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Appendix E Calculating caps – assumptions, methods and tests

Appendix E1 Introduction

Under current legislation, the Authority is required to recommend annual caps under the carbon pricing mechanism to 2020. Chapter 14 sets out the relevant considerations and associated analysis.

This Appendix presents the assumptions and methods used to estimate emissions, calculate caps and test the robustness of recommended caps against a range of possible futures. The Appendix draws extensively on the results of the economic modelling discussed in Chapter 10 and Appendix C.

All emissions are presented using Fourth Assessment Report (AR4) global warming potentials unless otherwise stated.

All references to covered emissions refer to emissions covered by the carbon pricing mechanism.

Appendix E2 Default cap

As outlined in Chapter 14, the Authority calculated default caps using the medium price scenario estimate of 2012–13 covered emissions (Table E.1).

Table E.1: Calculation of default caps

 

2012–13

2013–14

2014–15

2015–16

2016–17

2017–18

2018–19

2019–20

Covered emissions

308

 

 

 

 

 

 

 

Default caps

 

n/a

n/a

270

258

246

234

222

Note: All figures in million tonnes carbon dioxide equivalent (Mt CO2-e). The estimate of 2012–13 covered emissions is likely to be revised in coming months.
Source: The Treasury and DIICCSRTE 2013

Appendix E3 Assumptions and methods for estimating emissions outside the caps

This Section sets out the emission estimates used to calculate caps and, where relevant, explains the method used to derive those estimates.

E3.1 Whole-of-economy emissions during the fixed-price period

The Authority estimated Australia’s domestic emissions for the fixed-price period (Table E.2). The estimate is based on the medium scenario from the modelling. Two additional adjustments were made to ensure the estimates are consistent with current legislative settings:

  • the estimate of 2014–15 fixed-price emissions is based on the three-year fixed-price sensitivity test, which assumes the legislated fixed price applies in 2014–15. In contrast, the medium scenario assumes a floating price in 2014–15.
  • the estimate of 2013–14 and 2014–15 emissions is adjusted based on the heavy on-road vehicle sensitivity test, which assumes the equivalent carbon price does not apply to heavy on-road vehicles. In contrast, the medium scenario assumes the equivalent carbon price applies to heavy on-road vehicles from 2014.

Table E.2: Emissions during the fixed-price period (2012–13 to 2014–15)

 

2012–13

2013–14

2014–15

National emissions

593.07

593.04

597.57

Adjustment for heavy on-road vehicles (add)

n/a

0.06

0.20

Total fixed–price emissions

1 783.93

 

 

 

Note: All figures in Mt CO2-e. Adjustment for heavy on-road vehicles in 2013–14 reflects forward-looking behaviour by some consumers. Numbers may not sum due to rounding.
Source: The Treasury and DIICCSRTE 2013

E3.2 Credits from the Carbon Farming Initiative

Carbon Farming Initiative (CFI) credits for the flexible-price period (Table E.3) are based on the medium price scenario. This has been subtracted from the national emissions budget when calculating caps. The estimate takes into account:

  • emerging information on eligible emissions reduction costs;
  • CFI project uptake rates; and
  • the development of new CFI methodologies.

Credits are assumed to be generated in the year the emissions reductions occur. Further information on the CFI is provided in Appendix C of The Treasury and DIICCSRTE modelling report.

Table E.3: Assumed credits from the Carbon Farming Initiative (2015–16 to 2019–20)

2015–16

2016–17

2017–18

2018–19

2019–20

Total

10.24

11.43

13.35

14.62

15.88

65.53

 

Note: All figures in Mt CO2-e. Numbers may not sum due to rounding.
Source: The Treasury and DIICCSRTE 2013

E3.3 Opt-in emissions

The Authority has estimated opt-in emissions and added these to the budget available for caps (Table E.4). The estimate has been developed based on data on applications for opt-in from the Clean Energy Regulator, and estimates from the modelling exercise on how these emissions might change over time. It is also informed by discussions with liable entities that have not yet applied to opt in, but may do so in the future.

