AU-1:Carbon Pricing Mechanism (CPM)

Policy Description

Australia has committed to reduce its greenhouse gas emissions by 5% compared with 2000 levels by 2020. By 2050, emissions must be reduced by 80% compared with 2000 levels. In June 2011, the Australian government introduced the Clean Energy Legislative Package, which includes various support measures to stimulate clean energy and provide support to safeguard competitiveness, economic growth and household purchasing power. A part of the policy package, is the so-called Carbon Pricing Mechanism (CPM).


Australia has committed to reduce its greenhouse gas emissions by 5% compared with 2000 levels by 2020. By 2050, emissions must be reduced by 80% compared with 2000 levels.

In June 2011, the Australian government introduced the Clean Energy Legislative Package, which includes various support measures to stimulate clean energy and provide support to safeguard competitiveness, economic growth and household purchasing power. A key component of the policy package is the Carbon Pricing Mechanism (CPM).

As of 1 July 2012, the CPM requires ‘Liable Entities’, i.e. operating facilities with annual emissions >25kt GHG emissions, to purchase and surrender tradable permits (carbon units - Eligible Emission Units - and project-based ACCU – Australian Carbon Credit Units) for each tonne of GHG (*1) emitted. After an initial three-year period (starting 1 July 2012, start of the Fiscal Year (FY) 2012 in Australia) during which emissions are not capped, the government (on the basis of the advice of the new Climate Change Authority (CCA)) will set an annual cap, consistent with Australia’s downward emissions trajectory at the national level.

The Carbon Pricing Mechanism is established by the Clean Energy Act of 2011, while a large number of other Acts (*2) establish the overall design and administration of the carbon trading scheme; targets to reduce GHG emissions; the issuance of carbon units; trading rules, the operation of the Australian National Registry of Emissions Units; the provision of assistance to businesses affected by the Scheme; the application of an equivalent carbon price on fuel use for those not covered by the Scheme (e.g., transport); and new taxation measures.

During the first three years of the scheme’s operation (FY2012-2015), the carbon price is fixed by the government and trading options are limited. This is known as the Fixed Price period. After this period, there is a Flexible Price period with trading, of which the first three years (FY2015-2018) will be restricted by imposing price floors and price ceilings. After 2018, there will be full trading of all types of units and no price controls).

  • In July 2012, the carbon price was set at AUS$23/t, rising at 2.5% annually, until the price is fully determined by the market at the end of the fixed price period (1 July 2015), (though within the limits of the price floor and price ceiling till 2018). During the Fixed Price period, participants must surrender units to cover 75% of the previous (financial) year’s emissions by the 15th of June, with the remainder due the following February. Units purchased from the government will be automatically surrendered (i.e. no trading of units is possible), and can be complemented with credits (see below) as well as units obtained for free under the assistance packages (when eligible, see below). Carbon units obtained for free can be traded, i.e. other parties than those to whom they were awarded can surrender them.
  • As of 1 July 2015 (start of the Flexible Price period), all emission units must be surrendered annually by 2 February to cover the emissions of the preceding financial year. Emission units can be purchased from auctions, from the market or from the regulator (when the floor price applies) or received for free (when eligible).

Note: As of June 2013, the Government announced that it will bring forward the start date of carbon trading to July 2014 (instead of 2015). This will end the fixed-price period of the carbon pricing mechanism  a year earlier than originally envisioned and will enable the Australia to meet its emissions reduction target under the second commitment period fo the Kyoto Protocol [16]. Due to the earlier start of emissions trading, for the year 2014-2015 there will only be a single compliance point: February 1, 2016 and there will be no requirement to make a surrender of units on June 15, 2015.  Other changes are being recommended to price ceilings, auctions, allocations and other aspects of the Carbon Pricing Mechanism [16].



