects relating to research and development, unless they can be fully implemented within three to five years of receiving the first payment of funds. Funding is also not provided for projects which:

derive renewable energy sources from materials or waste products derived from fossil fuels and native forest bio-material

reduce greenhouse gases from transportation energy

would reasonably be expected to proceed without assistance from the Fund, including those sufficiently cost effective to implement without funding assistance, or

are eligible for funding under other programs of the Climate Change Fund (eg, Public Facilities Program, Green Business Program).127

124 NSW Government, List of Measures Provided to IPART. 125 Advice from DECC. 126 DECC, NSW Climate Change Fund, Renewable Energy Development Program: Guide for Applicants,

December 2007, p 4. 127 DECC, NSW Climate Change Fund, Renewable Energy Development Program: Guide for Applicants,

December 2007, p 5.



5.3 NSW Energy Efficiency Strategy

The NSW Energy Efficiency Strategy comprises a number of measures to promote more efficient use of energy by households, businesses and the NSW Government.128 The overall objectives of this strategy are to:

reduce greenhouse emissions from energy consumption in NSW

reduce the cost of, or need for, additional energy generation, transmission and distribution infrastructure

reduce costs to the economy through more economically efficient energy consumption and supply patterns, and

help reduce the cost impact of CPRS (eg, higher electricity prices).129

All measures included in the NSW Energy Efficiency Strategy are intended to contribute towards meeting a non-binding state-wide energy efficiency target. IPART understands that this target will be announced in the first half of 2009.130 The measures include:

the proposed NSW Energy Efficiency Trading (NEET) Scheme

mandating cost-effective actions under Energy Savings Action Plans

the Low-income Household Retrofit Program

the Small Business Energy Efficiency Program

the expansion of the Sustainability Advantage Program

the Energy Efficiency Skills Development Program, and

the Energy Efficiency Community Awareness Program.131

All measures under the Strategy with the exception of the proposed NSW Energy Efficiency Trading (NEET) Scheme will be funded through increased electricity distributor levy contributions to the Climate Change Fund.132 The cost of the Strategy, excluding the NEET scheme, is estimated at $109.6 million over 2008/09 to 2011/12.133

128 Premier’s news release “150 million helps consumers save money and the environment” 18

June, 2008. 129 NSW Government, List of Measures Provided to IPART. 130 Advice from DECC. 131 NSW Government, Energy Future, 6 Step Action Plan, NSW Government Action Plan for Energy

Efficiency, June 2008. 132 NSW Government, 2008-09 Mini-Budget, 11 November 2008, p A-3; advice from DECC. 133 NSW Government, 2008-09 Mini-Budget, 11 November 2008, p A-3.



5.3.1 NSW Energy Efficiency Trading (NEET) Scheme

The proposed NEET scheme is a market-based scheme that will replace and extend the current energy efficiency initiatives currently in place under the GGAS Demand Side Abatement (DSA) Rule (Box 5.1).134 The Government considers that, although most GHG-reduction activities under GGAS will be covered by the CPRS, continued policy support is required to overcome barriers to the take-up of cost-effective energy efficiency opportunities.

The NEET Scheme is aimed at overcoming these barriers, including the transaction costs involved in researching energy savings measures; high up-front costs of investment; information barriers (such as lack of information on how the choice of technologies and patterns of electricity use actually relate to the size of electricity bills); and split incentives between owners of buildings and tenants.135

Box 5.1 Energy efficiency under GGAS

The energy efficiency component of GGAS allows the creation and trading of certificates that represent GHG savings from the reduced consumption of electricity.

Demand-side abatement activities might include:

changes to processes, controls, maintenance, or other factors that reduce the consumptionof energy

replacement of energy intensive appliances with less energy intensive appliances, and

changes to the energy supply or fuel for a piece of equipment or process to, or from,electricity.

To date, a significant area of certificate creation has been the replacement of less efficient products, such as energy efficient light bulbs, with more efficient products at low or no cost to consumers. It is estimated that more than 20 per cent of households in NSW have been retro-fitted with energy-efficient compact fluorescent lamps.

Certificate creation through energy efficiency activity under GGAS has increased from around 345,000 certificates in 2003 to almost 10 million in 2007, which represents abatement (deemed) of almost 10 million tonnes of GHG emissions.

Sources: GGAS, Fact Sheet, Abatement Certificates July 2004, http://www.greenhousegas.nsw.gov.au/documents/FS-Sch-Certs-03.pdf, accessed November 2008. NSW Government, NSW Energy Efficiency Trading Scheme Discussion Paper, July 2008, p 7. GGAS, Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2007, Report to Minister, July 2008, p 49.

134 NSW Government, NSW Energy Efficiency Trading Scheme Discussion Paper, July 2008, p 1. 135 NSW Government, NSW Energy Efficiency Trading Scheme Discussion Paper, July 2008, pp 1-2.