Opt-in emissions reduce uncovered sector emissions, and from this point forward are incorporated in the estimate of uncovered sector emissions.

Table E.4: Opt-in emissions (2015–16 to 2019–20)

2015–16

2016–17

2017–18

2018–19

2019–20

Total

15.41

13.63

13.95

14.23

14.50

71.72

 

Note: All figures in Mt CO2-e.
Source: The Treasury and DIICCSRTE 2013

E3.4 Below threshold emissions

The Authority has estimated below threshold emissions for sectors other than waste, and deducted this from the budget available for caps (Table E.5). The estimate has been developed by comparing historical emissions from covered activities with liable emissions under the carbon pricing mechanism using data from the Clean Energy Regulator. The estimate is also informed by the modelling exercise, including the growth rate of covered emissions from the medium price scenario. Below threshold emissions for the waste sector are included in the total estimate of uncovered emissions (Table E.6).

Below threshold emissions increase uncovered sector emissions, and from this point forward are incorporated in the estimate of uncovered sector emissions.

Table E.5: Below threshold emissions
(2015–16 to 2019–20)

2015–16

2016–17

2017–18

2018–19

2019–20

Total

2.37

2.40

2.42

2.45

2.47

12.12

 

Note: All figures in Mt CO2-e. Numbers may not sum due to rounding.
Source: The Treasury and DIICCSRTE 2013

E3.5 Uncovered emissions during the flexible-price period

The Authority estimated emissions from sources not covered by the carbon pricing mechanism, based on the medium price scenario. This estimate includes below threshold emissions; opt-in emissions have been subtracted. The Authority adjusted these estimates to remove the impact of the equivalent carbon price on heavy on-road vehicles (Table E.6).

Table E.6: Uncovered emissions during the flexible-price period (2015–16 to 2019–20)

 

2015–16

2016–17

2017–18

2018–19

2019–20

Uncovered emissions

260.11

261.86

261.21

260.16

259.81

Adjustment for heavy on-road vehicles (add)

0.35

1.22

1.99

3.11

3.61

Total uncovered emissions

1 313.43

Total uncovered emissions including CFI

1 378.96

 

Note: All figures in Mt CO2-e.
Source: The Treasury and DIICCSRTE 2013

E3.6 Adjustment for accounting discrepancies – changes in global warming potentials

Different global warming potential (GWP) values will be used to calculate emissions in the carbon pricing mechanism and in Australia’s national emissions budget until 2017–18, when the rules are harmonised. The Authority estimated the discrepancy arising from this difference for 2015–16 and 2016–17 (Table E.7), and deducted this from the carbon units available for caps.

The estimate is based on the projected level of emissions covered by the carbon pricing mechanism in the medium price scenario. Emissions are estimated using both sets of GWPs (the Intergovernmental Panel on Climate Change (IPCC) Second Assessment Report (AR2) values used for the carbon pricing mechanism, and AR4 values used for the national emissions budget), and the differences summed.

Table E.7: Global warming potentials adjustment (2015–16 and 2016–17)

 

2015–16

2016–17

Total

Covered emissions (AR2)

350.21

351.20

16.00

Covered emissions (AR4)

358.06

359.35

Difference

7.85

8.15

 

Note: All figures in Mt CO2-e.
Source: The Treasury and DIICCSRTE 2013

E3.7 Adjustment for voluntary action

The Authority estimated the emissions reductions associated with GreenPower purchases and the voluntary cancellation of Renewable Energy Certificates (RECs) for the period 2012–13 to 2019–20 (Table E.8), and deducted this from the national emissions budget when calculating caps. This helps ensure GreenPower and the voluntary cancellation of RECs deliver emissions reductions additional to Australia’s national target.

