Chapter 6
Technical design issues with the
Emissions Reduction Fund
6.1
This chapter examines a number of technical design issues related to the
design of the Emissions Reduction Fund (ERF), as identified by submissions and
witnesses. These critical issues, which will impact on the ERF's ability to reduce
Australia's greenhouse gas emissions, include:
-
additionality;
-
difficulties in setting baselines;
-
compliance mechanisms and penalties;
-
overall limits on emissions;
-
the need for longer timeframes, including contract duration and
funding and planning beyond 2020;
-
future scalability of the ERF; and
-
access to international permits.
6.2
Mr Erwin Jackson from The Climate Institute summarised the design
problem as follows:
The challenge you have is balancing the burden of proof, if
you like. If you make it too strict then you will not get people investing,
because it becomes too strict and too much of a burden. If it is too loose,
then you basically get a whole bunch of money being given away for no benefit.[1]
Additionality
6.3
A key design issue was the difficulty involved in ensuring that
emissions reductions are 'additional' to reductions that would have happened
without intervention.[2]
Submitters were concerned that funding could be provided under the ERF auction
process to projects that would have gone ahead anyway, such as investments in
energy efficiency equipment when a company may have already planned to purchase
this equipment.[3]
6.4
As Sustainable Energy Now warned:
If criteria for additionality are not determined fairly,
there is a real danger that taxpayers will be simply subsidising industries and
projects that do not need subsidizing. Conversely there is also the risk that
additionality criteria acceptable to taxpayers would make the scheme too
unattractive to attract bidders.[4]
6.5
The Grattan Institute pointed to anotherĀ possible example of the need
for caution in relation to additionality in the case of:
...electricity generators where falling demand is already
leading to the mothballing and possible permanent closure of capacity. The 2010
published Direct Action Plan allowed for the ERF to support the reduction of
emissions from old or inefficient power stations. It would be inappropriate if
such funding was to flow to power stations that would have closed anyway.[5]
6.6
Professor Frank Jotzo described the problem of additionality as:
...a problem fundamentally of asymmetric information. No
government and no government agency will be able to truly get to the bottom of
cost structures as they exist in industry, and so if the potential financial
gains are large enough to business it will be easy to pull the wool over the
eyes of any regulatory.[6]
6.7
Professor Ross Garnaut suggested that additionality 'actually requires
clairvoyance to know whether or not, on financial grounds, an investor would
have made an investment'.[7]
6.8
Some suggested that the question of additionality could be
satisfactorily resolved with appropriate administrative resources. However, Mr
Paul Pollard was concerned that there would need to be 'huge administrative
resources to investigate every spending proposal and even to get into the minds
of the firm to know that they were not going to do this anyway'.[8]
Similarly, Mr Tony Wood from the Grattan Institute observed that it is not yet
clear 'how much extra administrative work will be imposed as a result of having
to be comfortable that activities which are credited under the program are
additional'.[9]
6.9
As the ACTU concluded:
...it will be near impossible for the Direct Action Plan to
avoid funding non-additional abatement. This means government will be paying
business for projects and abatement that would have occurred even in the
absence of government policy.[10]
6.10
In response to questioning on this issue, the Department advised that 'genuine
and additional abatement is a key part of the Government's policy as outlined
in the green paper' and:
That is a challenge we already face under the Carbon Farming
Initiative. It is also a challenge that other schemes have faced and dealt
with. The Clean Development Mechanism, for example, also has to deal with the
issue of how to establish abatement and how to determine that the abatement
that is being claimed is genuine and additional...there are a number of different
approaches one can use in different sectors with different methods, with a
strong focus on keeping them as simple as possible. But the policy principle
around paying for abatement, not paying for emissions reductions that would
have occurred anyway, is a clear policy principle of this scheme, and so all
the design around developing methods is to give the greatest confidence
possible that anything that is being credited and subsequently contracted for
is additional.[11]
Difficulties in setting baselines
6.11
The ERF will also require various emissions 'baselines' to be set, both
in relation to the purchasing and crediting of emissions reductions and also