The scheme’s scope includes stationary energy users, industrial processes, landfills and fugitive emissions from coal mining and natural gas extraction. Emissions from agriculture and land use are excluded, as are emissions from transport (though certain large fuel users can opt in (*3)). Sectoral distribution of the 500 ‘liable entities’ to be covered by the scheme is as follows: ~190 in waste disposal (*4), ~100 in mining (*5), ~60 in electricity generation, ~40 natural gas retailers, ~60 in industrial processes and in other fuel-intensive sectors. The scheme generally uses the ‘direct emissions’ also used in the EU ETS, i.e. obligations are put on the direct emitters, not on the end user of e.g. electricity. An exception is made for small natural gas users, where the liability is on the fuel retailer rather than the producer (*6).


Assistance packages are foreseen to compensate strong impacts of the scheme on emission-intensive industries that are exposed to international trade (EITE), as well as additional measures directed specifically to coal-fired power stations, the steel industry and households. This assistance can take the form of free permits or cash payments (For households this can e.g. be through tax or pension adjustments), depending on the sector and the package, as described below. In addition, policies to support renewable energy and energy efficiency measures are put in place.

EITE: Under the Jobs and Competitiveness Program, industry can receive free permits if they meet certain requirements regarding Emission Intensity and Trade Exposure (EITE - steel, aluminium, cement, pulp and paper). Assistance for a given year will be given for both direct and indirect (to also compensate for the price increase in electricity, steam and natural gas as a result of the scheme)  emissions, based on the production levels in the previous year (adjusted for any over- or under-allocation in that year. Upon closure, recipients must return permits for production that did not occur ). High emission intensity EITEs(*7) will receive 94.5% of their carbon units for free, moderately emission intensity EITEs (*8) 66% (LNG projects will get assistance at or above 50%). The free assistance will be reduced by a ‘carbon productivity factor’ of 1.3% per year. No end date for the application of the carbon productivity factor is specified (*9). Assistance to new facilities will be limited “to avoid windfall gains” (*10)

Power generators: Transitional assistance, in the form of free permits and cash payments (*11), is provided to the electricity sector by the Energy Security Fund. Eligible high emission intensity generators (>1.0 t CO2-e/MWh) can receive free carbon units if they were in operation before 30 June 2010. In return, the generators are required to provide (public) Clean Energy Investment Plans.

The holders of freely allocated permits will be able to sell them to the Government at a discount. According to the Clean Energy Act: ”The price paid by the Government will be equal to the price of the fixed price permits for that year, discounted to 15 June of the compliance year by the latest available Reserve Bank of Australia index of the BBB corporate bond rate, so that the buy-back price reflects the present market value

As part of the Clean Energy policy package, a number of supporting measures stimulating clean and renewable energy, are being put in place, including:

  • The Clean Energy Finance Corporation (AUS$10 billion), providing commercial and concessional loans, loan guarantees and equity for the commercialisation and deployment of renewable energy, energy efficiency and low-emission technologies,
  • The Clean Technology Program (AUS$1.2 billion), providing matching grants for investment in clean technology innovation (including in manufacturing);
  • The Australian Renewable Energy Agency (ARENA, AUS$3.2 billion), supporting RD&D and commercialisation of renewable energy technologies through competitive grants.


Offset scheme:

The Carbon Pricing Mechanism will be linked to the Carbon Farming Initiative (CFI), a domestic offset scheme for the land sector (*12), from which the emission reduction credits (Australian Carbon Credit Units, ACCU) can be used for compliance in the scheme if they have been generated in compliance with the Kyoto Protocol. ACCU use is limited to 5% in the Fixed Price period (*13), but unlimited during the Flexible Price period.

International Kyoto Protocol-compliant credits (JI/CDM/RMUs) (*14) cannot be used during the Fixed Price period, but afterwards they can be used up to 50% of the entity’s ‘liability’.


In 2012, the governments of Australia and  the EU announced their intention to link their emissions trading systems. An interim one-way link is scheduled for a start date of July 2015, where liable entities can surrender European Union allowances for compliance with their Australian carbon price liabilities. A full two-way link is expected to start by July 2018.

To allow for early emissions trading to link with international markets, the Government is expected to amend the Clean Energy Act 2011 to allow liable entities to surrender eligible international emissions units (including European Union allowances and eligible Kyoto units) from 1 July 2014.

The “50 percent limit” on the use of eligible international emissions units will be brought forward to apply in 2014-15. Other changes are being brought in to further facilitate international linking with other carbon markets [16].


