CPRS Changes and Reforestation, Client Briefing
The Government continues to back reforestation as a key strategy in reducing Australia’s greenhouse gas emissions.
Despite the Government recently announcing a delay in the commencement of obligations under the Carbon Pollution Reduction Scheme (CPRS), with a start date now of 2011, the Government will enable sequestration starting from 2010 to be included in the scheme.
The 1 year $10 per tonne price cap will not materially alter the economics of carbon sequestration because permits from reforestation can still be ‘banked’ whereas the first year $10 units cannot be banked for use post 2012.
The possibility of a 25% emission reductions target increases the upside in sink investment since it opens the possibility of a more stringent national target and a commensurate increase in carbon price with a cap on the level at which the government would use CERs (5%).
CO2 Australia has been involved in detailed discussions with the Department of Climate Change regarding the implications of this announcement for reforestation projects. Key points are:
Reforestation projects continue to be the only way to create CPRS permits.
Reforestation projects will still be the only option available for producing permits within the CPRS outside those made available under the government’s open-market auction process. Reforestation projects will still be able to opt forests into the scheme from July 2010. In other words, the timetable for producing CPRS permits from forests is not changed despite the 12 month delay in entry of liable parties to the scheme.
The business case for prompt investment in sinks is strengthened. An early investment in sinks matches the profile of permit creation required as the liabilities under the CPRS increase.
Early investment in reforestation projects continues to be an advantage.
Early investors in reforestation projects may be benefited since the compliance start-date has been delayed by 12 months, while production of CPRS permits will occur as per the original timetable. Investors have the opportunity to bank a year’s worth of permits from the forest in advance of their compliance obligations commencing in 2011. This carbon bank should help ease transition into the CPRS.
Reforestation projects retain their tax deductibility status.
The unique tax deductibility provisions that apply to reforestation projects remain unchanged. The tax treatment is still most favourable for forests established prior to 30 June 2012, providing additional incentive to move early on forest sink investments.
The Government intends to keep its timetable for the legislation.
Significant resources are still being directed at drafting the legislation that will underpin the operation of the CPRS. It is still intended that the legislation will be introduced to parliament during May with voting in June 2009. In effect, the delay is in scheme commencement, not the legislative program.
The commitment to continue with the existing timetable for introducing legislation into parliament means that we may see the legal structure underpinning the CPRS pass into law within the next two months. Reforestation projects will be able to commence producing bankable CPRS permits from July 2010.
Reforestation projects remain an important hedge against increasing penalty prices.
The penalty price for the first year only of operation will now be set at $10. Beyond this, the penalty price jumps to $40 during the second year of operation and will rise progressively in subsequent years. The government will allow for the importation of some Kyoto recognised credits, such as CER’s, presently trading at around $25. Treasury modelling suggests CPRS permits will be trading in the range $50-70 by 2020.
As a direct result of the early, strategic investment into reforestation projects, our clients can continue to expect reduced exposure to upwards movement in carbon prices and a smooth transition into the CPRS.
Andrew Grant: CEO, CO2 Group Limited
For more information contact:
Elise Margaritis: Marketing and Communications Manager, CO2 Australia Limited
T: (03) 9928 5111