the proposed safeguard mechanism.[12]
As the Department explained, for crediting emissions reductions, baselines will
form part of the crediting methodology:
One has to understand...what the underlying change in
emissions, say, per unit of output, might have been before an action was taken
and then credit over and above that action.[13]
6.12
Baselines will also need to be set for the safeguard mechanism – that is
a mechanism to provide businesses with an incentive not to exceed historical
emissions baselines.[14]
In response to questioning as to how those historical baselines might be
determined, the Department indicated that NGERS reporting information could
provide a useful basis in this context, but that the:
...other aspects of the safeguard baselines, such as how they
would evolve over time, who they would cover, what any compliance arrangements
would be that were associated with them, what form they would take—all those
dimensions the government is currently consulting on and it has not announced
its decisions on those dimensions of the scheme.[15]
6.13
However, the inherent difficulty and complexity involved in establishing
emissions baselines was highlighted by many submitters and witnesses.[16]
As the Grattan Institute observed that 'setting of baselines and establishing
additionality are not straight forward—they present a high regulatory burden
and a large potential for regulatory capture'.[17]
6.14
Mr David Rossiter, former Renewable Energy Regulatory, who had the task
of setting baselines for the original Renewable Energy Target, submitted that
setting baselines is:
...a very difficult and highly specialised task that should not
be under estimated. It is highly site and geographical location specific,
extremely resource intensive and often exposes a lack of firm data from which
baselines can be set.[18]
6.15
Mr Rossiter told the committee that:
...baseline setting and verification are complex and resource
intensive, so there will be considerable time delays in the implementation. The
credibility of the whole plan will be rapidly eroded if baselines are not set
in a transparent, fair, robust and repeatable manner. These delays will further
reduce the period of time available to recover abatement costs and also reduce
the abatement quantities the plan can achieve.[19]
6.16
Mr Rossiter, suggested that it is possible that up to 600 baselines may
need to be set, depending on geographical locations and different types of
actions.[20]
He was concerned that if there is not sufficient funds, it would be very
difficult and that:
I would be quite worried about the level of staffing and the
capability of the staff...This is a technical operation...[21]
6.17
Other emphasised the importance of establishing robust baselines:
...if there are no effective baselines and penalties for
exceeding that baseline in enterprises which are not being paid to reduce emissions,
once can expect those other sources of emissions to rise strongly, and so the
fund would have to buy a lot more and there is actually a limit to that...[22]
6.18
The setting of baselines, and the consequences for organisations that go
above or below their baselines under the safeguard mechanism, was described by the
Grattan Institute as complex, but 'fundamentally important' to how effective
and efficient the ERF will be.[23]
The Grattan Institute highlighted the challenge of determining the 'detail
around historical activity' and 'what business as usual activity means'.[24]
Mr Wood gave the example of LNG plants in Queensland – 'there is no history in
the world of developing LNG off the back of a large coal seam gas facility, so
how would you set baselines for those facilities?'.[25]
6.19
As noted in the previous chapter, for the safeguard mechanism, the
Government has put forward two options for setting these historical baselines,
based on either emissions intensity (the ratio of emissions per output)
or on absolute emissions levels (the absolute level of emissions from a
facility during a historical period).[26]
6.20
Some, such as the ADIC, expressed a preference for baselines based on
emissions intensity.[27]
However, others, such as Mr Erwin Jackson from The Climate Institute noted that
baselines based on emissions intensity would be difficult and complex, and
expressed a preference for setting absolute baselines 'for the major emitting
industries outside the electricity sector'. He noted that, in the electricity
sector, setting absolute baselines would disadvantage gas versus coal.[28]
6.21
WWF-Australia noted that applying an absolute emissions baseline, as
opposed to an emissions intensity baseline, will result in significantly more
abatement from the safeguard mechanism.[29]
6.22
Mr Rossiter further observed:
The atmosphere is not concerned about emissions intensity and
neither are Australia's international target commitments framed in such terms—total
emissions are the only issue at stake here.[30]