New energy efficiency targets will be imposed on all NSW electricity retailers from 1 July 2009.136 Electricity retailers will be required to pursue improvements in the efficiency of electricity use in the residential, commercial and industrial sectors. The Scheme will use tradable certificates to provide retailers with the flexibility to undertake the energy efficiency improvements directly or to pay companies specialising in energy efficiency to undertake them. The scheme targets (the overall level of energy savings to be achieved through the scheme) will be announced in the first half of 2009.137

It is proposed that all DSA activities under GGAS be eligible to create the new class of NEET certificates, with the exception of activities relating to the reduction of emissions from on-site generation (embedded generation and cogeneration), as this activity will be covered by the CPRS. Existing targets in GGAS will continue to apply, however, to activities under the DSA Rule initiated before the commencement of the NEET Scheme. Only energy efficiency activities taking place from the commencement of the NEET Scheme will be eligible for the new class of tradeable certificates.138

The NSW Government will consult on the rules of the NEET Scheme in the first half of 2009, with a view to recognising new ways of improving energy efficiency and to improve the existing rules. Its intention is that this scheme will be funded through participants’ fees, similar to the current funding arrangements for GGAS. IPART is to administer the NEET scheme, similar to the role that it has currently for GGAS.

The Government’s preference is for a national, rather than state-based, energy efficiency scheme. It has proposed that the NEET scheme operates until a national energy efficiency trading scheme is established or, in the absence of this, until 2020, subject to five-yearly reviews.139

5.3.2 Mandating cost-effective actions under Energy Savings Action Plans

Section 34Q of the Energy and Utilities Administration Act 1987 requires large energy users in NSW to prepare draft Energy Savings Action Plans (ESAPs) and submit these plans to the Minister for Climate Change and Environment for approval. ‘Large energy users’ are defined as businesses and government agencies with sites that annually consume more than 10 GWh of electricity, and local councils with populations in excess of 50,000.140

136 NSW Government, NSW Government legislates for new energy efficiency scheme, press release,

28 November 2008. 137 Advice from DECC. 138 NSW Government, NSW Energy Efficiency Trading Scheme Discussion Paper, July 2008, p 6. 139 NSW Government, NSW Energy Efficiency Trading Scheme Discussion Paper, July 2008, p 2. 140 DEUS, Energy Savings Action Plans

(http://www.deus.nsw.gov.au/Energy/Energy%20Savings%20Action%20Plans/Energy%20Savings%20Action%20Plans.asp#TopOfPage, accessed October 2008).



ESAPS must include:

a description of the organisation’s current energy usage

a list of potential energy savings measures

a statement concerning the measures that the organisation proposes to implement in the four-year period following approval of the action plan, and

any other matter specified by the Minister.141

Currently, it is not mandatory that organisations implement the actions proposed in their ESAPS, although they are required to report annually on the outcomes from their plans.

However, the NSW Government intends, under the NSW Energy Efficiency Strategy, to require by law the state’s 200 largest energy users to implement the cost-effective actions they have identified in their ESAPs. The mandating of cost-effective energy savings measures is expected to produce an additional 60 to 80 GWh of electricity savings per year, compared to savings of between 240 and 320 GWh under current voluntary arrangements.142

5.3.3 Low Income Household Retrofit Program

This program aims to provide 220,000 low income households with energy efficiency audits and free energy savings kits that include water and energy saving devices and advice, such as energy efficient light bulbs and water savings showerheads. It is estimated to cost $63 million over the next five years. It is expected to reduce the average annual power bill of low-income households by up to 10 per cent, or around $95 a year.143 The program is aimed at helping vulnerable households to save energy usage and costs, and thereby assist them to adjust to rising energy prices.

5.3.4 Small Business Energy Efficiency Program

This program will provide 6,000 small and medium businesses with assistance to conduct energy efficiency audits of their sites. Participating businesses will be required to contribute 50 per cent of costs and implement projects that generate net savings (through reduced energy bills) within two years.144 Small businesses are defined as those using less than 160 MWh per year.145 The program is expected to

141 Section 34R, Energy and Utilities Administration Act 1987. 142 Advice from DECC. 143 Premier of NSW, News release, $150 million plan helps consumers save money and the environment,

18 June 2008. 144 NSW Government, Energy Future, 6 Step Action Plan, NSW Government Action Plan for Energy

Efficiency, June 2008. 145 Section 7, Electricity Supply (General) Regulation 2001.



cost $15 million over two and a half years146 and save the average small business $7,850 on power bills over 10 years.147

5.3.5 Expansion of the Sustainability Advantage Program

The Sustainability Advantage Program was established in November 2006. The program provides tailored support to medium to large businesses to help them reduce waste, energy and water use. A feature of Sustainability Advantage is that the Department of Environment and Climate Change bring groups of businesses together in clusters that share regional, industry or supply chain interests to share expertise and ideas.148

The NSW Government will expand the program from over 200 to 1000 participants, with the objective of improving energy efficiency in participating organisations by a minimum of 10 per cent per year after five years.149 This expansion is anticipated to cost $20 million over 2008-2013.

