This week I went along to the Carbon Expo, which for several years now has been the main conference focused primarily on the opportunities and challenges of trading carbon.
It’s at this conference that you get an intersection between the big carbon emitters and those looking to help them manage and reduce their carbon liability.
These are the people dealing with the practical reality of how we reduce emissions given that 100 per cent renewables may sound great, but isn’t politically feasible for some time to come. Big miners and big industry are in attendance, the bankers, and the accounting and legal firms as well as government policy makers.
And all of them were scratching their heads trying to work out how on earth the Coalition’s Emission Reduction Fund was going to effectively function.
While industrial plants and miners are often demonised as ‘big dirty polluters’, the interesting thing that you find in such conferences is that the staff aren’t devils in disguise. In fact many are just as baffled and frustrated by the abandonment of a price on pollution as the environmentalists.
One thing everyone could agree was a deal-killer for Direct Action was Minister Hunt’s suggestion that the government would not be prepared to sign abatement purchasing contracts longer than five-years. Abatement projects often involve large upfront expenditure on equipment that lasts for well beyond a decade. If you can’t lock in carbon abatement revenue for at least 10 years – and ideally 15 to 20 – then the banks just aren’t interested in coughing up the finance. Direct Action is already dead in the water if the government refuses to budge from contracts limited to five years.
But another issue was whether many big emitters could actually be bothered participating in the ERF auction.
Some might think of the Direct Action Emission Reduction Fund as some kind of great welfare scheme for polluters. But the reality is that:
$300m $500m $750m $1b = drop in the ocean..
While $2.55 billion sounds like a lot of money, you need to consider the nature of the businesses and projects that are expected to deliver emissions abatement. Single big emitters have capital expenditure plans which could gobble up the entire Emission Reduction Fund in a single gulp. If you look at the raw numbers of tonnes of CO2 to overall business expenditure or revenue for industries – outside of power, cement and metals smelting – it's generally pretty small beer.
It might sound great for a polluter that they could get a government handout to partly fund a new energy savings project. But the guys I spoke to know very well that government money almost always comes with strings attached. Those strings can create a whole lot of headaches as bureaucrats suddenly become arbiters of what you can and can’t do with your business. For a number of companies they’re thinking about whether the money on offer will be enough to be worth the inevitable pain.
Under the current emissions trading scheme, a business can develop a projection of what a tonne of CO2 is likely to be worth from a range of analysts and banks. They then incorporate that into an overall financial evaluation of each project and then proceed with those that financially stack up, all without having to get a single person from the government involved.
But from what we know about Direct Action, if you want government money your business expenditure and operation plants need to work around government officials, processes and legal contracts (unless somehow they can convert Direct Action into an emissions trading scheme). This can lead to delays in proceeding with projects, which can then have a flow-on impact to other parts of the business, leaving things in limbo. If it leads to loss of production it doesn’t take long for this cost to exceed any money you might be getting out of the government for carbon abatement. In addition, dealing with government officials can act as a drain on highly constrained management time and attention.
Also what if you happen to enter a recession and you need to reduce production output? This might mean the energy savings project saves less energy than you’d contracted with the government. Core production decisions now become a matter for negotiation with government.
For some big emitters the money on the table from Direct Action just doesn’t look like enough to be worth the risk and hassle of becoming beholden to government bureaucratic processes.