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Focus: The Opposition's Direct Action Plan

23 April 2013

In brief: Although there is bipartisan commitment to reducing Australia's greenhouse gas emissions to 95 per cent of their 2000 levels by 2020, the current Government and Opposition policies for achieving this are very different. The forthcoming Federal election, and the recent collapse in the price of European Union emissions trading scheme allowances, means that a review of the Opposition's Direct Action Policy is timely. Partner Grant Anderson reports.

How does it affect you?

  • Much of the detail surrounding the Opposition's Direct Action Plan has yet to be spelt out. However, the success of the Plan will be critically dependent on certainty as to funding, both in terms of the funds made available to the Emissions Reduction Fund for purchasing emissions abatement and in terms of the arrangements by which that funding is made available to individual emissions abatement projects over a period of time.
  • It will be necessary to put in place mechanisms that will create sustained demand for emissions abatement, together with a penalty regime for emitters, so as to attract investment in emissions abatement projects.
  • Further consideration needs to be given as to how the Direct Action Plan will generate sufficient internationally-recognised emissions abatement to enable Australia to meet its international emissions reduction obligations, and as to how any targets will be able to be met without there being an effective and enforceable emissions cap.
  • In the absence of a meaningful carbon price, the Commonwealth mandatory renewable energy target will play a much more significant role in encouraging investment in renewable energy.  

Background

The Government's climate change policy is largely based on its carbon pricing scheme, which came into operation on 1 July 2012. However, the effectiveness of this scheme, both as a driver for emissions reductions and as a stimulant for the development of renewable energy and lower emissions technologies, has been seriously challenged by the plummeting price of European Union emissions trading scheme allowances (EUAs).  The failure of the European Union Parliament to approve the reserving of 900 million EUAs, so as to prop up the carbon price in the face of a substantial oversupply of EUAs (caused by the issue of too many free EUAs and the reduction in economic activity induced by the global financial crisis), recently led to EUA prices falling to around $4 (with the prospect of even lower future prices). With the Australian carbon price being heavily dictated by the EUA price from 1 July 2015, when there will be a one-way link between the European Union and Australian schemes, this suggests that there is likely to be a dramatic reduction in the Australian carbon price when the Australian carbon pricing scheme changes from its fixed price phase (when carbon units will cost $25.40) to its floating price phase on 1 July 2015. A carbon price of $4 will provide little incentive either for emitters to control their emissions or for the introduction of more carbon-efficient technologies. In light of this, and the forthcoming Federal election on 14 September 2013, it is timely to consider in more detail the Opposition's climate change policy.

The Opposition has pledged to repeal the carbon pricing scheme as a matter of priority. To do so it will need to obtain a majority in both Houses of Parliament in the forthcoming Federal election. Even if the Opposition does obtain a majority in the Senate (it will only be a half-Senate election), it will not have the numbers to repeal the scheme until the new senators take their seats on 1 July 2014 (assuming that the current Labor and Australian Greens senators refuse to vote in favour of repeal earlier than that). If the Opposition does not obtain a majority in the Senate, then the Opposition has promised to seek a double dissolution election. This will entail the repealing legislation being put to, and rejected by, the Senate twice with a three-month gap, a subsequent election for both Houses of Parliament (with the entire Senate being up for election), and the repealing legislation being put to the newly constituted Senate. If the legislation is again rejected, a joint sitting of both Houses of Parliament can be convened to vote on the repeal, a vote that the then-Government will win if it controls an overall majority of votes in the 150-member House of Representatives and the 76-member Senate. In place of the carbon pricing scheme, the Opposition would implement its Direct Action Plan.


Direct Action Plan – the Emissions Reduction Fund

The centre piece of the Opposition's Direct Action Plan is the establishment of an Emissions Reduction Fund, which is to be administered by an expert body that will assess and recommend emissions abatement activities in Australia which should be supported by the Fund. The Opposition took this policy to the 2010 Federal election (it was framed in the context of the then-Rudd Labor Government's Carbon Pollution Reduction Scheme), but it has recently been reiterated as current Opposition policy. When the Opposition initially released its policy, it envisaged the Fund supporting 140 million tonnes per annum of abatement by 2020, with the Fund investing an average of $1.2 billion per annum for this purpose.

