Carbon policy limbo must end

The long-term requirement for businesses to remain competitive in an international carbon policy context cannot be ignored. The incoming government must act decisively to implement a carbon policy that protects existing commitments as well as supporting long-term investments that reduce carbon emissions.

Future carbon policy must provide regulatory certainty as well as focus on achieving the carbon emissions reduction target for the lowest cost to business.

This will incentivise business to reduce carbon emissions in the most efficient way and support the transition to a low carbon economy. It will also help Australia meet both its short terms targets and more aggressive long-terms targets

While there is a live debate about the respective merits of the two policies, one point is clear: the ongoing debate means further uncertainty about the future policy environment in which businesses will have to operate.

This uncertainty is damaging, especially in the electricity sector, as businesses require a level of certainty to plan and invest for the future. Australia urgently needs to agree on a policy framework for responding to the challenge of climate change.

Appropriately designed, carbon pricing is the most effective way of achieving least-cost abatement, particularly in the long-term. It can drive the cheapest abatement options across the economy, and avoid many of the administrative burdens and inefficiencies found with more interventionist government policies. As a matter of urgency, the incoming government will need to clarify the new carbon rules for business. It will also need to consider how it will achieve Australia’s commitment to meet the agreed 2020 emissions reduction target.

The Opposition has stated a full repeal of the Carbon Pricing Mechanism is one of the first actions it will initiate if elected, while the Rudd government has suggested it will accelerate the CPM to its flexible pricing scheme earlier than originally planned. As an obvious consequence, businesses are delaying strategic decisions or investments because they are uncertain about the future existence of a carbon price or the structure of any alternative carbon policy – particularly in the short term.

Should the Opposition come into power and repeal the CPM and implement the Direct Action Plan, it needs to leverage what businesses have already done as part of responding to existing legislation and any investments that result in carbon abatement.

Businesses should now be re-visiting or considering new renewable or energy efficiency projects, which have the potential to generate abatement that can be subsequently sold to the government – this includes small businesses and those who do not have obligations under existing carbon schemes (as there will be an opportunity for non-impacted businesses to ‘opt-in’). 

We strongly support the proposed process of releasing a white paper, providing greater detail on the DAP and Emissions Reduction Fund, where business have the opportunity to provide input and give guidance on the development of the policy. There would obviously be significantly divergent views in response to the white paper, however we recommend setting some overarching policy principles to underpin the key elements of the DAP.

We would recommend businesses DAP whitepaper submissions pay close attention to the design elements that will positively or negatively impact business including:

– Methodologies for calculating emissions baseline.

– Scope of eligible projects, including the inclusion of projects that commenced under past abatement schemes.

– Funding mechanics such as auction and payment schedules.

– Arrangements to guarantee cash flows on abatement delivery.

General consensus by the scientific community is that if the DAP is implemented, significant developments in particular sectors such as soil carbon will be needed to achieve the desired abatement within the cost constraints and it will be much more challenging to achieve aggressive longer-term reduction targets.

Australia is not alone in its commitment to reduce carbon emissions – our largest trading partners have or are looking to put in place measures to do the same.

The US has announced new rules to cut carbon pollution, China is implementing seven pilot emission trading schemes commencing later this year (with the intention of introducing a national trading scheme by 2015-2016) and South Korea will launch its emissions trading scheme next year. China has also become the largest investor in renewable energy and its incoming president has proposed other measures to reduce emissions and pollution such as putting a cap on coal consumption by 2015. This is in addition to existing emissions trading schemes already in place in the EU, New Zealand and California.

If the CPM remains in place and converts to an international emissions trading scheme, it is likely Australia would reach the minimum 5 per cent emission reduction by 2020. If this occurs, industry will be incentivised to reduce its carbon intensity, which will improve its efficiency and relative international competitiveness.

However, a large portion of the abatement associated with such a scheme is expected to occur offshore, as the purchase of international credits is the lowest cost form of compliance.

It could also leave Australia with an uncompetitive and inefficient industry sector compared to countries that have significantly reduced their industry’s reliance on fossil fuels leaving us unprepared for a future low carbon global economy and a ramp up of carbon reductions beyond 2020.

Mathew Nelson is Ernst & Young's climate change and sustainability leader.

The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.