The 'safeguard mechanism': Compliance and penalty issues
6.23
Another key design issue was the proposed 'safeguard mechanism'. Some described
the safeguard mechanism as a 'key component' which could 'act to prevent
business from increasing their emissions to an extent that may cause problems
for other sectors of the economy'.[31]
Mr Jackson from The Climate Institute highlighted the importance of a robust
safeguard mechanism:
...to safeguard against emissions increases in sectors which
work against your national target...if you are spending money to improve the
efficiency of buildings, you want to make sure that does not mean you are
getting emissions increases from the cement industry or the steel industry. You
need some sort of safeguarding mechanism to ensure you are not wasting your
money...[32]
6.24
However, there was considerable concern as to whether there will be any
penalties or compliance mechanisms under the ERF system.[33]
For example, 350 Australia were concerned that the Green Paper:
...states that business will only be 'encouraged' to reduce
emissions, that 'flexible' compliance arrangements will be available, and that
there is no funding sought or available for a 'safeguard' mechanism.[34]
6.25
The committee notes there have been media reports indicating that the
Environment Minister has stated that there will be strong enough penalties to
stop companies from going 'rogue' with their carbon emissions, but that any penalties
will allow for 'fluctuations in emissions as part of the business cycle'.[35]
6.26
The Energy Supply Association of Australia (ESAA) was under the
impression that 'Government has stated on numerous occasions that it does not
intend for the penalties mechanism to apply to business as usual activity'.[36]
ESAA argued that 'penalties should not apply where businesses are clearly
operating as usual'.[37]
6.27
The Australian Industry Group similarly noted that:
The government's expressed intention is not to penalise
businesses for business-as-usual activity...our view that if you were to require,
through a standard of some sort, a business to stick with gas when coal is
cheaper that is imposing a real cost on that business and that is not what we
understand the government's policy intention to be.[38]
6.28
However, others pointed out that, for the safeguard mechanism to work
effectively, there would need to be consequences for breaching the baselines.[39]
WWF‑Australia were concerned that the Green Paper 'suggests that there
will be no penalty mechanism' and that:
It is unclear what then will be the motivation for companies
to reduce their emissions if there is no penalty for not reducing emissions and
what, therefore, will prevent Australia’s emissions from continuing to
increase.[40]
6.29
Sustainable Energy Now argued that, if there are no penalties, this
would be a 'fundamental flaw' in the system:
The lack of penalties would mean no guaranteed limit to
emissions and would not provide any incentive for industry to reduce carbon
intensity in future.[41]
6.30
WWF-Australia argued that a penalty price would need to be set at a
sufficiently high level 'to incentivise abatement activity'.[42]
However, WWF‑Australia pointed out that a high penalty price would be
irrelevant if no company exceeds their individual baseline, and therefore the
safeguard mechanism would also need adequate and appropriate baselines.[43]
6.31
Some submitters observed that, with a robust safeguard mechanism, the
ERF has the potential to be a 'baseline and credit' style system.[44]
ESAA pointed out that:
If there is to be any consideration of a baseline scheme with
penalties, it must also include credits for businesses that are able to reduce
their emissions. A scheme that has penalties for exceeding baselines but no
incentives for remaining below is unbalanced and could increase costs for
businesses. Any costs imposed through penalties would ultimately be passed on
to end consumers through higher prices.[45]
6.32
Mr Nathan Fabian from IGCC also told the committee that the baselines
would need to be reduce over time and would need to require companies in major
emitting sectors to participate in the scheme.[46]
6.33
Some witnesses warned that, in the absence of penalties, a carbon price
or sufficient safeguard mechanism, there is also a possibility that
fuel-switching might occur. That is, some companies may convert to the use of
coal for electricity generation, as a result of rising gas prices.[47]
6.34
Once again, it was observed that the safeguard mechanism could
potentially result in a huge administrative effort:
....the implication is that the government will need to
calculate a 'business as usual' projection of emissions for every business (not
just those currently producing reports under NGERS, or those submitting
tenders) against which their actual emissions can be assessed. This sounds like
a vast and subjective bureaucratic enterprise...[48]
6.35