Market & trading rules

The cap will be set 5 years in advance, and announced one year prior to the start of the 5-year period. The Climate Change Authority has been established as an independent body to advise the government on the setting of the cap. There are no limitations on the banking of ACCUs.

For Eligible Emission Units, no banking is possible during the Fixed Price period, as the units are automatically surrendered on purchase, and borrowing is not allowed. During the Flexible Price period, banking of these units is unlimited, while borrowing against next year’s units is allowed up to 5% of an entity’s liability. During the Fixed Price period, eligible emission units can be purchased twice a year, with limitations on the quantity (Not more than the difference between the emissions and the units already surrendered).

To accommodate early emissions trading, the Government will set a pollution cap for 2014-15, following advice from the Climate Change Authority. The Climate Change Authority is to complete a special review to recommend a pollution cap for 2014-15. The Authority’s final report will be completed by 28 February 2014 [16]. 



The scheme will use the National Greenhouse and Energy Reporting Scheme (NGERS) (*15), which has been operating since 2009. Under NGERS, companies with energy use or GHG emissions above certain thresholds are required to report energy production, energy use, GHG emissions and emission reduction projects at the corporate level to the Government. All participants in the Carbon Pricing Mechanism must register under NGERS (if not already covered), monitor their emissions and report in line with NGERS rules on direct (Scope 1) facility-level emissions.

Policy Information Expand this section for information on the key features of the policy, such as its date of introduction, categorization, main objective(s) and linkages with other policies.

Policy Categorisation

Policy Instrument Type: Economic, Emissions Trading

Position in the Pyramid

About Us

Participation: Mandatory


Start Date: 2012

Policy Linkages

Supported By Clean Technology Program (CTP) Supporting Measure
Supported By Generator Efficiency Standards (GES) (ENDED) Effort Defining
Supported By Clean Energy Finance Corporation (CEFC) funding Supporting Measure
Supported By Energy Efficiency Opportunities Program (EEO) Supporting Measure

Agencies Responsible

Clean Energy Regulator
Productivity Commission and Energy Security Council

Primary Objective: GHG Emissions


­- Create incentives to reduce GHG emissions and invest in clean energy; ­- To reduce GHG emissions in Australia at lowest cost (through trading)

Target Group

Operators of facilities with annual GHG emissions> 25kt covering the following sources: stationary energy users, industrial processes, landfills and fugitive emissions from coal mining and natural gas extraction. Emissions from agriculture and land use, as well as transport are excluded from obligations although land use and agricultural offsets are eligible and opt in of certain large fuel users is possible.

Driver of energy consumption or emissions affected by policy: Total GHG emissions

Implementation Information Expand this section for information on targets, monitoring, verification and enforcement regimes, and implementation requirements and tools.


60% of Australia’s GHG emissions, about 500 entities as of July 2012.

Quantitative Target? yes

Target: There will be qantitative targets from July 2014 Caps for the Flexible Price period are still to be determined.

Progress Monitored? yes

Verification Required? yes

Enforced? yes

Sanctions:  Penalty over shortfall of emission units surrendered: ­ 130% of the fixed price of a carbon unit during the Fixed Price Period; ­ 200% of the average price during the Flexible Price Period.  No make-good provision exists (i.e. no making up of the permit shortfall is required on top of paying the penalty).  Administrative and late payment penalties apply if the shortfall charge is not paid.  Possibility for executive officers to be held liable for company non-compliance

Requirements on the Target Group

  • Register with and monitor emissions in line with NGERS;
  • Report GHG emissions (both under NGERS and additionally as a basis for determining the liability under the scheme);
  • Surrender sufficient carbon units to cover the emissions in each Fiscal Year;

Support by Government

  • Free units for emissions-intensive industries (AUS$9.2 billion from 2011-2017);
  • Free permits to coal-fired generators (and closure payments) (AUS$5.5 billion from 2011-2017);
  • Coal Sector Jobs Package (AUS$1.3 billion from 2011-2017);
  • Funding for clean energy and energy efficiency through the Clean Energy Finance Corporation (AUS$10 billion), the Clean Technology Program (AUS$1 billion in manufacturing), the Australian Renewable Energy Agency (ARENA);
  • Steel Industry Assistance Plan (AUS$300 million in 4 years);
  • Clean Energy and Other Skills Program (AUS$32 million in 4 years) to help educational institutions and industry develop the materials and expertise needed to promote clean energy skills;
  • Uniform GHG reporting framework (consistent across states) under NGERS, including online reporting tools, guidance, tools, training workshops, etc.