The principal source of emissions abatement under the Direct Action Plan is intended to be soil sequestration (at least 85 million tonnes per annum), but with funds also available for forest industry-based sequestration activities (both native forest and plantations), electricity generation using waste coal mine gas and landfill-generated methane, the introduction of energy efficiency measures in domestic and commercial buildings, the adoption of alternative transport fuels, the use of composting, and recycling (totalling around 45 million tonnes per annum of abatement). Projects will be chosen by way of tender, and will be evaluated on the basis of their contribution to emissions reductions, their resultant public policy benefits, their delivery of practical environmental benefits, there being no consequential price increases to consumers, and the protection they afford to Australian jobs. Similar proposals from similar sectors will be evaluated against each other, which suggests that allocations within the Fund will be dedicated to different types of projects (so that a broad range of projects will receive funding). In addition, the projects chosen must be ones that would not otherwise proceed without assistance from the Fund.

On its face, this approach seems to be similar to the philosophy behind the Opposition-supported Carbon Farming Initiative, which aims to encourage emissions abatement through enabling accredited emissions avoidance offsets projects and sequestration offsets projects to generate tradeable carbon credits. However, its success will depend on the ability to establish measurement methodologies cost-effectively and quickly, something which has not been achieved under the Carbon Farming Initiative.

The Emissions Reduction Fund is also intended to fund two other types of initiatives.

First, it appears that the Fund will purchase from businesses emissions abatement that is represented by reductions in their emissions below their historical average emissions, as measured under the National Greenhouse and Energy Reporting Scheme (NGERS).

Second, it will fund incentives for the 'oldest and most inefficient' power stations to reduce their emissions (10 million tonnes per annum of abatement), with funding being subject to there being guarantees given in relation to jobs, energy security and electricity prices.

Direct Action Plan – other elements

Other aspects of the Opposition's Direct Action Plan are:

  • providing a $1000 rebate (for households) and a $10,000 rebate (for not-for-profit entities) for the installation of roof-top solar power and solar hot water heating systems;
  • providing grants (of up to $2 million each), awarded through competitive tender on the basis of greatest emissions savings per dollar of funding, for towns and non-capital cities to access direct solar energy for on-site energy use and return of excess power to the grid;
  • providing grants (of up to $0.5 million each), awarded through competitive tender on the basis of greatest emissions savings per dollar of funding, for schools to access major solar energy projects for on-site energy use and return of excess to the grid;
  • providing grants (of up to $2 million each), awarded through competitive tender on the basis of greatest emissions savings per dollar of funding, for towns and non-capital cities to establish micro, pilot and demonstration geothermal and tidal energy projects for on-site energy use and return of excess power to the grid;
  • providing $60 million to develop the La Trobe Valley, Hunter and Central Queensland regions as hubs for clean energy research and development;
  • the reservation of up to 6,000GWh by 2020 within the Commonwealth Renewable Energy Target scheme for above-50MW renewable energy projects and above-10MW emerging renewable energy (eg solar fields, geothermal, tidal and wave) projects; and
  • the planting of 20 million trees in available public spaces.

Analysis

It appears that the Emissions Reduction Fund will be deployed to support emissions abatement largely by providing funds for the purchase of emissions abatement, rather than by directly investing in (or lending money to) emissions abatement projects. Whether this will be sufficient to render investment in emissions abatement projects viable is debatable. In the absence of a mandatory carbon pricing scheme, there will be no deep pool of demand for emissions abatement that can provide a source of long term revenue to underpin those projects. Instead, any revenue (in addition to that obtained from selling emissions abatement to the Emissions Reduction Fund) will need to be derived from the voluntary market through corporate social responsibility buyers. In addition, the proposed arrangements for obtaining funding from the Emissions Reduction Fund do little to enhance investment certainty. It appears that the Fund will only purchase emissions abatement when the emissions savings have been independently verified, and that such purchases will be by way of a reverse auction process under which sellers compete to sell their emissions abatement to the Fund at progressively decreasing bid prices. This means that an emissions abatement project will only be able to secure revenue from the sale of the resultant abatement to the Fund once the project has been established and, even then, its success in obtaining funding will depend on the relative attractiveness of other competing projects. The fact that funding is dependent on the outcome of successive auctions conducted over time, and that funding is not locked in prior to the project commencing, is not conducive to certainty as to the project's likely revenue stream, which will be a major consideration in the viability of the project. This uncertainty will be exacerbated to the extent funding relies on annual budgetary appropriations, which may be withheld depending on broader competing budgetary pressures and priorities. For the Emissions Reduction Fund to have on-going credibility, it will be necessary for the Fund to be set up as an independent statutory authority subject to limited Ministerial direction and with an assured source of funds available for disbursement.