Professor Ross Garnaut agreed:
A baseline and credit scheme of the kind contemplated
requires baselines to be establish for old and new firms, with incentives for
over-achievement and penalties for underachievement. The setting and
enforcement of baselines is an immense bureaucratic task.[49]
6.36
In relation to all these concerns, the Department advised that this is
why 'the government is consulting very carefully over that dimension of the
scheme'. The Department noted that 'quite a bit of relevant information is
already collected in the area through the National Greenhouse and Energy
Reporting Scheme that could form part of those considerations'. The Department
further noted that:
The extent of any possible compliance burden there would also
depend on who was covered under such an arrangement, which is also a decision
that the government is consulting carefully on.[50]
No overall limit on emissions
6.37
Another concern was that there would be no overall limit or legislated
'cap' on greenhouse gas emissions under the Direct Action Plan or the ERF.[51]
For example, Mr Jamie Hanson from ACF told the committee that:
A good climate policy will place a limit on the amount of
pollution Australia creates each year and will reduce that limit over time,
incentivising Australia's biggest polluters—our dirty coal power stations or
chemical processors, for instance—to belch out less environmentally-damaging
pollution each year.[52]
6.38
Similarly, Mr Gates remarked that:
You have to have a cap; otherwise, how do you know you are
going to meet your target? We know what the emission reduction trajectories
have to be, so unless we set a cap we are bound to fail. It is like taking your
hands off the steering wheel and just hoping you there; there is no feedback
into the system.[53]
6.39
The ACTU submitted that:
By not capping emissions or providing a signal beyond 2020
(the year in which the Emissions Reduction Fund Program will conclude), the
Direct Action Plan fails to provide the required long term incentive and
certainty to the market for industry to invest in deep emission-reduction
investments with longer payback periods. Without a clear signal driving
abatement, it also risks delaying climate action to post-2020, which will be
more costly and disruptive to the economy.[54]
6.40
In this context, a key issue raised as to how new business and projects
with significant greenhouse gas emissions will be dealt with under the Direct
Action Plan and the ERF.[55]
For example, 350 Australia warned that the system 'could give new polluters the
rights to pollute up to current industry rates rather than incentivising
cleaner and alternative technologies and lower rates of pollution...'.[56]
The Grattan Institute noted that:
A preferred solution has not been published by the
Government, although it has sought input from stakeholders. The absence of a
solution will represent a threat to both the effectiveness and efficiency of
the Direct Action Plan.[57]
6.41
Several submitters and witnesses also warned of the need to guard
against domestic 'carbon leakage',
that is, ensuring that emissions reductions paid for under the ERF does not
result in emissions increases by other business or activities.[58]
As Dr Paul Burke submitted, 'without a cap on total emissions, there is no
guarantee that emissions reductions in a specific project will not be offset by
additional emissions elsewhere'.[59]
6.42
However, The Climate Institute advised that the safeguard mechanism
could, in theory, potentially work as an effective cap on emissions:
Absolute emission baselines could be applied to facilities in
major emitting sectors, possibly excluding electricity. These absolute
baselines could be added up to an effective cap on emissions in these sectors.
Absolute emissions baselines at a facility level may be not appropriate for the
electricity sectors as it may discourage switching from coal to gas-fired
generation.[60]
6.43
As Professor Garnaut observed:
... it is not clear from the Green Paper whether and the extent
to which abatement through the Emissions Reduction Fund would place restraints
on growth in emissions in enterprises that were not receiving payments for
reductions in emissions.[61]
6.44
Professor Garnaut described this as a 'large and obvious flaw' in the
ERF and a source of pressure on its budget:
this flaw may lead a Government seeking to meet its emissions
targets to set baselines for each enterprise and penalties for emissions in
excess of the baseline. Without a national cap of a kind that is present under
established Carbon Pricing policies, the baselines and penalties would need to
be set business facility by business facility. This would be a huge
bureaucratic exercise.[62]
Timeframes
6.45
A number of issues relating to timeframes were raised in relation to the
Direct Action Plan and the ERF, including:
-
the commencement of the system;
-
duration of contracts under the ERF; and
-
the need for a longer term approach.