Implementation Toolbox

  • Online System for Comprehensive Activity Reporting tool (OSCAR)
  • NGERS guidance material
  • NGERS Technical Guidelines

Complexity of Implementation


Combination of obligation on emitters and on suppliers (with transferable liability on a voluntary basis); Participation threshold is set in emissions (not capacity). As emissions can fluctuate over time, this may create uncertainty regarding participation; Creation of a new project-based credit mechanism (offset scheme) for difficult project types; Inclusion of fugitive emissions more difficult to monitor; Inclusion of some but not all mobile sources; Different eligibility thresholds for landfills depending on location; Complex set of compensation mechanisms for both direct and indirect effects.

Target Group

Combination of obligation on emitters and on suppliers (+ the possibility to voluntarily transfer the liability under the scheme); Participation threshold based on GHG emissions (not capacity), which can fluctuate over time; Inclusion of fugitive emissions more difficult to monitor; Inclusion of some but not all mobile sources; Different eligibility thresholds for landfills depending on location; Complex set of compensation mechanisms.

Impacts, Costs & Benefits Expand this section to find information on policy effectiveness and efficiency.

Impact Quantitative Estimate Qualitative Estimate
Estimated effect on energy consumption or emissions ­- Without a domestic carbon price, Australia’s emissions are projected to increase to 679 Mt CO2-e in 2020, 22% above 2000 levels) (*18) [14]. In the core policy scenario (AUS$20/t), the carbon price results in 58 Mt CO2-e of domestic abatement and 94 Mt CO2-e of international abatement in 2020 (resulting in emissions of 10% above 2000 levels (*19)). Reductions are predicted for later periods, mainly from the electricity sector. ­- Large-scale renewable energy (excluding hydro) is projected to be 18 times its current size by 2050. Total renewable generation (including hydro) will comprise around 40 per cent of electricity generation in 2050. ­- Gas-fired electricity increases by over 200 per cent by 2050. A year since the Clean Energy Future policies have taken affect, evidence shows that these have resulted in: - Reduced carbon emissions from electricity generation in the National Electricity Market emissions are down by 7 per cent; - Increased investments in clean energy: like solar and wind by 25 per cent; - Over 160,000 new jobs created across the economy, including clean energy jobs [17].
Estimated costs/benefits for industry Treasury modelling suggests the output of iron and steel manufacturing, alumina and chemical production and refineries are all projected to continue to grow in the long term, but at a slightly slower rate of growth. It also suggests the carbon price will add 0.7 percent to the Consumer Price Index in its first year.
Estimated cost for government - Implementation of the plan is expected to cost the government AUS$ 4.3 billion over the first four years, over and above revenue generated (50% of the generated revenue will be used in the Household Assistance Package ); - Treasury modeling suggests a limited macro-economic impact: annual GDP growth reduced with 0.1%/yr to 1.1%/yr. Government costs: ­ - AUS$14.9 billion household assistance to compensate consumers for price increases due to the scheme. ­ - AUS$9.2 billion for free units for emissions-intensive industries. Free permits to coal-fired electricity generators, and the closure of highly polluting plants, will cost $5.5 billion from 2011-2017. ­ - $1.3 billion from 2011-2017 for the Coal Sector Jobs Package. ­ - Clean energy and energy efficiency also receive government funding (Clean Energy Finance Corporation (AUS$10 billion), Clean Technology Program (AUS$1 billion), Australian Renewable Energy Agency (ARENA, AUS$3.2 billion) (these numbers are in flux due to the changes being proposed to the CPM - status Sept 2013).

