CLIMATE SPECTATOR: How polluters can cream the scheme

Climate Spectator

A poorly appreciated aspect of the Australian carbon trading scheme is that a number of large industrial plants will be given more free permits than they need to meet their liability. This occurs because:

1. Permits are provided for free based on a historical average level of emissions per unit of production across all plants. Consequently a number of plants have emissions lower than the industry average, or can readily lower their emissions intensity below past levels.

2. The proportion of permits provided for free is very high – for many eligible industries it will commence this year at 94.5 per cent of the historical industry average, and is unlikely to drop below 90 per cent at least until 2020 due to a specific tricky clause in the legislation.

This will mean a number of these industrial plants will end up making money out of the carbon trading scheme rather than facing a cost penalty.

In addition, the recent decision to remove the carbon price floor while restricting the use of CERs to 12.5 per cent of a company's liability also creates a peculiar wrinkle that enables these firms to capture even further windfall gains. That's because they can meet part of their liability through buying up cheap developing country carbon credits at about $4, which then frees up further surplus Australian permits given to them for free, that they can then sell at a price expected to be close to $12.

It's no surprise then that industry groups haven't complained much about the recent changes to the scheme.

As an example in the table below I've estimated the end cost impact of the carbon trading scheme on Australian alumina refineries. It shows that five of the seven alumina refineries will end up with windfall gains ranging from $2 to $13 million per annum.

This is based on data I managed to uncover during research I undertook at the Grattan Institute. This is largely based on the relevant companies own published emissions and production data in annual and sustainability reports. This may be somewhat out of date and I'd welcome more up-to-date data if the companies concerned would be nice enough to provide it.

The table lists each plant's likely emissions, assuming full production, which will be the permit liability. In addition I've estimated the amount of free permits they'll receive from the government assuming 90 per cent free permit allocation and using the government specified historical industry average emissions intensity (0.63tCO2 direct and 0.228tCO2 from electricity consumption).

After taking into account their eligibility to use CERs, the table provides estimates of the amount of Australian permits they'll have that are surplus to their requirements.

By being able to buy CERs cheap (I've assumed $4) and selling Australian permits at a premium (I've assumed $12) each of these facilities will gain between $1 million to $2.5 million per annum.

No wonder the only aluminium company executive still publicly complaining about the decision to link to Europe was John Hannagan, who works for Rusal.