Commencement of the ERF and its
safeguard mechanism
6.46
It was also suggested that it will be difficult for the ERF to attain
emissions reductions targets, simply because it will be difficult to get the
scheme up and running in time. As Dr Burke pointed out:
2020 is actually very soon. This scheme is going to take time
to get going, even once it is started. Companies would need to submit bids for
it and projects would need to be analysed, approved and then, of course,
implemented. Everything takes time, and our experience...is that these programs
take a lot of time for emissions reductions to perhaps start to happen....[63]
6.47
Several submissions and witnesses were concerned that the Government has
deferred its decision on how emissions baselines will be determined for the
safeguard mechanism until mid‑2015, noting that 'this is a critically
important element of Direct Action that remains uncertain...'.[64]
In contrast, the Australian Industry Group told the committee:
...the purpose of the baseline system is not entirely clear and
at this stage our suggestion would be either to articulate a clearer purpose
for the safeguard mechanism or not to proceed with that element of the policy.
We certainly appreciate that the government has undertaken that that element
will not commence until at least 1 July 2015, to allow additional time for
consultation with industry.[65]
6.48
Others expressed surprise at the proposed review of the Direct Action
Plan in 2015, given that 'implementation would only be getting underway at that
time'.[66]
The Climate Institute suggested that:
The Government needs to be flexible on this timeline as it is
currently misaligned with international processes and commitments.[67]
Duration of contracts
6.49
Many submitters and witnesses highlighted the need for long-term
commitments, were concerned that the proposed maximum five-year contract
duration proposed in the ERF Green Paper would be too short.[68]
In particular, it was suggested that it would be difficult to find finance for
such short-term projects. For example, the CEFC submitted that:
...the proposed five year forward contracts will be
insufficient and may need to be for longer than five year's duration to be
effective in attracting the necessary finance for abatement projects.[69]
6.50
Similarly, Professor Frank Jotzo warned that:
Project proponents will have no realistic expectations that
further payments would be made beyond the initial five-year period. Therefore,
only investments with payback periods of less than five years at a given
payment per tonne of claimed emissions reductions will be commercially viable.
This will exclude many abatement options that involve long-lived equipment, as
is usually the case in energy and industrial investments.[70]
6.51
Representatives from the NFF also pointed out that a five-year timeframe
'probably does not correlate with the time it takes to actually put projects on
the ground' and that 'longer term approaches are required for agriculture'.[71]
They pointed to the time taken to approve methodologies for the CFI by way of
example.[72]
In the same vein, WWF-Australia submitted that:
...to unlock more substantial levels of abatement from the land
sector, potential investors and project developers will need a long-term
investment signal. Indeed, most land-use projects require an income stream of
at least 10 years to become economically viable. [73]
6.52
Others pointed out that certain emissions reduction activities will
deliver abatement over a much longer time frame than five years.[74]
For example, the ESAA were concerned that:
...emissions reduction activities from power stations are
unlikely to be cost‑competitive with other forms of abatement, as they
will deliver abatement over a much longer time frame than that for which they will
be rewarded by the fund...we consider it unlikely that there will be significant
participation from our sector in the emissions reduction fund. This is not a
flaw in the design of the fund per se, but it is important to recognise that if
the government's policy framework is solely focussed on short-term goals it
will be less likely to deliver long-term changes.[75]
6.53
In contrast, the Australian Industry Group expressed support for five
year limits on contracts:
...to succeed the ERF needs to attract strong participation,
and that could be assisted by minimising the risks to bidders including around
the adoption, if there is a five-year limit on the terms for which abatement
will be contracted, allowing projects to recover their full costs within that
period without competitive disadvantage inside the auction process.[76]
6.54
Others warned that the short timeframes would increase the cost of
abatement. For example, Mr Pollard told the committee that the short timeframes
of the ERF would be a 'major obstacle' to finding low-cost opportunities:
...emissions mainly come from very large long-term investments
like a power station and so a low-cost abatement comes about looking at over 30
or 40 years or 15 or 20 years. Clearly you need a long-term payment scheme or a
long-term pricing scheme to reduce that low-cost abatement.[77]
6.55
Mr Rossiter agreed that:
...the five-year maximum term for recovery of abatement costs
will increase the apparent costs by factors of two to four or more, because
industry normally looks for returns over periods of 10, 15, 20 years or more.