The investment mandate for the Emissions Reduction Fund will also be of critical importance. While the reservation of funding for different categories of projects will make it possible for a diversity of projects to be funded, including those that are developed later (rather than earlier) this decade, there is an element of 'picking winners', which in the past has not always proven to be a successful strategy for achieving lowest cost outcomes. Moreover, the fact that the selection criteria include a broad range of political and social (as well as economic and environmental) factors further reduces funding certainty, particularly to the extent that these criteria may be subject to change for political reasons. In fact, one clear winner has already been picked, with there being a clear emphasis on soil sequestration. Apart from the technical issues associated with monitoring and verifying carbon sequestration in soil, there is the issue that soil sequestration (and potentially other activities that might qualify for funding) are not currently recognised as abatement activities for the purposes of the Kyoto Protocol. If this continues to be the case, then (to that extent) the Direct Action Plan will not assist Australia in meeting whatever international emissions reduction obligations might apply to it in the future.

It is not entirely clear how the proposal that the Emissions Reduction Fund will pay for emissions reductions below NGERS-determined business-as-usual baselines fits in with the purchase of emissions abatement from specific projects. In particular, a 'business' baseline will be very difficult to apply as it will change over time with business restructurings (including sales and acquisitions), and variations in emissions levels as measured against this baseline will not necessarily be attributable to emissions reductions (as opposed to, for example, reduced economic activity). The same will be the case with 'facility' level baselines. Moreover, the mere fact that absolute emissions fall below a baseline says nothing about whether the abatement is additional (ie would not have occurred but for the prospect of funding from the Emissions Reduction Fund) or whether there has been an improvement in emissions intensity.

The efficacy of using the Emissions Reduction Fund to fund emissions reductions by particularly emissions-intensive coal-fired electricity generation capacity, where there is no (or an insignificant) carbon price, is also unclear. As evidenced by the failure to agree the buy-out of such generation capacity using the Government's Energy Security Fund, such generators are likely to have little incentive to agree to reduce their emissions or to give any guarantees in relation to jobs, energy security or electricity prices.

In the absence of any effective (or enforceable) cap on Australia's greenhouse gas emissions, the Direct Action Plan cannot guarantee that those emissions will actually be reduced. In this regard, the Opposition policy on penalties is quite vague. It states that businesses that undertake activity with an emissions level above their 'business as usual' levels will incur a financial penalty that is based 'on a sliding scale at levels commensurate with the size of the business and the extent to which they exceed their "business as usual" levels'. Apart from the problems with fixing business-specific baselines (as referred to above), a penalty of some kind is essential to curb emissions, but the use of a 'business as usual' baseline will not contribute to putting emissions on a downward trajectory. Conceivably, businesses could avoid incurring this penalty by acquiring approved forms of emissions abatement, but this source of demand is unlikely to be sufficiently predictable to underwrite abatement projects (especially to the extent emissions vary with changes in economic activity).

Finally, the likely depressed levels of the Australian carbon price during the floating price phase means that the Commonwealth mandatory renewable energy target assumes increased importance as a policy mechanism for incentivising investment in renewable energy. In this regard the Opposition's formal position is that it supports the target of 20 per cent of Australia's electricity supply being provided by renewable energy sources by 2020, although recently it has been suggested that it would review this scheme. The proposal to reserve some of the renewable energy target for large renewable energy projects and significant-sized emerging technology projects suggests that the Opposition does indeed view this scheme as being of some significance in driving investment in renewable energy – despite its contribution to increased electricity prices and the fact that it entails 'picking winners'.


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