References & Footnotes


[1] Clean Energy Future Package,;

[2] Securing a clean energy future; The Australian Government’s Climate Change Plan, 2011,;

[3] Clean Energy Acts, 2011,; and

[4] Guidance paper: Assessment of activities for the purposes of the Jobs and Competitiveness Program, 2011,;

[5] Clear Energy Amendment Regulation, 2011,;

[6] National Greenhouse and Energy Reporting Act, 2007,;

[7] NGER,

[8] NGER tools and resources,

[9] Carbon Farming initiative Act,

[10] Carbon Market Institute, 2011, Australia’s Clean Energy Legislative Package; A Guide for Business, November 2011

[11] Center for Climate and Energy Solutions, 2011, Australia’s Carbon Pricing Mechanism, December 2011,

[12] R. Lyster, 2011, ‘Explainer: Australia’s carbon price mechanism in six dot points’, Professor Professor of Climate and Environmental Law at University of Sydney, 10 November 2011,

[13] ‘How low can you go’,

[14] Australian Treasury, 2011, ‘Strong Growth, Low Pollution - Modelling a Carbon Price’,

[15] ‘Is Garnaut’s 26$/t the right price for carbon?’,

[16] Australian Government (2013). 'Starting Emissions Trading on 1 July 2014'.

[17] Australian Government (2013). 'How Australia’s Carbon Price is working one year on'.


(*1) The scheme covers CO2, CH4, N2O and PFC emissions from aluminium production. Other legislation will impose an ‘equivalent carbon price’ on the other Kyoto gases (HFCs, SF6, other PFCs).

(*2) Clean Energy (Charges—Customs) Act 2011, C2011A00153 • Act No. 153 of 2011; Clean Energy (Charges—Excise) Act 2011, C2011A00154 • Act No. 154 of 2011; Clean Energy (International Unit Surrender Charge) Act 2011, C2011A00158 • Act No. 158 of 2011 Clean Energy (Unit Issue Charge—Auctions) Act 2011, C2011A00160 • Act No. 160 of 2011 Clean Energy (Unit Issue Charge—Fixed Charge) Act 2011, C2011A00161 • Act No. 161 of 2011 Clean Energy (Unit Shortfall Charge—General) Act 2011, C2011A00162 • Act No. 162 of 2011 Clean Energy Act 2011, C2011A00131 • Act No. 131 of 2011 Clean Energy Act 2011 - Proclamation, F2011L02617 Clean Energy Advances for Approved Care Organisations Administrative Scheme Determination 2012 (Carbon Market Institute, 2011) Clean Energy Regulations 2011, F2011L02473 • SLI 2011 No. 221 Clean Energy Regulator Act 2011 , C2012C00257 • Act No. 163 of 2011 as amended Financial Management and Accountability Determination 2009/21 - Clean Energy Initiative Special Account Establishment 2009, F2009L02281 • 2009/21 Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment Act 2011 Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment Act 2011 Clean Energy (Fuel Tax Legislation Amendment) Act 2011 Clean Energy (Excise Tariff Legislation Amendment) Act 2011 Clean Energy (Customs Tariff Amendment) Act 2011 Clean Energy (Household Assistance Amendment) Act 2011 Clean Energy (Tax Laws Amendments) Act 2011 Steel Transformation Plan Act 2011 Clean Energy (Income Tax Rates Amendments) Act 2011

(*3) Some businesses which effectively pay no fuel excise will face an effective carbon price, through changes to the current fuel tax regime. Sectors (or users within a sector) that up to now do not pay fuel taxes (excise) will have a new tax imposed. Eligible businesses may choose to opt-in their liquid transport fuel emissions into the CPM instead of paying the new tax. Excise levels are not yet known, so neither is the expected interest to opt-in. As aviation fuels do not receive fuel tax credits, domestic aviation fuel excise will be increased by an amount equivalent to the carbon price. Businesses that have opted-into the carbon pricing mechanism will be entitled to a fuel tax credit equal to the excise increase equivalent to the carbon price. International aviation fuel use is not subject to fuel tax and will therefore not be subject to an effective carbon price

(*4) For landfills the participation threshold is 25kt CO2-e/yr. However, smaller landfills (emitting >10kt/yr) are also covered if they are within a certain distance from a larger facility that is covered by the scheme. Landfills closed before 1 July 2008 are not covered.