The estimate of GreenPower purchases is based on 2011 purchases (the latest available audited data), from the GreenPower administrator. It is assumed that GreenPower remains a constant share of total electricity demand over the period to 2019–20. Emission reductions associated with GreenPower are calculated based on the average emission intensity of the electricity grid on a state-by-state basis. Electricity demand and emission intensity are based on the medium scenario.

The estimate for the voluntary cancellation of RECs is based on the average cancellation for 2010, 2011 and 2012 from the Clean Energy Regulator. It is also assumed that the voluntary cancellation of RECs remains a constant share of total electricity demand over the period to 2019–20. Emission reductions associated with the voluntary cancellation of RECs are calculated based on the average emission intensity of the electricity grid. Electricity demand and emission intensity are also based on the medium scenario.

Table E.8: Adjustment for voluntary action (2012–13 to 2019–20)

 

2012–13

2013–14

2014–15

2015–16

2016–17

2017–18

2018–19

2019–20

GreenPower

1.77

1.78

1.88

1.87

1.85

1.82

1.78

1.75

Voluntary cancellation of RECs

0.25

0.25

0.27

0.26

0.25

0.24

0.23

0.23

Total

16.47

 

 

 

 

 

 

 

 

Note: All figures in Mt CO2-e. Numbers may not sum due to rounding.
Source: Based on GreenPower 2013, The Treasury and DIICCSRTE 2013 data, and the Clean Energy Regulator

E3.8 Carryover – the first commitment period under the Kyoto Protocol

The carryover from Australia’s first commitment under the Kyoto Protocol (for the period 2008 to 2012) is estimated to be 91 Mt CO2-e. This is calculated by comparing Australia’s assigned amount against domestic emissions for the 2008–2012 period. This estimate takes into account that 5 Mt CO2-e will be cancelled by the Government to account for voluntary action undertaken as part of GreenPower and the Greenhouse Friendly program for the period 1 January 2010 to 30 June 2012.

Appendix E4 Assumptions and methods for year-by-year shape of caps

As outlined in Chapter 14, the Authority’s general preference is to have caps that follow the shape of the national trajectory. To determine the annual caps, the total budget available for caps is distributed across the flexible-price period at the same declining percentage rate as the national trajectory.

The annual caps are then assessed to ensure they are sufficient to accommodate free allocation and early auction of carbon units, and to avoid impacts on the carbon price.

E4.1 Free allocation and early auction

The Authority estimated the number of carbon units required for free allocation under the Jobs and Competitiveness Program by analysing production levels for eligible industries in the medium scenario. Free allocation under the Energy Security Fund, and early auction of carbon units, are scheduled according to regulations and previous Government policy. Table E.9 summarises the annual requirement.

Table E.9: Carbon units required for free allocation and early auction (2015–16 to 2019–20)

 

2015–16

2016–17

2017–18

2018–19

2019–20

Jobs and Competitiveness Program (estimate)

106

108

108

106

105

Energy Security Fund

42

42

0

0

0

Early auction

40

20

0

0

0

Total

188

169

108

106

105

Note: All figures in Mt CO2-e Numbers may not sum due to rounding.
Source: Based on The Treasury and DIICCSRTE 2013 data

E4.2 Minimising carbon price effects due to import limits

Caps calculated for the 15 per cent target are robust across all carbon price scenarios. The 12.5 per cent sublimit on Kyoto units binds in every year, and the overall 50 per cent limit on international units does not bind in any year. Figure E.1 illustrates the result for the medium scenario.

Figure E.1: Import limit testing under a 15 per cent target, medium scenarioThis figure shows estimated demand for international units for the period 2015-16 to 2019-20, comprising the estimated surrender and import limit of Certified Emission Reduction units (Kyoto units), and European Union Allowances. The estimates are based on the results from the medium scenario. It shows how these volumes compare to the 12.5 per cent sublimit on Kyoto units and the 50 per cent limit on imports. It shows that the 12.5 per cent sublimit on Kyoto units binds in every year, and that the overall 50 per cent limit on international units does not bind in any year.

