electricty prices to rise by 16pc by 2010 2011

Wind now even more competitive!

DJ UPDATE: Australia To Adopt Cap-And-Trade Emissions In 201016/07/2008 12:11PM AEST
(Adds detail, Wong quotes.)

By Rachel Pannett
Of DOW JONES NEWSWIRES

CANBERRA (Dow Jones)--Australia's center-left Labor government Wednesday proposed a cap-and-tradeemissions system, to be introduced in 2010, designed to curb the country's greenhouse gas emissions.

Australia contributes only around 1.5% of global emissions, but tops the U.S. on a per person basis due to its heavy reliance on hydrocarbons for power generation.

Equity analysts have warned that any emissions trading plan may derail the country's resource-based economic boom by pulling the plug on the supply of cheap fossil fuel-based energy that has allowed industry to prosper in recent years.

Government forecasts issued Wednesday suggest electricity prices will rise by 16% in 2010-2011, the year that carbon trading begins, while gas and other household fuels will rise by 9%.

The forecasts, based on a hypothetical carbon price of A$20 per ton, would also add 0.9% to inflation, as measured by the consumer price index, in the first year. Still, any CPI impact "will be largely one-off", the government added.

Wednesday's discussion paper didn't recommend specific targets or trajectories for emissions reductions in Australia, or speculate on a likely carbon price.

However, the government extended an olive branch to industry by proposing transitional measures such as free permits for the worst-affected industries and cuts to fuel taxes to cushion the transport sector from the initial price impact of carbon trading.

In a green paper on climate change, the government called for public comment on a proposal that will see Australiacap the amount of carbon dioxide that companies can produce. If they exceed this cap, they must buy so-called carbon permits, either at auction, or on a secondary trading market from companies that have surplus permits.

The theory is that this so-called cap-and-trade system gives companies a financial incentive to clean up.

The government said the plan, if implemented, would cover around 75% of Australia's greenhouse gas emissions, including those produced by electricity generation, transport, industrial processes, and fugitive emissions from oil and gas production.

"As one of the hottest and driest continents on earth, Australia's economy and environment will be one of the hardest and fastest hit by climate change if we don't act now," Climate Change Minister Penny Wong said in an accompanying statement.

"Climate change threatens our food production, agriculture, and water supplies, as well as icons like the Great Barrier Reef, the Kakadu wetlands and the multibillion dollar tourism industries they support," she said.

The government's green paper adopted a softer line than recommended by Australia's climate change adviser, Ross Garnaut, earlier this month. Garnaut had wanted to include vulnerable sectors such as emissions-intensive and trade-exposed companies from the outset.

Concessions to business in Wednesday's green paper include a proposal that up to 30% of carbon permits be allocated for free to emissions-intensive and trade-exposed firms. These firms could use the permits or sell them.

The government also proposed cent-for-cent cuts to fuel taxes to offset the likely impact of carbon trading on gasoline prices. These fuel tax concessions will be offered to households in the first three years of the scheme and heavy vehicle users in the first year.

Agriculture would be excluded until 2015 under the government's favored approach.

Australia faces a tougher balancing act than Europe, which has had market-based emissions trading in place since 2005, because its recent rapid economic growth has been driven by demand for its iron ore, coal, and other natural resources.

The heaviest emitters include the electricity sector, which generates 90% of its power from fossil fuel-based generation, particularly coal, and companies that emit greenhouse gases during the production phase, such as steel maker Bluescope Steel Ltd. (BSL.AU). Many of Australia's biggest exporters are indirectly emitters through their heavy use of energy to extract natural resources for export.

The government's balancing act is made even tougher given that providing compensation for households and certain industry groups would force others to shoulder a greater share of the cost burden.

Notably, the decision to compensate households for the impact on gasoline prices appears to go against the purpose of the scheme, analysts said.

"It's like not including (gasoline) in the scheme at all," BT Investment Management Chief Economist Chris Caton told ABC radio earlier Wednesday. "If you don't include (gasoline), then you have to go to cut emissions harder elsewhere and so the price of electricity for example goes up by more than it otherwise would."

Still, the biggest issue for business remains the lack of detail on the government's plan. Until a specific emissions cap is set and carbon price established, firms will struggle to plan future investment.

The government is committed to carbon emissions cuts of 60% on year 2000 levels by 2050. It also wants 20% of power generated by solar, wind and other renewable technologies by 2020.

The government said Wednesday it will announce a medium-term emissions reduction target for 2020 by the end of the year, following the release of detailed Treasury modeling on the likely economic impact of carbon trading in October. Finalized carbon caps for the first five years of the scheme won't be announced until early 2010.

The government will issue a white paper outlining the draft carbon trading legislation in December. It expects to pass the legislation into law in 2009.


-By Rachel Pannett, Dow Jones Newswires; 61-2-6208-0901; [email protected]

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(END) Dow Jones Newswires

July 15, 2008 22:11 ET (02:11 GMT)

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