(*5) Including fugitive emissions released during the mining process and emissions from fuel combustion in equipment and on-site vehicles. Fugitive emissions from decommissioned underground mines are excluded.

(*6) For natural gas, the obligation to surrender emissions is with the retailer instead of the emitter (the user of the national gas), unless the emitter qualifies as a Large Gas-Consuming Facility (LGCF, >25 kt CO2-e/yr) or voluntarily takes over the liability from the gas supplier (by stating a Obligation Transfer Number – OTN in to the supplier). This may be considered preferable as potential cost increases due to the scheme are then within the consumer’s own control.

(*7) Petroleum refining, production of ethane, ethylene, ammonia and ammonia nitrate, integrated iron and steel manufacturing, manufacture of carbon steel from cold ferrous feed, production of fused alumina, copper, manganese, clinker, lime, synthetic rutile, sodium carbonate (soda ash) and sodium bicarbonate dry pulp, carton board, packaging and industrial paper, printing and writing paper, newsprint paper, bulk flat glass, methanol, carbon black, silicon, magnesia, zinc smelting, aluminium smelting. (Clear Energy Amendment Regulation, 2011)

(*8) Production of LNG, high purity ethanol, carbamide (urea), polyethylene, white titanium dioxide pigment, glass containers, tissue paper, iron ore pellets, magnetite concentrate, integrated production of lead and zinc, alumina refining. (Clear Energy Amendment Regulation, 2011)

(*9) The carbon productivity factor is part of the regular reviews to be carried out by the Production Commission (see under ‘Agencies responsible’)

(*10) Not defined in the legislation. The allocation to new entrants is capped, while that of existing installations is not. Allocations to existing entities conducting EITE activities will not be adjusted for allocations to new entrants. It is not clear whether the latter point means there will be a (limited size) new entrants reserve in place, or whether allocation to new entrants results in an increase in the overall cap.

(*11) Around 2000MW of very high emission intensity coal-fired generating capacity(>1.2 t CO2-e/MWh will be closed by 2020, in exchange of cash payments by the government in a tendering process and under strict conditions related to energy security.

(*12) Abatement activities can include, among others, reforestation and revegetation, landfill gas capture, savannah burning, agricultural methane waste capture and reducing N2O emissions from fertilizer use.

(*13) Except for waste facilities where the majority of the liability arises from landfill emissions. Here 100% of the liability can be met through ACCU (either purchased or from own projects).

(*14) Similar to the EU ETS, the Australian scheme does not accept international project-based credits from certain project types (forestry projects, nuclear energy, large-scale hydro power, certain industrial gases).

(*15) Two important differences for reporting under the CPM are that only scope 1 emissions are covered (NGRGS covers scope 1 and 2) and the operational control is defined at the facility level in the CPM (in NGERs at both corporate and facility level).

(*16) During first three years, emissions are not capped, permits are not tradable and the carbon price is fixed, so the scheme will work more like energy pricing than as a cap and trade system. In addition, an equivalent carbon price is introduced on fuel use not covered by the scheme (also after the fixed price period).

(*17) The Australian Government's independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians:

(*18) If the government has reasonable grounds to suspect that a registered corporation is not meeting its obligations under the legislation, it can instigate an audit. Upon receiving a written notice from the government to this effect, a corporation may appoint a greenhouse and energy auditor of its own choice. The cost of the audit will be borne by the corporation. A greenhouse and energy audit can also be instigated in the absence of suspicion of non-compliance, as part of a broader compliance strategy. The government will appoint a greenhouse and energy auditor and the cost of the audit is borne by the government.

(*19) Electricity generation emissions grow with 0.4%/yr, ‘other stationary emissions’ with more than 3%/yr and industry process emissions (non-energy) with 1.6%/yr

(*20) Treasury modeling done for the CPRS scheme indicates that a 2020 carbon price in the range of $50 to $60 (in today’s prices) would be needed to achieve a reduction in emissions, relative to year 2000 levels.