Advice of Further Definition on the Auction Proposals in the Discussion Paper - Possible Design for a National Greenhouse Gas Emissions Trading Scheme (August 2006) - NETT-2007-02

The NSW Cabinet Office, on behalf of the National Emissions Trading Taskforce seeks consultancy advice.

Scope of Consultancy:

Provide advice on preferred auction design parameters for a possible national emissions trading scheme, including bidding type, price determination, reserve price, lot size, prequalification requirements, timing, and proportion of permits date stamped for future periods. Identify auction design issues that, where appropriate, could benefit from further investigation through experimental economics

Background:

In January 2004, First Ministers of State and Territory Governments established a working group of senior officials (later named the National Emissions Trading Taskforce) to develop a model for a national emissions trading scheme (NETS)

The National Emissions Trading Taskforce (the Taskforce) reported progress to First Ministers in December 2004, including the ten design propositions as the basis for further investigation and analysis of a NETS. In March 2005 First Ministers released a joint communiqué outlining the ten design propositions and issues for further consideration. In September 2005 the Taskforce released a paper, The Background Paper for Stakeholder Consultation into Emissions Trading, seeking stakeholder views on the ten design propositions. The Background Paper provided the basis for extensive consultation with stakeholders; in total 70 submissions were received.

The Taskforce engaged consultants to estimate the likely impacts of a NETS on the electricity sector and the broader economy. It also established Industry and Environment Stakeholder Roundtables to canvass key issues and options for the design of an emissions trading scheme.

Following widespread consultation and detailed analysis the Taskforce released a Discussion Paper in August 2006 that sets out a possible design for a NETS. The Discussion Paper invites the Commonwealth Government to join with State and Territory Governments in considering the proposed design.

The possible design seeks to accommodate multiple objectives including: ensuring environmental integrity; promoting investor security; minimising economic impact; ensuring flexibility; and equity. It also takes into account lessons from the worlds largest emissions trading scheme, the European Union Emissions Trading Scheme.

Submissions to the Discussion Paper closed on 22 December 2006.

A copy of the Discussion Paper, modelling reports, submissions and other background information is available at www.emissionstrading.net.au

NSW Regions: Central West, Far West, Hunter, Illawarra, Mid North Coast, Murray, Murrumbidgee, Northern, North Western, Richmond Tweed, South Eastern, Sydney
States and Territories: ACT, NT, QLD, SA, TAS, VIC, WA

Open Tenders - An invitation to tender by public advertisement with no restriction placed on who may tender. Tenderers will normally be required to demonstrate in their tender that they have the necessary skills, resources, experience, financial capacity, and in some cases licences, accreditations, etc., to fulfil the tender requirements.

http://www.emissionstrading.net.au

Key proposals regarding permits:

In regard to permits and allocation the Discussion Paper makes the following key proposals:

• Permit allocation will occur through a national process.
  
• One type of permit an annual permit will be issued. Each annual permit will be date stamped with the first year on which it becomes valid. Banking will be allowed (for example, a 2015 permit can be surrendered against a liability in any year on or after 2015, but not before 2015).
  
• Permits will be structured so as to give holders firm property rights.
  
• Some permits would be allocated for free to those generators estimated to be adversely affected by the scheme. A process needs to be developed whereby impacts on generators are assessed. A one-off allocation of permits would be made to compensate for estimated reductions in operating profits to 2030 (i.e. a maximum of 20 years). The net present value of permits given for free to a generator would be set to equal the estimated net present value of reductions in operating profits. The shape of the distribution (ie the distribution of vintages) of permits to generators has not yet been determined. No free allocation of permits would be made to new generators or to those that are likely to be better off under the scheme.
  
• Some permits would be allocated for free to firms in trade-exposed, energy-intensive industries (both existing and new). The purpose of this allocation is to offset the impact of the emissions trading scheme on energy prices, and thereby neutralise the effect of the scheme on international competitiveness. Again, this requires a process to be developed to estimate the impact on energy prices that the scheme might bring about. For existing firms, for the first 10 years of the scheme permit allocation would be based on a baseline level of energy intensity that would be specific to the firm. For the subsequent 10 years of the scheme, the baseline would be set in relation to an Australian existing best practice benchmark. For new entrants, the baseline would be set on a best practice benchmark using commercially viable technology. Permit allocation would cease in the event that a firm were to close down its Australian production or competitors were subject to equivalent emissions constraints.
  
• The remainder of permits would be auctioned. Auction revenue would be divided among the States and Territories on a basis yet to be determined, but in a manner that recognises the differing impacts of the scheme. This revenue could be used to fund assistance measures for other groups, such as households, regions or small business.

The next stage of the NETS design process will be to prepare a Report to Premiers and Chief Ministers. This will take into account the results of further consultation, modelling and research. The Taskforce intends to submit this Report to the Council for the Australian Federation for consideration in the second half of 2007. If States and Territories agree to proceed with further development of scheme design then a detailed scheme design and implementation would follow.

The purpose of this consultancy is to provide qualitative advice on a preferred auction model to allocate permits to inform the further definition of the auction proposals in the Discussion Paper (Quantitative analysis of the volume of permits, permit prices, auction revenue etc is not required). As discussed above, if States and Territories agree to proceed with the further development of the scheme design, then further work would be undertaken to develop a detailed auction design including experimental modelling to fine tune design parameters, development of auction rules, establishment of institutions etc.

Project tasks:

The NETT will provide the successful consultant with a list of objectives with which to assess auction design options. It will also provide a background paper on general characterises of the market for permits including but not limited to

• the number, size and type of market participants;
  
• estimated marginal cost of abatement; and
  
• estimates of the number of permits that might be available for auctioning over time.

The background paper would also provide a preliminary assessment of the key auction design issues (see RFT documents).

The consultant will be required to:

• Undertake a detailed assessment of the likely characteristics of the permit market, noting the NETTgeneral background paper on this issue.
  
• Review relevant local and international experience in the design and implementation of auctions.
  
• Undertake an assessment of the key issues associated with the auction and if and where appropriate these issues would be addressed through the auction design (see the following preliminary list of issues below, which will finalised by the NETT in consultation with the successful consultant prior to the commencement of the contract).
  
• Using the above information (market characteristics and issues assessment) and information provided by the NETT, provide advice on a preferred auction design parameters including bidding type, price determination, reserve price, lot size, prequalification requirements, timing, proportion of permits for future periods etc. The consultant would also be required to identify auction issues that, where appropriate, require further investigation through experimental economics.
  
  

More details are available in the RFT documents.

Standard contract:

Successful consultants will be required to sign a standard NSW Government contract, a copy of which is part of the RFT documents. If you have any difficulties with this proposed contract, please provide details in your submission.

Contact details:

For further information about these consultancies, please contact Anthea Harris, Project Leader, National Emissions Trading Taskforce, Mb Ph 0417 359 273 or Ph 03 9665 9572 (Melbourne), or Ph. 02 9228 3663 (Sydney). Email: anthea.harris@doi.vic.gov.au or anthea.harris@mail.cabinet.nsw.gov.au