CLIMATE SPECTATOR: Hunt puts some flesh on policy

Shadow Climate Change Minister Greg Hunt gave one his most expansive talks on Wednesday on how the Direct Action Emission Reduction Fund might work, while at the Australian Alliance to Save Energy Summer Study conference.

Winners of the abatement auction rounds will be awarded contracts providing guaranteed payment rates from government for each tonne of CO2 abatement they deliver. Payment will only be provided on delivery of "measurable and verified” abatement. No payments will be provided prior to delivery of abatement.

What Hunt explained as the key components for the operation of the fund sounded essentially like a baseline and credit abatement scheme (similar to the NSW Greenhouse Gas Abatement Scheme), but with government as the only purchaser of abatement credits, rather than obligated entities.

His description was that the Coalition would take the core approach of the Carbon Farming Initiative, and expand it out to additional abatement activity methodologies. For example, Hunt said he would be open to using methodologies prepared for the Clean Development Mechanism with suitable modifications to fit Australian circumstances.

The Clean Energy Regulator would take on the task of administering the scheme and undertaking measurement and verification of the abatement delivered by contracted parties.

When asked about the existing NSW and Victorian energy efficiency tradeable certificate schemes and the potential for a national scheme, Hunt explained that the Fund could effectively serve a similar function, providing abatement payments for the same activities as covered by the existing energy efficiency schemes. However he didn't cover off on the extensive use of deeming under these schemes, which does provide credits upfront, rather than as abatement is delivered.

He continued to emphasise that the scheme would be driven solely by lowest cost of abatement, and made no mention of other criteria being applied to assessing bids. 

The 2010 Direct Action election policy outlines, "assessment of projects will also take into account any additional significant public policy benefits”. It seems hard to imagine how such an unavoidably qualitative assessment could be compatible with an auctioning process based on lowest cost per tonne of CO2.

This extra detail represents a major improvement over what has been provided in the public domain to date. On top of this, the program would also impose historical emission allowance baselines on existing emitters. These emitters could then elect to sell down their emission allowances via the auction process.

The DAERF is now unambiguously (at least when Greg Hunt is speaking) evolving away from the kind of disastrous grant-tendering programs employed in the past.

These programs such as the Howard Government's Greenhouse Gas Abatement Program and Kevin Rudd's Solar Flagships are like a form of production suited to making a finely tailored suit. 

Government analyses each individual project in detail, negotiating different payment terms with each proponent, and then giving them money upfront as the project is constructed rather than when they actually deliver what you're ultimately after – avoided tonnes of CO2. 

But the volumes of abatement and the speed with which it is needed is akin to mass production of millions of motor vehicles and fridges, not a handful of finely tailored suits. Each abatement activity methodology represents a mass-production line for government to assess, measure and pay for abatement projects. It also forces a certain degree of discipline.   

Also the use of an auction process to select projects should hopefully remove the potential for the National Party to commandeer (or "leverage”) the DAERF to fund their pet projects. An auction process is not capable of taking non-quantitative criteria into account. This should hopefully avoid things like subsidising construction of transmission lines from Papua New Guinea to Australia or gas pipelines to Gove to support an aluminium industry, rather than low cost abatement. 

Of course this is not to say that there aren't still some very important holes in the policy.

Most importantly is its funding. The DAERF is still built upon an assumption the Coalition will be able to acquire a huge amount of abatement for around $10 per tonne of CO2. No one with any kind of track record in delivering abatement projects thinks they'll get anywhere close to the 5 per cent reduction target with the money they've budgeted.

The other major gap is overoptimistic bidding in the auction process. A proponent can be tempted to overestimate the quantity of abatement they think they can deliver for a given price to ensure they win a bidding round. They then find projects are more costly or harder to develop than they had initially proposed. 

In past programs there has been no penalty or make-good provision for failing to deliver, so many selected projects are just abandoned or are strung out for several years before government finally pulls the pin on funding.

It's likely a Coalition government, based on auction results could think the DAERF is going to deliver the required volume of abatement. Then after a two to three year lag they find they'll only get half or even less of the quantity of abatement that had actually been promised.

The Coalition needs to explain how they'll plug these holes before September.