5.3.6 Energy Efficiency Skills Development Program

This program will provide $20 million over 2008-2013 to develop new ‘green’ skills training and accreditation through the TAFE system, universities and registered training organisations for key trades and professionals, such as electricians, plumbers, engineers and interior designers. The program will consist of short courses to address skills gaps, a professional development program for teachers and trainers, and pilot projects in partnership with industries to develop specific training standards and modules for different sectors.150

5.3.7 Energy Efficiency Community Awareness Program

The NSW Government has allocated $15 million over the period 2008 to June 2011 to increase community awareness and knowledge about opportunities to improve energy efficiency, and about NSW energy efficiency programs.151

146 NSW Government, Energy Future, 6 Step Action Plan, NSW Government Action Plan for Energy

Efficiency June 2008. 147 Premier of NSW, News release, $150 million plan helps consumers save money and the environment,

18 June 2008. 148 DECC, Sustainability Advantage.

www.environment.nsw.gov.au/sustainbus/sustainabilityadvantage.htm, accessed November 2008.

149 Premier of NSW, News release, $150 million plan helps consumers save money and the environment, 18 June 2008. DECC, Sustainability Advantage, (http://www.environment.nsw.gov.au/sustainbus/sustainabilityadvantage.htm, accessed November 2008).

150 Advice from DECC. 151 NSW Government, List of Measures Provided to IPART.



5.4 Building Sustainability Index

The State Environmental Planning Policy (Building Sustainability Index: BASIX) 2004 (the BASIX policy) commenced on 1 July 2004. The BASIX policy aims to encourage sustainable residential development in NSW by establishing a scheme that requires all proposed new homes or renovations over $50,000 to meet energy and water reduction targets.

Every development application for a new home must be submitted to councils with a BASIX certificate that attests that the home will meet the energy and water targets. The projected energy and water consumption of the home is determined by using the online BASIX modelling tool, which incorporates the design of the dwelling, its land and lawn area, and its geographic location.152

The criteria for obtaining a BASIX certificate requires that the home’s projected GHG emissions from its energy use be 40 per cent less than a typical similar dwelling in that geographic location.153 Users are free to determine how they will meet their efficiency targets from a wide range of options. However, in order to obtain a BASIX certificate, the home’s design will usually need to include some or all of the following: compact fluorescent lamps; water-efficient showerheads and taps; insulation; rainwater tanks; double glazed windows; and high efficiency gas, solar or heat pump hot water systems.154 BASIX is forecast to save 9.4 million tonnes of GHG emissions by 2020 (and 296 billion litres of water).155

Between 2005 and 2008, BASIX has saved an estimated 5.7 billion litres of water and 173 million kilograms of GHG emissions from 42,570 single dwelling approvals.156 The main commitments made to meet the BASIX energy targets related to the installation of gas and solar hot water systems (60 and 31 per cent of BASIX certificates, respectively), and adherence to minimum insulation levels for roofs, walls and floors. Dedicated energy efficient light fittings have risen in popularity, with 42 per cent of certificates in 2007/08 opting for these fittings in living areas, up from 37 per cent in 2005/06.157

Water and energy savings outcomes from multi dwelling approvals, and alterations and additions, are due to be reported in 2009. The Department of Planning intends to undertake a review of the cost of compliance with the BASIX scheme in 2009.158

152 IPART, Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2007,

Report to Minister, July 2008, p 76. 153 In 2005/06 the energy target was a 25 per cent reduction in greenhouse gas emissions for single

dwellings. This increased to 40 per cent on 1 July 2006. 154 Ibid. 155 NSW Government, List of Measures Provided to IPART. 156 Department of Planning, 2005-2008 Single Dwelling Outcomes: BASIX Ongoing Monitoring

Program, November 2008, p 3. 157 Department of Planning, 2005-2008 Single Dwelling Outcomes: BASIX Ongoing Monitoring

Program, November 2008, p 68. 158 Advice from the Department of Planning.



5.4.1 BASIX Multi Unit Cogeneration Demonstration Project

The application of BASIX to multi-unit developments has led to interest in cogeneration as a cost-effective GHG abatement and energy efficiency strategy in the residential sector.159 The BASIX Multi Unit Cogeneration Demonstration Project aims to demonstrate how this technology can be embedded within new residential developments to reduce energy consumption and GHG emissions.

The project features the installation of small-scale, gas-fuelled generators in a seven storey development at Rouse Hill in western Sydney, and a 25 storey apartment building at Chatswood, in northern Sydney. The demonstration project is estimated to cost $400,000 in total.