Source: Based on The Treasury and DIICCSRTE 2013 data

Caps calculated for a 25 per cent target include 75 million additional units, reflecting the assumed Government purchase discussed in Chapter 14. The 12.5 per cent sublimit on Kyoto units binds in every year. The overall 50 per cent import limit could bind in the final two years (2018–19 to 2019–20). However, there are surplus Australian carbon units and Australian Carbon Credit Units available in the first three years. If market participants banked sufficient units in anticipation, the import limit need not bind. Figure E.2 illustrates the result for the medium scenario.

Figure E.2: Import limit testing under a 25 per cent target, medium scenario

This figure shows estimated demand for international units for the period 2015-16 to 2019-20, comprising the estimated surrender and import limit of Certified Emission Reduction units (Kyoto units), and European Union Allowances. The estimates are based on the results from the medium scenario. It shows how these volumes compare to the 12.5 per cent sublimit on Kyoto units and the 50 per cent limit on imports. It shows that the 12.5 per cent sublimit on Kyoto units binds in every year, and that the overall 50 per cent import limit binds in the final two years (2018-19 to 2019-20).

Source: Based on The Treasury and DIICCSRTE 2013 data. These calculations do not include Australian Carbon Credit Units; in practice, EUA demand could be lower than illustrated, allowing more Australian units to be banked for use in the later years.

Appendix E5 Caps for a 5 per cent target

Chapter 14 presents cap calculations for a 15 per cent and a 25 per cent target. Calculations for the minimum 5 per cent target are presented here for comparison (Table E.10).

Table E.10: Budget available for caps, 5 per cent target

 

 

National emissions budget 2013–2020

4 619

Fixed-price period emissions (2013–2015)

–1 784

Uncovered emissions (2016–2020)

–1 379

Global Warming Potentials adjustment

–16

Voluntary action (GreenPower and the voluntary cancellation of RECs)

–16

Available for caps

1 424

 

Note: All figures in Mt CO2-e unless otherwise stated. Uncovered emissions include the CFI, below threshold emissions and emissions from the opt-in scheme.
Source: The Treasury and DIICCSRTE 2013

Table E.11 outlines annual caps for a 5 per cent target, consistent with the slope of the trajectory.

Table E.11: Annual caps in line with the trajectory, 5 per cent target (2015–16 to 2019–20)

2015–16

2016–17

2017–18

2018–19

2019–20

291

288

285

282

279

 

Note: All figures in Mt CO2-e.
Source: The Treasury and DIICCSRTE 2013

The caps shown in Table E.11 are sufficient to cover requirements for free allocation and early auction. The 12.5 per cent sublimit on Kyoto units binds in every year, and the overall 50 per cent limit on international units does not bind in any year.

Appendix E6 Outlook for caps beyond 2020

Based on current legislation, the budget available for caps would continue to decline after 2020. Caps would become increasingly tight to 2030 (Figure E.3) and, for the strongest trajectory, decline to zero by 2030. The uncovered emissions estimate used here is based on current legislation and the medium scenario. Any new policies, or higher prices, could reduce uncovered emissions and increase the budget available for caps.

Figure E.3: Budget available for caps, 2013–2030

This figure shows the two options for the indicative national trajectory from 2013 to 2020 and trajectory ranges from 2020 to 2030. It also shows estimated uncovered emissions from 2013 to 2030, based on the medium scenario. The gap between the trajectory and uncovered emissions is the budget available for caps. This gap gets smaller over time, suggesting caps would become increasingly tight. For the strongest trajectory, a 50 per cent reduction to 2030, the budget available for caps declines to zero by 2030. The two options illustrated are: (1) 15 per cent by 2020, and 35-50  per cent by 2030; and (2) 25 per cent by 2020, and 40-50 per cent by 2030.

Source: Climate Change Authority, The Treasury and DIICCSRTE 2013