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The ultimate compliance cost for the ETS

By Peter Lang - posted Monday, 7 May 2012


Recently I wrote to the Minister for Climate Change and Energy Efficiency, Hon Greg Combet, MP, and asked him:

Where can I find an estimate of what the compliance cost of the ETS will be when fully implemented to the standard that will eventually be required? (I have not been able to find such an estimate, including on the Treasury, DRET or DCCEE web sites).

I then went on to elaborate that my question was about the total compliance cost for an ETS when it is implemented to the standard that will eventually be required to support trade in virtually unmeasurable commodities (emissions of CO2 and other gasses).

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The Department (DCCEE) replied, on the Minister's behalf, in a 14 paragraph letter; 13 paragraphs were irrelevant to my question. One paragraph contained one sentence that related to my question - but did not answer it. The sentence said:

The Clean Energy Regulator will be established to administer the carbon pricing mechanism and will cost $256 million over the period 2011-12 to 2014-15.

My question was not about just the DCCEE's administration cost, nor was it about the years 2011-12 to 2014-15. It was about the total compliance cost when fully implemented to the standard that would ultimately be required. The full text of my question and the elaboration is included below.

The fact that the DCCEE did not answer my questions – it seems they obfuscated – suggests the compliance cost of the system that will ultimately be required has not been estimated properly, if at all. If this is correct, the Labor-Greens Government may have committed Australian consumers and businesses to enormous future costs without realising the consequences of their 'Clean Energy Future' legislation.

My question and the elaboration of it is included below.

Where I can find an estimate of what the compliance cost of the ETS will be when fully implemented to the standard that will eventually be required? (I have not been able to find such an estimate, including on the Treasury, DRET or DCCEE web sites).

Expansion of my question and some thoughts follow:

What would be the compliance cost for the ETS once it is fully implemented and running at the level of accuracy required for trading the commodity (CO2-e) and at the level of financial security from fraud that will be expected? For example, what will be the annual cost for:

Public servants in DCCEE, Treasury, ATO, Australian Federal Police, state police forces, state bureaucracies, Attorneys' General Departments, Federal Department of Resources, Energy and Tourism, ABARE, BREE, the equivalent state departments of energy, resources, agriculture, forestry, environment, Prime Minister and Cabinet, State departments of Premier and Cabinet, the law courts, High Court, jails, any others I haven't thought of?

The businesses that have to report their emissions – what is the cost to implement and maintain the monitoring equipment and to report? What is the cost to update and replace equipment, reporting systems and legacy data each time the rules change (as they do every few years)?

Farmers and all the upstream and downstream industries (farming will be included eventually if the tax and ETS remain)

Accountants, lawyers, accounting firms, law firms, courts?

Firms that use the data, analyse it and report? What is the cost for them to have to maintain and continually update their systems and legacy data?

What about the compliance cost for purchasing overseas carbon credits?

I understand some of the costs involved in doing what the US legislation requires the US EPA to do (clearly we would have to move to that level of accountability and beyond it eventually), would be in the order of $21 billion per year. These two links provide some insight into the current requirements in the USA www.epa.gov/airmarkets/business/ecmps/docs/ECMPSEMRI2009Q2.pdf
www.epa.gov/airmarkt/emissions/docs/plain_english_guide_par75_final_rule.pdf

We can only guess what the costs would be for the businesses involved and all the organisations who take this data and analyses it. Notice that the rules have been changing (for emissions other than CO2) every few years for about the last three decades (roughly); think of the compliance cost that imposes.

The EPA recently stated in a court submission that the cost to the EPA alone to implement and manage in accordance with the existing laws would cost $21 billion per year. That is not a typo. They estimated they would have to increase their permanent staff numbers from 17,000 to 233,000 permanent employees. The cost to business could be expected to be at least ten times the EPA's cost, and the other departments who have a role to play would probably double the EPA's cost.

What does this mean for Australia? Well, initially Australia does not intend to monitor or measure its emissions. It will simply estimate them (very crudely). The system set up by AEMO to estimate electricity system emissions is very crude. It is nowhere near the standard the USA or even the Europeans are doing. I am sure we will have to get up to best practice eventually. That means big increases in compliance cost as time goes on. And this is for electricity emissions only. What happens when the compliance requirements are extended to all businesses emitting CO2 emissions, as will be required eventually.

To repeat my question, where can I find an estimate of the compliance cost for the ETS and for emissions monitoring at the level of accuracy and accountability that will ultimately be required for trading CO2-e emissions?

Peter Lang

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Furthermore, I understand farmers would have to determine the baseline level of carbon in their soils in order to be able to claim carbon credits. The cost for each analysis is about $1600. They'd need in the order of many tens to hundreds of analyses to get a proper baseline on their property before they begin storing carbon. What would the cost be for farmers?.

I've asked about farmers as just one example of businesses that will eventually be caught up in the ETS. How will other businesses that emit CO2, CH4, CFCs, SF6 be effected? What will be their compliance cost?

As an aside, farmers will also be required to sign contracts for 100 years! What are the consequences of that? What is the compliance cost?

Have the full compliance costs of the ETS, when implemented to the standard that will ultimately be required for trade, been evaluated and estimated?

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About the Author

Peter Lang is a retired geologist and engineer with 40 years experience on a wide range of energy projects throughout the world, including managing energy R&D and providing policy advice for government and opposition. His experience includes: hydro, geothermal, nuclear, coal, oil, and gas plants and a wide range of energy end use management projects.

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