The generators supply a modest part of the electrical demand of each building, which is used in common areas. The cogeneration function makes use of the heat that is a by-product of generator operation to provide approximately two-thirds of the hot water needed by the residents. Each site is expected to save around 80 tonnes of GHG emissions per year.160

Initial performance results show that after eight months operation (mid-December 2007 to mid-August 2008), cogeneration at the Chatswood development is collectively saving its occupants around $1,000 a month on power bills and has cut GHG emissions by 53,594 kilograms. The potential saving for a year at this rate is estimated to reach 120 tonnes of GHG emissions. It is estimated that the Chatswood generator will pay for itself within 12 years, which is within the generator’s 25-year expected asset life.161

5.5 Biofuel (Ethanol Content) Act 2007

The Biofuel (Ethanol Content) Act 2007 (the Act) came into force on 1 October 2007162 and is administered by the Department of Lands.163 The Act requires primary wholesalers of petrol to ensure that ethanol comprises not less than two per cent of the total volume of petrol that they sell. The objectives of the Act are to create employment opportunities in regional NSW; improve energy security, reduce GHG emissions; and improve air quality.164 The NSW Government has indicated that the

159 NSW Government, Owen Inquiry into Electricity Supply, September 2007, p 4-13. 160 Department of Planning, BASIX Factsheet, BASIX Multi-Unit Residential Cogeneration

Demonstration Project, September 2008, p 1. 161 Department of Planning, BASIX Factsheet, BASIX Multi-Unit Residential Cogeneration

Demonstration Project, September 2008, p 2. 162 Department of State and Regional Development, Ethanol and Biofuels,

(http://www.business.nsw.gov.au/region/biofuels, accessed October 2008). 163 Up to 11 November 2008, the Biofuel (Ethanol Content) Act 2007 was administered by the NSW

Department of State and Regional Development, advice from the Department of Premier and Cabinet.

164 Department of State and Regional Development, Ethanol and Biofuels, (http://www.business.nsw.gov.au/region/biofuels, accessed October 2008).



two per cent ethanol mandate is a first step towards developing a long-term sustainable biofuels industry in NSW.165

The Act applies only to sales to person in NSW or for delivery in NSW. Primary wholesalers include petrol wholesalers who supply petrol from an oil refinery, a shipping facility, or a facility to which petrol is supplied by pipeline from an oil refinery or a shipping facility.166 As the mandate requires only an average of two per cent ethanol across the total volume of petrol sold, not that all petrol must contain ethanol.

Administration of the Act is anticipated to cost $176,000 in 2007/08, $82,000 in 2008/09, and $57,000 per annum thereafter.167

5.6 FleetWise Partnership

The FleetWise Partnership (FleetWise) commenced as a pilot in July 2008. It is a voluntary program open to private and local government vehicle fleet operators in NSW which aims to reduce fuel consumption, GHG emissions and other air pollutants, as well as help operators save on vehicle purchase, running and maintenance costs. FleetWise targets both light and heavy vehicle fleets.

Under the light-vehicle partnership, passenger fleet operators are encouraged to improve the sustainability of their fleets in a similar way to the NSW Government’s commitment under the Cleaner NSW Government Fleet policy (see 5.9.4 below).168 Participants are encouraged to reduce their emissions by choosing a combination of purchasing vehicles that consume less fuel, using their existing fleet more efficiently, and substituting vehicle travel with less emissions-intensive forms of transport.169 The NSW Clean Car Benchmark is used to rate the environmental performance of new passenger vehicles and measure improvements in performance over time.

FleetWise also has a heavy-vehicle research project. The aim of this project is to help heavy-vehicle fleet operators identify sustainability opportunities for their fleet, such as cleaner fuels and technologies, and improved operational and maintenance practices (eg, driver training and in-service inspection and maintenance programs). The project is expected to involve developing a similar benchmarking exercise to the one used in the light-vehicle partnership.170

FleetWise is estimated to cost $715,000 over the period 2008-2010.171

165 NSW Department of State and Regional Development,

(http://www.business.nsw.gov.au/region/biofuels/biofuel_faq.htm, accessed November 2008).

166 Section 4(1), Biofuel (Ethanol Content) Act 2007. 167 NSW Government, List of Measures Provided to IPART. 168 DECC, NSW Cleaner Vehicles and Fuels Strategy, August 2008, p 26. 169 DECC, NSW Cleaner Vehicles and Fuels Strategy, August 2008, p 26-7. 170 DECC, NSW Cleaner Vehicles and Fuels Strategy, August 2008, p 26. 171 NSW Government, List of Measures provided to IPART.



