Australia’s Climate Change Policy: An Overview

The termination of carbon pricing in Australia is occurring at a time when moves towards carbon pricing and more stringent climate change policies are appearing around the world, for example in China and the United States. The international Panel on Climate Change 2013-2014 reports cover the science, effects on ecosystems, the economy and population and policies to combat climate change.  Overall the IPCC sees substantial net costs of climate change and the need for urgent action.

In Australia carbon pricing is planned to be replaced by a Direct Action Plan (DAP) at the Federal level. The DAP will mainly subsidise greenhouse gas abatement (GHGA) delivered by an Emissions Reduction Fund (ERF) through bidding for GHGA though a reverse auction (lowest bids win). The ERF will be funded by tax payers so, in fact it is a form of carbon tax.

The ERF is the central element of the Coalition Government’s Direct Action Plan (DAP) to meet the target reducing greenhouse has (GHG) emissions by 5 per cent below 2000 levels by 2020.

The ERF will help reduce Australia’s greenhouse gas emissions while delivering valuable co-benefits to Australian businesses, households and the environment. The ERF will operate alongside existing programs that are already working to offset Australia’s emissions growth such as the Renewable Energy Target and energy efficiency standards on appliances, equipment and buildings.

The overriding objective of the Emissions Reduction Fund (ERF) will be to reduce emissions at lowest cost over the period to 2020, and make a contribution towards Australia’s 2020 emissions reduction target of five percent below 2000 levels by 2020.

The Government set out a commitment to the Emissions Reduction Fund of $300 million, $500 million and $750 million – a total of $1.55 billion over 3 years with total funding capped at $2.55 billion. These funds will be allocated flexibly over time according to the profile of projects contracted under the ERF.

Businesses, community organizations, local councils and other members of the community can undertake activities and offer to sell, at auction, the resulting emissions reductions to the Government. Winning bids will be paid for out of the ERF.

Emissions reductions will be verified and credited according to approved methods. These methods will ensure that emissions reductions are genuine. Emissions reduction methods will set out rules for estimating emissions reductions from different activities. To let a wide range of businesses participate in Emissions Reduction Fund, a menu of emissions reduction methods will be available. This will let businesses choose the method that best suits their specific projects.

Some emissions reduction activities such as re-vegetation and household and commercial energy efficiency may often be smaller scale actions that are most cost-effectively implemented through aggregation. There are many businesses and organisations that are well placed to aggregate the emissions reductions resulting from these activities. The design of the Emissions Reduction Fund will encourage business models that aggregate emissions reductions.

Concerns

  • Lack of an explicit carbon pricing signal which we regard as an essential element of the internalisation of greenhouse gas emissions.
  • Additionality, that is, what projects would have been undertaken in the absence of the ERF
  • Attribution, that is, what amount of the project greenhouse gas abatement (GHGA) could be attributed to other programs such as Renewable Energy Target (RET, now under review) and State White Certificate Programs (VEET, ESS and REES)
  • The potential credit costs under the ERF, that is, what are the ‘likely’ bid costs under the ERF auction. No estimates have yet been provided.

The ERF is based on the erroneous assumption that an externality (global warming) need not be priced, in this case by pricing carbon dioxide equivalent (C02e) emissions. Externality pricing is fundamental to addressing externalities. Although pricing will, in most cases and certainly in the global warming case, require complementary actions as under the previous Government’s Climate Change Policy package. That is, carbon pricing alone is necessary but not sufficient to reach climate change targets.

The 2020 GHG emissions target may be achieved through economic and other policy circumstances. However, the more aggressive targets required from the overwhelmingly accepted climate science will not be achieved without some form of carbon pricing (carbon tax, emissions trading system) at the core of climate change policy.

Apart from the core carbon pricing issue, concerns with the ERF- design include:

  • The costs of achieving GHGA through the ERF
  • The limited ERF budget for the period to 2020
  • Additionality and attribution of GHGA from ERF projects
  • Safeguarding of emissions growth outside the DAP/ERF

The outcomes emanating from these concerns will become evident over the next 12 months. We will be reporting on and critiquing the DAP/ERF developments as they evolve.