20 Mar 2008
Trade and Transport Bulletin - Transport and the Garnaut Climate Change Review
A recently released report and preliminary issues paper provide a glimpse into what the transport industry can expect from future Federal Government policy in setting targets for greenhouse gas emissions. The report in particular also recommends that Australia take urgent and leading action on climate change.
Interim Report
Last month the Interim Report of the Garnaut Climate Change Review (Interim Report) was released. The Interim Report is one of a number of reports to be published by the Garnaut Climate Change Review, an independent review commissioned by the State and Territory Governments. The new Federal Government has also confirmed its participation, and it appears the Review's Interim Report will provide the foundations for the Federal Government's domestic and international climate change policy and development of a legal framework for action.
The Interim Report builds on the work of the former Prime Minister's Task Group and the National Emissions Trading Taskforce. It 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 Conference of the Parties to the United Nations Convention on Climate Change (UNFCCC) in Bali in December 2007.
The key findings of the Interim Report were that:
- Climate change is accelerating at a rate faster than originally predicted and urgent global action is required between now and 2020 to avoid a high risk of dangerous climate change.
- Australia must take urgent unilateral action to accelerate the global strategy to mitigate the impacts of climate change - including setting emissions reduction targets in 2008 for 2020 (interim) and 2050.
- Australia will benefit from early mitigation, but will suffer exceptionally from a failure to mitigate.
These findings confirm the likelihood that strong action will be taken by the Australian Government to cap Australian emissions.
The Interim Report 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 and the transport industry in particular must develop climate change mitigation strategies to manage their carbon risk and should immediately assess the opportunities that will be created by an ETS.
How do the recommendations in the Interim Report differ from those of the PM's Task Group?
Firstly, 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.
Some implications of the Interim Report's recommendations are that:
- Non trade exposed high emitters (eg stationary energy sector) may not be afforded the same compensation (including one-off free permit allocations under the ETS) 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 given some protection to prevent operations moving offshore, but 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. However, it questions the appropriateness of issuing free permits and indicates that alternative economic mechanisms will be explored in subsequent reports. Such mechanisms include compensation of capital, alternative assistances (such as structural adjustment assistance targeted at the demands of affected workers and communities) and the need to explore future competitiveness of firms.
What about economic benefits?
Like the UK's Stern Report, 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 climate change 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 to reduce emissions by preventing deforestation.
What does this mean for the transport industry?
Will the Australian ETS follow the EU to include aviation?
Although more detailed recommendations will be made in the draft final and final reports, it is clear from the Interim Report that the Government will be implementing an ETS and that it may be broader in scope and more stringent than originally expected (from the PM's Task Group recommendations).
Details of the ETS have yet to be finalised by the Federal Government, and will be informed by future reports of the Garnaut Climate Change Review and by many other stakeholders. However, if measures being taken within the European Union Emissions Trading Scheme (EU ETS) are any indication, the contribution of transport to climate change will be closely examined in developing an ETS.
Although the EU ETS does not currently include transport, a proposal was recently announced to incorporate aviation (including international aviation) in the new EU ETS (which will run from 2013 to 2020). Road transportation and shipping remain excluded at this stage, although it appears likely that shipping will be included at a later stage.
The EU have also stated that sectors not covered by the new EU ETS (including transport) will be required to achieve an average greenhouse gas (GHG) emissions reduction of 10% by 2020. The European Commission has set these national emissions reduction targets according to countries' GDP, with richer countries such as Denmark and Ireland being asked to make reductions of up to 20%.
Increased attention on transport as a high emitting sector
Even if transport is not included in the Australian ETS when it commences in 2010, it is clear that the transport industry will be expected to play its part in assisting Australia to reach its emissions reduction targets. With Australia recently committing itself to reducing its GHG emissions by 60% below 1990 levels by 2050, there is substantial work to be done.
According to the National Greenhouse Accounts, the transport sector in Australia currently contributes 15% of Australia's GHG emissions. This amount is split between freight transport (approximately 6%) and domestic transport (approximately 9%). Emissions from the transport sector increased by 30% between 1990 and 2005.
According to the October 2007 report Climate Change and Coastal Shipping, authored by The Australia Institute, road transport contributes the majority of GHG emissions from freight transport at approximately 84% of total freight emissions. This is compared with rail (8%), coastal shipping (4%), pipelines (3%) and aviation (less than 1%).
The Interim Report and other government policy has also stressed that Australian ETS is proposed as only part of a suite of measures to achieve a general reduction in GHG emissions. Proposed GHG emissions reduction measures that will involve or impact upon the transport sector include:
- Building carbon pricing into road use charges.
- Changes to fuel excise and other taxation instruments, such as changing tax differentiations to factor in GHG emissions of vehicles.
- Congestion pricing measures.
- Measures to encourage modal shift from more energy intensive sectors (road transport) to less energy intensive sectors (rail and shipping).
- Measures to improve efficiency within each transport mode, including behavioural changes such as 'eco-driving'.
Recent reports from the European Environment Agency suggest that increasing attention is being placed on measures to reduce demand and decrease the amount of transport that occurs, rather than focusing only on supply-side measures (such as improving the fuel-efficiency of vehicles).
Garnaut Transport Issues Paper
The Garnaut Climate Change Review released Issues Paper Number 5 - Transport, Planning and the Built Environment on 11 March 2008 (Issues Paper). The Issues Paper draws on the outcomes of a public forum on this topic hosted by Professor Garnaut earlier this year, as well as stakeholder discussions and internal analysis. It is a very preliminary discussion on this topic that raises matters for consideration, rather than making recommendations.
The Issues Paper sets out a number of opportunities for reducing emissions from passenger and freight transport, including improved fuel efficiency, modal shift, using alternative fuels, reducing travel distances and more efficient practices, including driver behaviour changes.
The Issues Paper also focuses on barriers that are preventing the adoption of lower emission opportunities for freight and passenger transport and international transport. These include price and information barriers, and infrastructure and service barriers. The key question for consideration outlined by the Issues Paper in relation to freight and international aviation and shipping, is what policies could support cost-effective emissions reductions in these sectors?
Submissions for the Issues Paper close on 11 April 2008. The Issues Paper and further information about the submissions process is available online at: http://www.garnautreview.org.au/CA25734E0016A131/pages/submissions.
Conclusion
Businesses within the transport sector must be sure to keep abreast of these proposed measures and the impact that it will have on their business.
In addition to businesses in the transport sector, the rapidly changing landscape of climate change policy and law will be relevant to:
- All 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.
- All 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.
- All new investors or businesses developing renewable energy or carbon reduction projects - to ensure that the projects will meet criteria to create tradable carbon credits.
Climate change risk overlaps the Trade and Transport, Environment, Corporate, Insurance and Construction practice areas of DLA Phillips Fox. Our climate change practice team includes expertise from a range of different core practice groups.
For further information or to arrange a meeting to discuss the impact of climate change policy and law on your business, please contact:
Alison Dodd, Articled Clerk
Tel +61 3 9274 5059
alison.dodd@dlaphillipsfox.com
Mark Beaufoy, Senior Associate
Tel +61 3 9274 5377
mark.beaufoy@dlaphillipsfox.com