5.7 Clean Coal Fund

The Clean Coal Fund was established in July 2008 under the Clean Coal Administration Act 2008. The purpose of this fund is to provide financial support for the R&D and commercialisation of clean coal technologies in NSW. The fund is also available for initiatives that aim to demonstrate clean coal technologies and increase public awareness and acceptance of the importance of reducing GHG emissions through the use of clean coal technologies.172

The levy on electricity distributors under the Energy and Utilities Administration Act 1987 will be adjusted from 2009/10 to finance the Clean Coal Fund. It is expected that $75 million will be raised for the fund by 2011/12.173

Over the period 2008/09 to 2011/12, $60 million will be invested in the development of clean coal technology through the Clean Coal Fund.174 In addition, the NSW Department of Primary Industries will receive $20 million for capital investment in carbon capture and storage over 2009/10 and 2010/11.175

5.8 Gas and electricity licence conditions

Section 11(1)(B) of the Gas Supply Act 1996 allows the Minister for Energy to impose conditions on the authorisation/licence of a gas supplier. In July 2004, the then Minister introduced a licence condition that requires gas suppliers whose supply of natural gas into a distribution pipeline exceeds 100 terajoules in a financial year to prepare a three-year plan to promote the adoption of thermally efficient gas appliances and efficient energy-use practices (greenhouse abatement plan). Suppliers must also prepare and publish an annual report detailing implementation of the plan, estimating resulting greenhouse gas savings achieved by the supplier and the greenhouse gas emissions of end-users related to their consumption of gas supplied by the supplier.176 The suppliers are liable for their costs.

Under section 45B of the Electricity Supply (General) Regulation 2001, all electricity suppliers that supply or offer to supply electricity to residential premises are required, as a condition of their licence, to make an offer to each potential new or moving customer that the equivalent of a minimum of 10 per cent of their electricity will be obtained from accredited renewable energy sources. This obligation was introduced in December 2006.

172 Section 5, Clean Coal Administration Act 2008. 173 NSW Government, 2008-09 Mini-Budget, November 2008, p A-9. 174 Ibid. 175 Ibid. 176 NSW Government, Gas Supply Act 1996, Supplier’s Authorisation, p 3.



5.9 Energy efficiency programs directed at government operations

NSW general government agencies account for around 4.5 per cent of total electricity consumption in NSW.177 The following programs aim to improve the energy efficiency of NSW Government operations.

5.9.1 Government Energy and Water Efficiency Investment Program (GEEIP)

The GEEIP provides loans to budget funded agencies for the purposes of undertaking small building-related water and energy saving projects (costing between $10,000 and $500,000).178 The program commenced in 2001.179 Typical projects under GEEIP include improving the energy efficiency of lighting, heating, ventilation hot water and cooling systems, and appliance upgrades.

GEEIP allows agencies to re-pay their loans through savings on energy and water costs. GEEIP aims to implement energy and water efficiency projects that are not suitable for Energy Performance Contracting (see below). The maximum loan term is seven years, with repayments required every six months. Once the loan is repaid, agencies can retain 100 per cent of the ongoing savings.180

Since its inception, GEEIP has been used by 15 agencies for 23 projects, providing a total of $4.7 million.181 The estimated annual savings are 7,000 MWh, 7,500 tonnes of greenhouse gas emissions and $0.8 million in energy bills.182

5.9.2 Energy Performance Contracts (EPCs)

EPCs provide loans to budget-funded agencies for the purposes of undertaking large building-related water and energy saving projects (costing over $500,000).183 The program was introduced in 1996. Similar to the GEEIP program, agencies are permitted to re-pay the cost of loans through energy and water cost savings. Generally, the maximum loan term is 10 years, with repayments every six months.184

177 NSW Government, Owen Inquiry into Electricity Supply, September 2007, p 4-13. 178 Department of Water and Energy, Government Energy and Water Efficiency Investment Program,

(http://www.deus.nsw.gov.au/energy/Government%20Programs/NSW%20Treasury%20Loan%20Fund/Government%20Energy%20and%20Water%20Efficiency%20Investment%20Program/Government%20Energy%20and%20Water%20Efficiency%20Investment%20Program.asp, accessed October 2008).

179 NSW Government, List of Measures Provided to IPART. 180 Ibid. 181 DECC, Government Energy and Water Efficiency Investment Program,

(http://www.environment.nsw.gov.au/government/geeip.htm, accessed October 2008). 182 Advice from DECC. 183 DECC, Performance Contracts, (http://www.environment.nsw.gov.au/government/pc.htm,

accessed October 2008). 184 Ibid.



Under EPCs, contractors guarantee the energy savings from upgrades to equipment or facilities for the term of the contract. Once the loan is repaid, agencies keep the cost savings. If cost savings fall short, the contractor makes up the difference.

Since 1998, EPCs have been used by thirteen agencies for nineteen projects, providing a total of $44.7 million.185 The estimated annual savings are 48,000 MWh, 50,000 tonnes of greenhouse gas emissions and $7.4 million in energy bills.186

5.9.3 Carbon Neutral NSW Government

In May 2008, the NSW Government announced that it will become ‘carbon neutral’ by 2020. The operations of the NSW Cabinet are to become carbon neutral from mid-2009.187 The objective of this commitment is to reduce the government’s own emissions and to demonstrate leadership in this area.

