Could Xenophon save Direct Action?

Amendments proposed by Nick Xenophon could see Direct Action within reach of Australia’s 2020 emissions target, Reputex says, but only with a significant 'baseline and penalty' component, which puts international permits back on the agenda.

A new study from carbon market analysts, Reputex, indicates that Australia's Kyoto Mark II commitment to reduce emissions 5 per cent from 2000 levels by 2020 may be within reach for the government's Direct Action Plan, if it incorporates a series of amendments proposed by independent Senator Nick Xenophon. According to Reputex these amendments could potentially boost the level of abatement delivered by scheme by 250 per cent. 

Senator Xenophon's amendments include longer contract periods for companies that win abatement contracts, removing constraints and improving the transparency of the abatement purchasing auction process, and access to international carbon permits to make-good on abatement delivery shortfalls.

In addition the government would have to introduce an effective baselines and penalties scheme on top of this, with the prospect of cheap international permits to again take centre stage.

The Australian market faces a remaining abatement challenge of 421 Mt in order to meet its 5 per cent emissions reduction target by 2020, an average of 70 Mt of emissions reductions per year. 

According to Reputex, the improved performance of the ERF, driven by Senator Xenophon's amendments, would lower the remaining emissions shortfall to 238 Mt, which would be in reach of an emissions baseline and penalty scheme, which could deliver an additional 196 and 316 Mt of greenhouse gas emissions reductions. Their calculations of how these design changes meet the emissions abatement gap are detailed in the chart below.

Graph for Could Xenophon save Direct Action?

The government has yet to sign off on its baselines and penalty scheme, also known as the safeguard mechanism. But having indicated that it is not going to use the scheme as a revenue-raising option, the option of allowing for the purchase of international permits – which has been backed by business groups, including the Australian Industry Group – appears the most likely path forward.

However, international permits have been criticised, with a recent Climate Change Authority report suggesting there are some reasons for whether they make a difference to global emissions beyond what is already locked-in.

Meanwhile, Reputex sees further improvements to the scheme via concentrating the allocated budget funding towards purchasing abatement delivered in the period prior to 2020. 

"At present, the operational timeline of the Direct Action Plan is disjointed," said RepuTex executive director Hugh Grossman. 

"For instance, Australia's 5 per cent emissions reduction target must be met within six years, by 2020, however the $2.55 billion ERF will purchase abatement over a much longer 10-year period to 2024, while companies that are credited for seven years of abatement will only win funding for five-year contracts."

According to Reputex, should ERF contracts be aligned with Australia's 2020 emissions target timeline, with full funding for the scheme spent by 2020 (rather than 2024), greenhouse gas emissions abatement purchased by the ERF could grow from 67 million tonnes of CO2-e by 2020, to 130 Mt, an increase of over 90 per cent. In addition if further funding was allocated of $1 billion per annum in 2019 and 2020 they estimate a further 53 million tonnes of CO2-e abatement could be obtained.

"Focusing the operation of the fund to 2020 would mean the ERF could purchase more abatement in a shorter amount of time, for the specific purpose of meeting Australia's 2020 emissions reduction obligations," Mr Grossman said.

The ERF legislation, which lies within the Carbon Farming Initiative Amendment Bill, is expected to be voted on by the new Senate in the upcoming spring session of parliament, with the government requiring the support of the Palmer United Party, which is expected to table its own 'dormant' emissions trading scheme proposal this week.