Climate Change Update: New Australian Report calls for immediate action on climate change

The recently released Garnaut Climate Change Review - Interim Report recommends Australia take urgent and leading action on climate change and calls for a broader and more stringent Emissions Trading Scheme than previously envisaged. As a result the Review's key findings carry significant implications for Australian businesses.

Background

On 21 February 2008, the Interim Report of the Garnaut Climate Change Review (Interim Report) was released to the Federal, State and Territory Governments.

The Interim Report is one of a number of reports to be published by the Garnaut Climate Change Review which will provide the foundations for the new Federal Government's domestic and international climate change policy and the development of a legal framework for action.

It builds on the work of the former Prime Minister's Task Group and the National Emissions Trading Taskforce. The Interim Report puts Australia's climate change policy framework in an international and regional context following the Rudd Government's ratification of the Kyoto Protocol and participation in the 2007 Conference of the Parties to the United Nations Convention on Climate Change in Bali. 

The key findings of the Interim Report are that:

• Climate change is accelerating at a rate faster than originally predicted. 
• Urgent global action is required - 'That without strong action by both developed and major developing countries alike between now and 2020, it will be impossible to avoid high risks of dangerous climate change.' 
• Urgent unilateral Australian action is required to accelerate the global mitigation strategy - including targets for 2020 (interim) and 2050.
• Australia will benefit from early global mitigation and/or suffer exceptionally from a failure to mitigate climate change on an international basis.

Although the Government has indicated that it will base its climate change policy decisions beyond the recommendations of the Garnaut Review, the Review's Interim Report  suggests that strong action is likely to be taken by the Australian Government to cap Australian emissions and engage with other countries on a bilateral, regional and international basis. 

The Interim Report's recommendations indicate that the anticipated 2010 Australian Emissions Trading Scheme (ETS) is likely to have broader coverage than that recommended by the Prime Minister's Task Group on Emissions Trading (PM's Task Group) and not afford the same degree of protection to high emitters.

From a commercial perspective, businesses must develop mitigation strategies to manage their carbon risk and should immediately assess the risks and opportunities that will be created by an ETS.

What does the Interim Report conclude?

The Interim Report concludes that Australia's interests lie in the world adopting a strong and effective position on climate change mitigation.  This is because of Australia's exceptional sensitivity to climate change and our exceptional opportunity to participate in effective global climate change mitigation. 

The Review has the ETS as the centrepiece of a domestic mitigation strategy, supported by measures to correct market failures or weaknesses related to innovation, research and development, to information and network infrastructure. 

Of key importance is that the Review concludes that Australia should make firm commitments in 2008 to 2020 and 2050 emission targets. 

Science and economics

The Interim Report considers the implications of business as usual and the stabilisation scenarios for 450 parts per million (ppm) C0₂-e and 550 ppm C0₂-e (based on the findings of the Intergovernmental Panel on Climate Change (IPCC) Forth Assessment Report (2007)). These stabilisation scenarios were discussed by developed countries at the UN Conference in Bali.

The Review concludes that current trends in global economic growth and energy intensity of total energy supply is driving higher emissions and as a result brings forward the need for critical action to avoid risks of dangerous climate change.

How do the recommendations in the Interim Report differ from those of the PM's Task Group?

It is important to note that the Interim Report does not cover all key areas. There are some important areas, including the details of an ETS, that will be covered in subsequent reports. (A discussion paper is expected in March 2008 on the design of an ETS.)

However many of Garnaut's findings indicate that future recommendations on the Australian ETS will be less lenient on high emitting industries than the recommendations made by the PM's Task Group. For example, the Interim Report implies:

• Non trade exposed high emitters (eg stationary energy sector) may not be afforded the same compensation (one-off free permit allocations) as suggested by the PM Task Group. Garnaut notes that carbon liability has been a known issue for a considerable amount of time and that the business community should be undertaking mitigation measures. Interestingly, the Interim Report notes that Australia does not have a history of compensating business for changes in government policy.
• Trade exposed emitters (eg concrete and steel industries) should be afforded protection to prevent operations moving offshore but that free permit allocations may not be the appropriate mechanism to achieve this. The Interim Report recognises that due to competition, these industries do not have the capacity to pass on costs to consumers and international competition is likely to result in carbon intensive industries being exported offshore. Garnaut questions the appropriateness of issuing free permits and indicates that alternative economic and compensation mechanisms will be explored in subsequent reports. 
• The ETS should have as broad a coverage as practicable, possibly including forestry and agriculture. 
• Mechanisms need to be developed to overcome energy providers' and private investors' reluctance to initiate the delivery of major infrastructure that promotes the significant uptake of renewable energy or technologies like carbon sequestration. The Interim Report recognises that incentives are need to offset the 'first mover disincentives' such as excessive costs, and where the benefits of the new infrastructure are then enjoyed by others at low cost. 

What about economic benefits?

Like the UK's Stern Review Report on the Economics of Climate Change (2006), the Interim Report makes it clear that the costs of not addressing climate change will far outweigh the costs of mitigating and reducing carbon emissions.

Although this will come at an initial cost to some industries, the Interim Report outlines that early mitigation will have economic benefits to Australia, given its resources and opportunities for regional partnerships.

Specifically the Interim Report recognises that:

• Australia has an abundance of natural resources and opportunities for sustainable energy and carbon storage. 
• Australia has an extensive human resource base, giving a competitive advantage for innovative developments in low-emission and mitigation technologies and industries. 
• The availability of renewable energy industries and carbon reduction mechanisms will, through market mechanisms, reduce the price of ETS permits. 
• Australia has the opportunity for regional partnerships to implement climate change policy through its geographical location and existing trade relationships. This includes partnerships with Papua New Guinea and Indonesia to reduce emissions by preventing deforestation and harnessing renewable energy opportunities in those countries.

What about your business?

Although more detailed recommendations will be made in the Review's draft final and final reports, it is clear that the Government will be implementing an ETS and that it may be broader in scope and more stringent that originally expected.

The outcomes of the Review (including the legal implications) will be important to:

• Businesses that procure products by sector affected businesses (electricity providers, construction materials, agricultural materials, transported materials) - to understand downstream implications (including rising costs) and how to manage and mitigate risks. 
• Businesses that have high emissions - to understand how an ETS will work (including any protection they may be afforded through permit allocations) and how to develop mitigation mechanisms to reduce carbon liability. 
• New investors or businesses developing renewable energy or carbon reduction projects - to ensure that the projects will meet criteria to create tradable carbon credits.

For further information or to arrange a meeting to discuss the implications for the Review for your business, please contact:

Louise Hicks, Partner
+61 3 9274 5459
louise.hicks@dlaphillipsfox.com

Mark Beaufoy, Senior Associate
+61 3 9274 5377
mark.beaufoy@dlaphillipsfox.com

The assistance of Jacqui Taylor, Solicitor in preparing this Update is gratefully acknowledged.