The NSW Government has indicated that this program will follow the framework of the internationally-recognised Greenhouse Gas Protocol, which categorises emissions and provides standards for auditing and reporting on progress.188 The NSW Government Sustainability Policy (see below) has been cited as an important step for the NSW Government to meet its carbon neutral commitment.189

The Minister for Climate Change and the Environment is to prepare an assessment on the best way for Government agencies to be carbon neutral by 2020 by the end of 2008.190

5.9.4 NSW Government Sustainability Policy

The NSW Sustainability Policy was announced in May 2008. It sets targets and strategies for NSW Government budget-dependent agencies on sustainable water use, reducing GHG emissions from energy, waste and fleet management, and sustainable purchasing.191 Local Government and public trading enterprises are strongly encouraged to adopt these principles as an integral part of their business, thereby contributing to NSW’s broad sustainability outcomes.

A key component of the Sustainability Policy is a state-wide target for NSW Government agencies to reduce GHG emissions from building energy use to 2000 levels (1.5 million tonnes) by 2019/20. Interim targets have also been set of 1.74 million tonnes by 2010/11, 1.67 million tonnes by 2013/14 and 1.59 million 185 Ibid. 186 Advice from DECC. 187 Premier of NSW, News release, NSW Government: Carbon neutral by 2020, 8 May 2008. 188 DECC, Carbon Neutral NSW Government,

(http://www.environment.nsw.gov.au/government/neutral.htm, accessed October 2008). 189 Ibid. 190 NSW Premier, NSW Government: Carbon Neutral by 2020, press release, 8 May 2008. 191 DECC, NSW Government Sustainability Policy,

(http://www.environment.nsw.gov.au/government/policy.htm, accessed October 2008).



tonnes by 2016/17.192 Measures that will contribute to the achievement of savings from building energy use include the following:193

agencies must continue to purchase a minimum of 6 per cent GreenPower, which is energy sourced from the renewable sources such as sun, wind, water and waste

government-owned or tenanted office buildings over 1000m² are to obtain a NABERS rating (National Australian Built Environment Rating System) by 31 December 2008 and achieve and maintain a NABERS rating of 4.5 stars for energy and water by 1 July 2011, where cost effective.

The Sustainability Policy also requires compliance with the Cleaner NSW Government Fleet policy. Agencies are required to improve the average ‘environment performance score’ of their fleet and to progressively reduce annual GHG emissions to achieve a 20 per cent reduction by 2007/08 (based on 2004/05 performance).194 The policy applies only to passenger and light commercial vehicles of less than 3.5 tonnes.195 By 2008, compliance with this policy was expected to reduce GHG emissions by over 55,000 tonnes through increased fuel efficiency and save about $50 million on vehicle lease and fuel costs.196 The results to 2007/08 are still being analysed. New targets will be set to apply from 2008-09 onwards.197


11. What are the costs and benefits of each of the nominated measures? Who do they impact and how?

12. How do the measures compare against the assessment framework outlined in Chapter 4?

13. If it is considered that a measure can be better-designed to complement the CPRS or should be phased out (or, in relation to proposed measures, not pursued), why and what are your views on the best way of doing this?

192 DECC, NSW Government Sustainability Policy, 2008, p 2. 193 DECC, NSW Government Sustainability Policy, 2008, p 1. 194 DECC, NSW Government Sustainability Policy, 2008, p 2. 195 DECC, NSW Cleaner Vehicles and Fuels Strategy, August 2008, p 25. 196 DECC, NSW Cleaner Vehicles and Fuels Strategy, August 2008, p 26. 197 Advice from DECC.



Appendices

A Glossary


A Glossary198

Abatement: Reduction of greenhouse gas emissions, or enhancement of greenhouse gas removal from the atmosphere by sinks.

Additionality*: A project or activity provides benefits that are additional to any that would occur in the absence of the project or activity.

Best-practice principles for regulation*: Broadly speaking, these principles require regulation to be efficient, effective, equitable, administratively simple, transparent and subject to regular review.

‘Cap and trade’ scheme: An emissions trading regime in which a limit (or cap) is placed on the total emissions allowable from the activities or sources of emissions covered under the scheme. Tradeable emissions units are issued up to an amount equal to the cap.

Carbon: Carbon is used in the issues paper to refer to the six major greenhouse gases. In line with the convention adopted by policymakers, references to ‘carbon’ emissions have the same meaning as ‘greenhouse gas’ emissions.

Carbon dioxide (CO2): A naturally occurring gas; it is also a by-product of burning fossil fuels and biomass, as well as land-use changes and other industrial processes. It is the principal anthropogenic greenhouse gas that affects the earth’s temperature.

Carbon dioxide equivalent (CO2-e): A standard measure that takes account of the different global warming potentials of greenhouse gases and expresses the cumulative effect in a common unit.

Carbon leakage: The effect when a firm facing increased costs in one country due to an emissions price chooses to reduce, close or relocate production to a country with less stringent climate change policies.

Carbon market: A generic term for a trading system in which countries or private organisations may buy or sell emission units in an effort to meet limits on emissions.