This time restriction and consequent increased apparent abatement cost will
reduce the number of actions bid into the program and implemented. This will
severely reduce abatement quantities that the plan can achieve.[78]
6.56
In response to questioning on this issue, the Department advised that it
had received a number of submissions in response to the Green Paper which were
concerned that the five-year contract length. The Department stated that 'the
government will take its decision [on contract length] in the light of those
submissions'.[79]
No long-term plan
6.57
Another concern was that the ERF and the Direct Action Plan appear to be
a short-term measure. In particular, there is no funding committed for the
Direct Action Plan and ERF beyond its fourth year and that there is no
indication of any continued program, budget or target beyond 2020.[80]
As the ACF observed:
Climate change will not end in 2020 and business decisions
being taken now and up to 2020 will have costly impacts for decades for come.[81]
6.58
Mr Hanson from ACF described the Direct Action Plan as 'a short-term
fix':
Investors have indicated that they require at least a 20-year
time frame if they are to make good long-term investment decisions and drive
the development in Australia of enduring industries for the future. The Direct
Action Plan does not provide that; it creates the opposite.[82]
6.59
Similarly, WWF-Australia were concerned that the ERF does not provide a
long-term signal to give 'business the certainty and confidence to plan for
transition, make long-term investments and drive structural change in the
economy'.[83]
6.60
Many submitters and witnesses also expressed concern that the Direct
Action plan is only funded for a three-year period initially:
This creates a significant concern that it will create a
boom-bust cycle of regulatory and political uncertainty, one that has been
historically problematic for both renewable energy and energy efficiency
markets and businesses. Short-term policy, such as Direct Action as it is
currently framed, is opportunistic rather than visionary and is not likely to
contribute to the development of technology, knowledge and skills within
Australia to support the long-term reduction of Australia's carbon emissions.[84]
6.61
As Ms Rose from the Sustainable Energy Association observed:
Energy infrastructure and the people who invest in energy
infrastructure are looking decades out. The lack of understanding of what the
policy may look like decades from now is a serious inhibitor to investment,
without a doubt.[85]
6.62
Similarly, the Energy Supply Association of Australia submitted that:
Long-term signals for investment would assist all sectors of
the economy to provide abatement. The energy industry in particular is made up
of capital‑intensive, long-lived assets. The ERF should provide certainty
that tenders for abatement can be made that extend beyond the current 2020
target date. This is crucial when some methodologies may take several years to
design and implement, and may also have a long payback period. The ERF should
take a long-term, strategic approach to ensure that all industries can
participate and find ways to provide low-cost, measurable and verifiable
abatement.[86]
6.63
As Mr Bernie Fraser, Chair of the Climate Change Authority told the
committee:
There is a long haul element to this challenge of climate
change, and that requires budgetary and other commitments from governments over
long periods of time—periods of time that run to decades not just the period of
the forward estimates.[87]
Future scalability and increasing targets
6.64
As outlined elsewhere in this report, many submissions and the Climate
Change Authority recommended that Australia increase its emissions reductions
targets. However, many witnesses and submitters were concerned as to whether
the Direct Action Plan could be 'scaled up' as Australia needs to make stronger
emissions reductions in the future.[88]
For example, the IGCC submitted that 'a policy framework that can respond to
deeper targets, at relatively low cost is a fundamental requirement of any
long-term policy framework'.[89]
6.65
Professor Frank Jotzo:
If you fast forward and you were to try to imagine a system
where you wanted to halve Australia's emissions by way of a subsidy scheme, you
would need enormous amounts of fiscal revenue to support that, even if you
could address all of the other problems that have been identified...[90]
6.66
Ms Rose from the Sustainable Energy Association expressed similar
concerns that the ERF is designed for 5% for 2020 'and not beyond'. She
acknowledged that:
There are aspects of it that certainly could be expanded
beyond 2020 if that is the choice, but one of our serious concerns is that we
do not have any of that visibility or transparency.[91]
6.67
In this context, the Grattan Institute submitted that:
The Direct Action Plan as published is focused only the five
per cent, 2020 target, although there is no fundamental reason why it could not
be expanded to meet conditional 2020 targets or longer term targets to which
the Government may commit...[92]
6.68
On the issue of scalability, the Department advised that:
The nature in which the scheme can emerge to meet any future
target is also a matter for government, but crediting mechanisms, purchasing
mechanisms and the safeguards mechanisms are all parts of the scheme that can
change over time if required.[93]
6.69
However, others pointed out that, if the budget is limited and will not
be increased, the targets under the ERF could not be scaled up due to budgetary
constraints.[94]
For example, WWF-Australia submitted that none of the ERF modelling scenarios were
able to achieve a 25% target by 2020, with domestic abatement alone at
any reasonable price.[95]
6.70
In contrast, if international emissions reductions were accessible under
the ERF, the committee notes that it might be possible for the ERF to
meet increased targets. This is discussed further below.
