Assistance for emissions-intensive trade-exposed industries
FACT SHEET 9
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- Assistance for emissions-intensive trade-exposed industries
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Emissions-intensive trade-exposed (EITE) industries in Australia may face a loss in profitability when the Carbon Pollution Reduction Scheme is introduced. The Government has determined that the design of the scheme will address the competitiveness challenges facing EITE industries.
Why provide assistance for business?
If constraints on emissions are introduced in Australia ahead of key competitors, firms conducting emissions-intensive trade-exposed (EITEs) activities may face a loss in profitability. This is because these firms may be constrained in their ability to pass through the increases in the carbon cost because they are price-takers on world markets.
If the Carbon Pollution Reduction Scheme failed to provide assistance, EITE firms may choose to leave Australia or avoid expansion following the introduction of the scheme. This could result in 'carbon leakage', whereby carbon-intensive activity in Australia relocates offshore and uses similar - or worse - emissions-intensive fuels and technologies.
Given the global nature of the climate change problem, the potential for carbon leakage is a real concern. A further reason for assisting EITE firms is that it may assist in smoothing the transition of the economy when the scheme is introduced.
Assistance to EITE firms must be weighed against the impact it may have on non-assisted industries and households. The more assistance provided to EITE industries, the greater the effort required by the rest of the economy to reduce carbon pollution. Also, every dollar spent helping EITE firms is a dollar less for assisting others.
Form and scope of assistance
Assistance, in the form of free permits is proposed to be provided to new and existing firms conducting EITE activities. Assistance would be targeted to the most emissions-intensive traded activities. The Government proposes to provide free permits for a high proportion of the emissions of the most emissions-intensive activities while providing significant, but lower, levels of assistance to activities that are moderately emissions intensive. Such an approach would ensure that all industries incur some of the costs of emitting, with scaled assistance for those facing significantly more material costs than others.
Based on available information, the Government's preferred position is to allocate up to around 30 per cent of permits to firms conducting EITE activities. Activities that have an emissions intensity above a threshold of 1500 t CO2-e per million dollars of revenue would be eligible for assistance under the following proposed approach:
| Proposed eligibility threshold (tonnes of emissions per million dollars revenue) |
Proposed assistance rate (initial assistance as proportion of baseline emissions) |
|---|---|
| Activities above 2000 | 90 |
| Activities between 1500 and 2000 | 60 |
The Government proposes that the rate of assistance per unit of output given to these firms should be reduced over time at a pre-announced rate to ensure that all parts of the economy contribute to the key objective of reducing emissions. If this did not occur, the share of permits provided free would rise as the sector grew and the national cap declined, increasing the burden onto the rest of the economy.
Duration and conditions of assistance
Assistance would be linked to the output generated by the EITE activity - expanding firms and industries would receive an increased share of freely allocated permits and contracting firms and industries would receive a reduction in the share of permits. If a firm ceased to operate in Australia, its allocations of free permits would also cease.
Assistance is to be provided until 2020 unless broadly comparable carbon constraints are introduced in other countries or sectoral agreements are developed. After 2020, assistance would be phased out over a five year period once an acceptable global agreement that places obligations on key competitor economies takes effect.
Next steps
The Government strongly encourages stakeholders to provide relevant information during the green paper consultation process to inform final decisions on EITE assistance. The Government intends to ensure that an appropriate degree of support is provided to EITE firms taking account both the risk of carbon leakage and the efforts required of the rest of the economy.
July 2008