198 The majority of terms in this glossary are taken directly from the glossary in the DCC, White

Paper, December 2008. Starred terms (*) are not taken from the White Paper.

A Glossary


Carbon permit: A unit corresponding to one metric tonne of carbon dioxide equivalent emissions. Permits will be tradeable (except those accessed under the price cap arrangements) and treated as personal property.

Carbon price: The cost of emitting carbon into the atmosphere.

(Carbon) sequestration: The long-term storage of carbon dioxide or other greenhouse gases in the forests, soils, oceans or underground in depleted oil and gas reservoirs, coal seams and saline aquifers.

Cost-effectiveness (of mitigation measure)*: An appraisal of the amount of abatement achieved by a measure for a given level of cost.

Covered sector: Sectors that are covered by the CPRS and attract an obligation to surrender a carbon permit or eligible international unit.

Deforestation: The conversion of forested land to an alternative, non-forest use.

Design features*: Refer to the parameters of the CPRS set or controlled by the Federal Government. They include, for example, scheme caps, scheme coverage, the method with which permits are allocated, banking and borrowing privileges, and price ceilings.

Effectiveness (of a measure)*: A measure is deemed effective if it achieves or is demonstrated to be capable of achieving its intended objectives.

Efficiency (of a measure)*: A measure is deemed efficient when it allocates society’s scarce resources to their highest value use. This is often taken to mean that the measure generates more benefits to society than costs relative to alternative options (or is the most cost-effective).

Eligible international units: The types of international units which an entity may surrender to meet its obligations under the scheme.

Emissions: The release of greenhouse gases into the atmosphere.

Emissions-intensive, trade exposed industries: Industries that are assessed to have an emissions intensity above a defined threshold and are trade exposed.

Equitable (measures)*: Objectives related to equity involve decisions about the distribution of the costs and benefits of a government action.

Free allocation: A method of allocating permits, where government releases them directly to particular entities at no cost.

Fugitive emissions: Greenhouse gases that are released in the course of oil and gas extraction and processing; through leaks from gas pipelines; and as waste methane from black coal mining.

A Glossary


Greenhouse gases (GHGs): The atmospheric gases responsible for causing global warming and climate change. The major GHGs are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). These six GHG emissions are counted under the Kyoto Protocol.

Kyoto Protocol: An international treaty created under the United Nations Framework Convention on Climate Change in 1997. It entered into force in 2005. Among other things, the Kyoto Protocol sets binding targets for the reduction of greenhouse gas emissions by developed countries. It includes individual emission reduction targets for specific countries to be met within the first commitment period of 2008-12.

Low-emissions technology: Technology in any sector which produces output with minimal greenhouse gas emissions, such as renewable, nuclear and clean coal generation.

Marginal cost of abatement: The cost of reducing emissions by one additional unit.

Market failure*: A situation where the market, left to itself, is not able to provide an efficient level of production and consumption of goods and services.

Mitigation: A human intervention to reduce the sources of, or enhance the sinks for, greenhouse gases.

Permit: see ‘carbon permit’

Price cap: A price cap is a limit set by the Federal Government on the maximum cost of compliance under the CPRS; that is, the permit price.

Reforestation: Conversion of land used for purposes other than forestry to forested land. Under the Kyoto Protocol, afforestation is defined as the direct human-induced conversion to forested land of land that did not contain forest on 31 December 1989

Scheme cap: The scheme cap determines the number of carbon permits that will be issued by the Federal Government. Allowable emissions from sources covered by the scheme will be able to exceed the cap only if the excess is matched by the surrender eligible international units, additional domestic permits issued as a result of forestry activities, additional permits issued under the price cap mechanism or, if allowed, scheme offsets.

Stationary energy emissions: Includes emissions from fuel consumption for electricity generation; fuels consumed in the manufacturing, construction and commercial sectors; and other sources such as domestic heating.

Trade exposed: Industries that are constrained in their ability to pass through carbon costs due to actual or potential international competition.

B Terms of Reference



NSW REVIEW OF CLIMATE CHANGE MITIGATION MEASURES TERMS OF REFERENCE

I, Nathan Rees, Premier of NSW, under section 9 of the Independent Pricing and Regulatory Tribunal Act 1992, approve the Independent Pricing and Regulatory Tribunal (IPART) entering into an arrangement with the Department of Premier and Cabinet to provide assistance to the Department by conducting a review with the following terms of reference. Scope of the Review The Review is to encompass a list of specific NSW programs and policies provided to IPART by the Department by December 2008. Tasks for the Review In conducting the review, IPART is to: 1. Identify the objectives of each of the programs or policies nominated for review. 2. Recommend a framework for the assessment of any NSW climate change

mitigation measures, to ensure their ongoing efficiency, effectiveness and complementarity to the Commonwealth’s proposed Carbon Pollution Reduction Scheme (CPRS). The framework should address any complementarity principles agreed by COAG, and be able to be applied in future to climate change policy measures retained or proposed by the NSW Government.