Accessing international credits
6.71
The Direct Action Plan proposes to source all emissions reductions
domestically, rather than using any overseas emissions credits.[96]
However, many submissions queried whether this was the best approach.[97]
For example, the IGCC submitted that 'access to verified international permits
supports our emissions reduction objectives, reduces abatement costs and
supports low carbon technologies internationally'.[98]
6.72
Many noted that purchasing international permits for emissions
reductions would be cheaper and more cost‑effective.[99]
The Climate Institute suggested that some of the ERF funds should be
apportioned to purchase credible Kyoto Protocol-compliant emission units 'as an
insurance policy against the risk that domestically sourced abatement is not
available at the scale or price required to achieve Australia's international
carbon budget obligations'.[100]
6.73
Mr Jackson from The Climate Institute further argued that:
This is a global problem. If we limit access to international
markets then we limit our ability to contribute to the global problem. The
ability to achieve much stronger targets is in part linked to our ability to
access international markets.[101]
6.74
Several submissions suggested that access to international emissions
credits should be part of 'make-good' provisions under the ERF. For example,
the Australian Industry Group suggested that it would reduce the risks for
bidders if proponents were able to access international carbon credits,
particularly in relation to the 'make good' provisions under the ERF.[102]
6.75
The committee notes that the recent Climate Change Authority report
recommended that:
The government use international emissions reductions to
bring any gap between domestic reductions achieved under the Direct Action Plan
and the recommended 2020 goals. [103]
6.76
And further that:
The government establish a fund to purchase Clean Development
Mechanism units to complement the Direct Action Plan and help meet the
recommended 2020 goals.[104]
6.77
In response to questioning on these recommendations, Mr Fraser, Chair of
the Climate Change Authority, explained, although they 'would like to see most
of the reductions in emissions occur through domestic actions':
In the short term, to get a credible start on the task of
reducing emissions for the 2020 target, it is not practicable to get these
domestic measures in place to achieve the minimum 15 per cent goal that we
talked about...in the next five or six years you cannot expect the kinds of
investments to occur and be flowing through to get to that 2020 emission
reduction target...in the short term, if we are going to make a serious attempt
to get to the 2020 target, we have to resort to permits for international
emission reductions.[105]
6.78
Mr Fraser provided the following example:
Even if you could get emission standards for light vehicles
in place tomorrow, by the time the whole light vehicle fleet turned over it
would be eight or 10 years. It would be a longer period of time before the full
effect of these domestic emission reductions would start to flow through. That
is true of so many other investments. Even if they start tomorrow to replace
old and inefficient power plants or to put more renewable energy projects in
place, it takes time, even with the best will and the best political
environment in the world, to do that.[106]
Benchmark price
6.79
Finally, some witnesses expressed the view that 'benchmark price'
proposed by the Green Paper should be made public, thereby increasing
transparency. For example, Ms Kirsten Rose from the Sustainable Energy
Association observed that:
A benchmark price in a reverse auction is helpful to the
participants, because they know roughly where they need to come in at to be
competitive...the benchmark price should be public, it should be open to all to
see, not necessarily on that specific auction.[107]
6.80
The CEFC warned that, if the benchmark price were kept confidential,
participants in ERF auctions would run a risk that the undisclosed price cap in
the auction would be well below the minimum price required, which could lead to
waste time and expense for participants. This risk, in turn, could be a strong
disincentive to participation. The CEFC recommended:
Publishing a benchmark price in advance for the auctions
would ensure that only those participants who can achieve abatement below the
benchmark will expend time and money developing project proposals and
participating in auctions.[108]
6.81
Similarly, Mr Wood from the Grattan Institute suggested that the ERF
could create 'at least a shadow carbon price', and 'it will be very important
to have price visibility' under the ERF.[109]
Committee comment
6.82
The committee notes that there has been very little detailed public
analysis of the Emissions Reduction Fund and its proposed design. The evidence
to this committee overwhelmingly indicated that there are numerous inherent
design problems with the Emissions Reduction Fund. Establishing baselines, and
ensuring that emissions reductions are truly additional, will be extremely
difficult and impose a high administrative burden on the Government. The
evidence also highlighted that the five-year timeframes proposed for contracts
under the Emissions Reduction Fund are insufficient to provide investor
confidence and encourage long-term business investment in low-carbon
technologies and projects. Based on its current proposed design and budget, it
is unlikely that the Emissions Reduction Fund could be sufficiently 'scaled up'
as Australia needs to make stronger emissions reductions in the future.
