For the pipeline industry, the proposal – in its current state – is ambiguous. Overall, the proposal will increase demand for gas as a replacement fuel for coal, providing clear signals that future investment should be as ‘clean’ as possible. The levels of compensation provided and the starting price mean that it will be some time before existing coal-fired power stations are shut down. For natural gas, the policy will introduce costs to the transportation and supply of gas.

The Federal Government has proposed compensation packages for the nation’s manufacturing industry and other businesses that will be affected by the carbon tax if the legislation is passed in 2011. But, at the time of writing, the Government had not provided clear direction on the matter of contractual impediments to cost pass-through, which means some gas transmission companies could face increased operating costs.

When will the tax be in effect?

The two-stage carbon pricing mechanism is proposed to commence on 1 July 2012, starting at a price of $23 per tonne for three years, after which the price will be determined by market forces. However, for the first three years of the flexible price period, a price ceiling and a price floor will apply.

Who will it affect?

The Federal Government has outlined that approximately 500 of the biggest polluters in Australia will be liable to pay for their emissions under the carbon pricing mechanism.

According to the Government, most companies operating large facilities will be liable – those which generate more than 25,000 tonnes of CO2 equivalent emissions each year. Most of these companies directly emit greenhouse gases, such as power stations, mines and heavy industry.

Of the 500 liable businesses, it is estimated that:
• Approximately 60 are primarily involved in electricity generation;
• Approximately 100 are primarily involved in coal or other mining;
• Approximately 40 are natural gas retailers;
• Approximately 60 are primarily involved in industrial processes;
• Approximately 50 operate in a range of other fossil fuel-intensive sectors; and,
• The remaining 190 operate in the waste disposal sector.

These numbers are estimates only, and are largely based on emissions data reported under the National Greenhouse and Energy Reporting (NGER) Scheme. Most Australian businesses that will be liable under the carbon pricing mechanism are businesses that already have reporting obligations under the NGER Act.

Reaction from APIA

In July this year, APIA stated that the gas transmission industry would be seeking more information from the Federal Government before determining a final position on the proposed carbon tax. However, no information the Government has provided so far has given APIA a reason to support the tax.

APIA Chief Executive Cheryl Cartwright said that the industry would welcome an increase in demand for natural gas, but would also require that the increased costs of operating transportation businesses be addressed.

The nature of the gas transmission industry is that the majority of commercial arrangements are conducted under long-term bilateral contracts. Many of these contracts were entered into before there was widespread discussion about carbon pricing, and do not have appropriate mechanisms to manage an emissions trading scheme.

“We look forward to working with the Government’s officials to ensure that our industry is not caught up in the fine print of this policy,” Ms Cartwright added.

Industry assistance

The Federal Government has said that it recognises the importance of domestic manufacturing and heavy industries, and that the goods that these industries supply will remain essential in a ‘clean energy economy’.

At the time of writing, these assistance measures are:
• A Jobs and Competitiveness Program worth $9.2 billion over the forward estimates for companies primarily in manufacturing and heavy industry that are energy intensive and face significant international competition from companies in countries yet to impose comparable costs on carbon. The aim of this program will support jobs and competitiveness in those sectors.
• Additional assistance for manufacturers worth $1.2 billion through the Clean Technology Program, including $200 million to assist food manufacturers, metal forging and foundry industries, and $200 million to support investment in clean technology innovation.
• Assistance for small business owners to enable improvements in energy efficiency and reduce energy costs.

The Government also intends to adopt two initiatives to support jobs in the steel manufacturing and coal mining industries, including the development of a Steel Transformation Plan. The plan has been allocated $300 million over the first four years of the carbon price mechanism, and offers support for manufacturers of carbon steel from cold ferrous feed and manufacturers of integrated iron and steel.

The Jobs and Competitiveness Program

The Government has designed a Jobs and Competitiveness Program to keep emissions-intensive industry onshore as a carbon price is implemented. However, it will maintain a strong price signal for industries to reduce the pollution intensity of their products.

The Jobs and Competitiveness Program has been designed to provide assistance to the most emissions-intensive activities in the economy that are highly exposed to international competition – either on export markets or from importers.

Almost all emissions-intensive and trade-exposed activities are in the manufacturing sector. The Government has said that its Jobs and Competitiveness Program will provide support to activities that generate over 80 per cent of emissions within the manufacturing sector. The Government expects that 40–50 activities will be eligible. Examples of eligible activities include aluminium production, steel manufacturing, pulp and paper manufacturing, glass making, cement production and petroleum refining.

The right way forward?

APIA is involved in discussion with the Government in regard to the implementation of the carbon pricing mechanism, particularly in relation to cost pass-through, coverage and emissions reporting.

If the legislation recognises the policy change as a tax, the problem of cost pass-through should be solved.

A new issue that has emerged with the July release of the exposure draft of the legislation means the carbon price may now apply to all gas transmission pipelines, not just those that meet the facility level threshold of 25,000 tonnes of CO2 equivalent.

The industry also has issues with the measurement of fugitive emissions, which has increasing relevance as we move closer to an environment where there will be a price on those emissions. This is currently being worked on with the Department of Climate Change and Energy Efficiency.