3. Use this framework to assess each of the measures nominated for review. 4. Based on this assessment and the range of objectives of each measure, identify

options and make recommendations for the future treatment of any measures which, in IPART’s view, should be:

terminated;

transitional in nature;

redesigned to better complement the CPRS; or

continued as they are complementary to the CPRS and/or an effective means of achieving other objectives of government.



In undertaking the Review, IPART is to have regard to:

the Document of Shared Understanding, including complementarity principles, agreed by COAG in November 2008;

the Commonwealth Government’s Green Paper on the CPRS, and any further related material (such as the expected White Paper) as it becomes available;

the scale and materiality of the measure in question;

any objectives a measure may have in addition to climate change mitigation;

any complementary measures being implemented by the Commonwealth which may interact or overlap with the operation of NSW measures;

transition arrangements if measures are recommended for termination, having regard to the design of the CPRS (including emissions caps and medium to long term targets);

where applicable, options for the redesign of policies and programs to make them complementary to, or more efficient and effective in the context of, the CPRS; and

where available, any analytical frameworks employed by other jurisdictions, and the findings of other jurisdictions’ complementarity reviews.

IPART should undertake consultation with key stakeholders (including NSW Government agencies) in performing the review tasks, to understand views and inform analysis. At a minimum, this should include IPART making a presentation to the NSW Climate Change CEOs Group and the Climate Change Council, and keeping the Government updated as to the progress of the review through the Interdepartmental Reference Group, as set out below. Joint inter-jurisdictional reviews It is possible that the NSW Government may opt to participate with other jurisdictions in joint complementarity reviews of measures that are shared or similar across those jurisdictions. Should this occur, IPART may be asked to participate in the joint review on behalf of NSW (where appropriate, in conjunction with other NSW agencies), and include any findings of these joint reviews in its final report on the NSW Review. The Department will keep IPART informed about the likelihood of any such joint reviews through the Interdepartmental Reference Group described below. Timeframes IPART should provide its final report to the Premier by 30 May 2009. IPART is requested to provide early advice to the Department as to the analytical approach it will adopt in undertaking the Review. This could form part of an issues paper produced by IPART. Given the centrality of the design of the CPRS to the question of complementary measures, it is appropriate that IPART release its issues



paper once the scheme design has been confirmed in the Commonwealth White Paper. Interdepartmental Reference Group An Interdepartmental Reference Group will be formed, consisting of senior officers of the Department of Premier and Cabinet (chair), Department of Environment and Climate Change, Department of Water and Energy, Department of Primary Industries and NSW Treasury. Representatives of other departments may join the Reference Group at the discretion of the Chair. IPART is to meet with this group at least monthly to provide updates on the progress of the review, and to receive ongoing information from the Government, for example in relation to the COAG process and other jurisdictions’ reviews. Background The NSW Government recognises that the national emissions trading scheme, the Carbon Pollution Reduction Scheme (CPRS), will be the principal national policy measure to mitigate climate change by reducing domestic greenhouse gas emissions. The objective of this review is assist the NSW Government to arrive at a streamlined suite of climate change mitigation measures within NSW, that are complementary to the CPRS, and effective and efficient in the context of the national scheme.

C COAG Complementarity Principles


C COAG Complementarity Principles

Box C.1 COAG complementarity principlesa

Additional measures should be assessed against the following principles.

1. The measures are targeted at a market failure that is not expected to be adequatelyaddressed by the CPRS or that impinges on its effectiveness in driving emissions reductions

Measures should adhere to the principles of efficiency, effectiveness, equity andadministrative simplicity and be kept under review. They may include:

a) measures targeted at a market failure in a sector that is not covered by the CPRS

b) measures for where the price signals provided by the CPRS are insufficient to overcomeother market failures that prevent the take-up of otherwise cost-effective abatement measures

c) measures targeted at sectors of the economy where price signals may not be as significant a driver of decision making (eg, land use and planning)

d) some measures in (a) or (b) may only need to be transitional depending on expectedchanges in coverage or movements in the carbon price

2. Measures should be tightly targeted to the market failure identified in the above criteriathat are amenable to government intervention. Where the measures are regulatory theyshould meet best practice regulatory principles, including that the benefits of anygovernment intervention should outweigh the costs.

3. Measures may also be targeted to manage the impacts of the CPRS on particular sectors ofthe economy (eg, to address equity or regional development concerns). Where this is thecase, in line with regulatory best practice, the non-abatement objective should be clearly identified and it should be established that the measure is the best method of attaining theobjective.

4. Where measures meet the above criteria, they should generally be implemented by thelevel of government that is best able to deliver the measure. In determining this,consideration should be given to which level of government has responsibility as definedby the Constitution or convention/practice, the regulatory and compliance costs that will beimposed on the community, and how the delivery of the measure is best coordinated ormanaged across jurisdictions.

a COAG, Communique, 29 November 2008, p 11; advice from NSW Department of Premier and Cabinet.

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