Stationary Energy & Industrial Processes Technical Advisory Group (SEIP TAG) Progress report to 28 May 2008

Climate Change Leadership Forum report number: 3

Briefing for the Climate Change Leadership Forum
Prepared by the Emissions Trading Group
Date: 28 May 2008

Overview

  1. The SEIP TAG, co-chaired by Chris Baker of Saunders and Unsworth and Mark Storey of the ETG, last met on the 6th of May and the next meeting is planned for Tuesday 3 June.  Work is progressing well within a number of sub groups.  
  2. The Eligibility sub-group, chaired by Hans Buwalda of Fletcher Building, is working on criteria to determine who would be eligible to receive a free allocation of units. The sub group is focusing on a targeted free allocation model – targeted at identifying firms who are trade exposed. 
  3. The eligibility sub-group is looking at a two step procedure to determining eligibility, the first being a test of trade exposure and the second a materiality threshold.
  4. The materiality threshold could be defined as firms with :
    1. Emissions above a specified threshold (e.g., 5,000, 10,000, or 50,000 tonnes[ Note some TAG members have concerns with specifying a threshold at any level.]), or
    2. emissions costs greater than a specified proportion of production costs.
  5. This two-step process to determining eligibility would, if implemented, go some way to addressing the concerns of small businesses that they could meet eligibility requirements. Although the two fundamental tests for eligibility (trade exposure and materiality) are separate, they may be mixed in the decision-tree contained in an on-line application process.
  6. An alternative approach being explored by this sub-group is whether the trade exposure test could be based on a product or sector basis (rather than at the firm or plant level).  This approach could see certain industrial classification codes (i.e, Australia New Zealand Standard Industrial Classification (ANZSIC)) being listed and eligibility being determined on this basis.
  7. The sub-group now intends to further develop and test proposed criteria using real data.  A major issue that has been raised during discussion of the sub group’s work in the TAG is the impact of different eligibility criteria (and tests) on small and medium size businesses.
  8. The sub-group on allocation, chaired by Ray Deacon (Rio Tinto), is in the early stage of evaluating different allocation options. Generally two allocation options are being considered with variations - the first a ‘grandparenting’ method based on historical emissions; the second an output/intensity based method.  Both methods are to apply within a ‘cap’ – or using more precise terminology - an overall limit on units that can be freely allocated.
  9. Initial discussions reveal the complexity of these decisions. The ability to be able to road-test these allocation options using reliable data is a key issue for the TAG at present.  A current priority for the TAG is to access existing Department of Statistics data and to complement this with additional firm - or sector specific information to allow the road testing to be undertaken. Initial analysis by the group illustrates relative gains and losses across different firms between a historical ‘grandparenting’ method compared to output/intensity approaches. There is concern amongst industry members of the TAG that an output/intensity based allocation is overly constrained when applied within a cap.
  10. A key issue to be addressed by the TAG is how the choice of allocation methodology impacts on the choice of eligibility criteria and vice versa. For example arguably an output/intensity based allocation methodology is best suited to a product/sector level eligibility test.
  11. Industry members of the TAG have also expressed concerns that elements of the draft legislation, in particular the size of the envelope for  allocation to the sector set at 90% of eligible firms’ 2005 emissions,  constrain or even compromise the effects of different allocation methods under consideration (including consideration  of a new entrant reserve). 
  12. The Methodologies (regulations) sub-group, is chaired by Carmen Blackler (Contact).  An officials’ task group has been working on regulations issues for some time.  Officials have met with the Chair to enable industry views to inform the regulation design process.   This work is progressing well.
  13. The Progressive obligation sub-group, chaired by Craig Palmer of Solid Energy, has concluded that a progressive obligation would not adequately target competitive at risk firms. As a consequence the sub-group recommended no further work on this option. This recommendation was agreed to by the TAG.
  14. A sub-group working on electricity emission factors has also been set up but is yet to have its first meeting.
  15. On the 14 April 2008, the Finance and Expenditure Committee requested an update on the TAG and where they are at in developing eligibility criteria and advice on the thresholds for trade exposed industry. This request was responded to on the 9th of May. The Committee has expressed further interest in the work the TAG is doing on thresholds and allocation methodologies.
  16. The TAG is to produce an interim report by the end of June and final report by the end of September 2008.