Climate policy – priceless

The federal government has released a low-key review into some of its Climate Solutions Fund (previously the Emissions Reduction Fund) policies as well as its response, which was largely positive. The Expert Panel examining additional sources of low-cost abatement was formed late last year and the list of stakeholders to be consulted was a who’s who of industry associations, indicating the intention that it be focussed on practical opportunities for abatement from the business sector.

The government has consistently trumpeted the success of the Fund, which has contracted over 190m tonnes of abatement, with 48m tonnes already delivered. Given the fund is in its 6th year of operation, this averages out at 8-10m tonnes per year, or around 1-1.5 per cent of Australia’s total emissions. Abatement has been achieved at a cost of around $12/tonne, which has created a useful benchmark for the value of emissions reduction in Australia.

The main sources of this emissions reduction fall into two broad categories: various land management activities and landfill gas combustion. In other words it’s not had any impact in the resources, industrial or transport sectors. These sectors account for around half of Australia’s emissions and include all the sectors that have growing emissions (electricity, the largest emissions source, is not covered by the Fund).

The Expert Panel made 26 recommendations aimed at unlocking more abatement from these sectors. Their approach was limited by their need to dance around the elephant in the room – the government’s extreme aversion to considering making any emitters financially accountable for their greenhouse gas emissions. While there are well-rehearsed drawbacks to putting a price on carbon, it does have the advantage of being relatively simple and transparent. Without it, the government has to swim in the murky waters of additionality, that is, ensuring they are only rewarding abatement that would not have happened anyway. Those pesky public servants in Canberra tend to think additionality is quite important, and this is the driver for a lot of the complexity and apparent barriers in the Climate Solutions Fund regulations.

Some of the barriers identified by the Panel include:

  • lack of an existing method to credit a credible and measurable abatement activity;
  • uncertainty regarding timing of and success in an auction (noting there are upfront costs in preparing to bid into an auction;
  • transaction costs of Fund participation more generally;
  • challenges around defining the boundary in which an activity takes place;
  • lack  of advisory firms to diffuse technical knowledge about abatement through the economy, and;
  • challenges in demonstrating additionality for projects such as bringing forward investment in energy efficiency upgrades.

Notably these issues would be absent or materially reduced under a policy of carbon pricing. Given that’s not an option on the table, the Panel recommended a range of measures to expand the Fund and make it easier for proponents to tap into. This includes paying for emissions reduction under the safeguard mechanism, which has recently been switched to an emissions intensity baseline. In other words, a growing industry could both increase its emissions and get paid for emissions reduction if it can get its emissions intensity below the baseline.

Cynics might think that a lack of interest in whether or not emissions reductions are real may be behind the government’s change of name for the Fund and also their alacrity in agreeing to most of the recommendations. Curiously, of the five they didn’t agree to, four relate to energy efficiency, long considered the low hanging fruit of emissions, as it can often pay for itself even before considering the emission reduction benefits.

Intriguingly, one of the recommendations would establish a link between the electricity sector and the Fund. This is to allow LGCs (renewable energy certificates) generated from new renewable plant to be used in a voluntary market for abatement (i.e. they are not eligible for auction participation) by defining the abatement associated with their generation. This is a nod to the fact that under the RET, which has now plateaued, the value of LGCs is in decline as supply will continue to grow but demand won’t. In effect, this idea seeks to create some new demand for LGCs and thus for new renewables.

Nonetheless it’s hard to imagine that voluntary action will be sufficient to drive the emission reductions needed to meet Australia’s 2030 Paris commitments, let alone the drive towards net zero that is presumably required after 2030. This leaves government footing the bill for most of the abatement. To share this burden there is a recommendation to work with state and territory governments on a  co-funding model for technology investment that would operate as an alternative to the fund. Where the money for all this is going to come from as governments try to repair their budget post COVID-19 crisis is anyone’s guess.