6.83
Clearly, any scheme to reduce Australia's emissions needs to ensure that
there is a limit or 'cap' on overall domestic emissions, and penalties for
polluters who exceed reasonable emissions limits. The committee notes evidence
that the so-called 'safeguard mechanism' has some potential in this regard, but
there is almost no detail about how the 'safeguard mechanism' will work and
whether there will be sufficient penalties and robust baselines associated with
the mechanism. Further, the Department indicated that the 'safeguard
mechanism', which is absolutely critical to the scheme, will not even be in
place until 1 July 2015 at the earliest.
6.84
The committee also considers that the proposal to review the Emissions
Reduction Fund in 2015 is extremely premature. The auction process itself will
take time in terms of preparing bids and assessing projects. It will also take
time to get projects under way and achieving emissions reductions. The
safeguard mechanism may not even be operational at that point. As such, it will
be difficult to make an accurate assessment of the success or otherwise of the
Emissions Reduction Fund.
6.85
The committee is also deeply concerned that there is no budget for the
Direct Action Plan beyond 2017, and that there appears to be no climate policy
or plan at all beyond 2020. Climate change will not be solved by then: it is a
long-term problem that requires a long-term solution. Further, the lack of
long-term planning and resultant uncertainty undermines investment and business
confidence in the very sectors that we need to be encouraging in the transition
to a low-carbon economy.
6.86
In light of all these issues, the committee considers that the Emissions
Reduction Fund is a fundamentally flawed proposal and should not proceed.
However, if the Government insists on proceeding with the Emissions Reduction
Fund, the committee considers that it will need increased funding and staffing,
a robust safeguard mechanism, an overall limit on Australia's emissions, longer
timeframes and to allow access to international emissions credits.
Recommendation 11
6.87
The committee recommends that the Government not proceed with the
Emissions Reduction Fund as it is fundamentally flawed and in doing so notes
that:
-
there is insufficient funding to be able to secure enough
abatement to meet Australia's emissions targets now and into the future;
-
there is a lack of a robust safeguard mechanism with stringent
baselines and penalties for exceeding baselines;
-
there is no legislated limit or 'cap' on Australia's emissions in
line with emissions reductions targets;
-
there is no access to international emissions credits;
-
the maximum terms of contracts for purchasing emissions
reductions under the Emissions Reduction Fund need to be increased;
-
the use of international permits needs to be limited at 50%, with
the maximum caps being 12.5% from Certified Emissions Reductions under the
Clean Development Mechanism and 37.5% from European Union permits;
-
an increase of staffing will be required within the Department of
the Environment to enable the scheme to be designed properly;
-
an increase of staffing will be required within the Clean Energy
Regulator in order to administer the scheme properly; and
-
the maintenance and establishment of a range of complementary
measures, including the Renewable Energy Target and fuel emissions standards
are required.
6.88
In particular, the committee also notes the overwhelming support for
allowing the purchasing of international emissions credits as a cost-effective
means of reaching Australia's emissions reduction target. The committee supports
the recommendations of the Climate Change Authority in this regard.
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