Following the baseline

*This is part three in a five-part series. Click here for parts one (Less talk, more action) and two (Listening to the market).

The third and fourth articles in Energetics’ series on the Emissions Reduction Fund, consider two key design issues. This article looks at some of the details around emissions baselines and compares sector-specific emissions intensity baselines with site-level baselines. On Tuesday we will discuss the support needed for emissions reduction projects.

The baselines and the level playing field

The role of the baseline (and how it is defined) is central to the operation of the fund. The baseline:

– dictates the extent to which a facility is potentially liable to pay penalties

– establishes the volume of abatement (along with the pool of money available) which can be sold to the ERF.

Deriving the historic average baseline from National Greenhouse and Energy Reporting data is easy. Businesses and government have this information. But NGER data does not provide the appropriate denominators (e.g. unit volume, ROM tonnes, etc) for establishing site-specific emissions intensity nor does it take into account adjustments to reflect changing business activity.

Site-specific baselines

Defining and maintaining baselines at the site or facility level poses challenges. The challenges arise simply because businesses differ so much in age, type of activities, underlying foundations and, of course, the types of technologies used are often very different.

Once defined, businesses that reduce their emissions below their individual baseline will be able to offer this CO2 abatement for sale to the government. An additional revenue stream becomes available for business, providing an opportunity to drive efficiency and abatement activities.

Not only does this make good business sense, but also aligns with policy outcomes.

However, the use of site-level baselines can act to disadvantage 'high performers', especially businesses that have already taken action to reduce emissions. These companies are likely to have lower than average baselines, and fewer low cost abatement opportunities. So the use of site-level baselines potentially results in a scheme that is not equitable.

Do we already have a good working model for sector-specific baselines?

Australia has accounted for emission activities through the Energy Intensive Trade Exposed activity definitions that were set up under the previous government’s Clean Energy legislative package. Establishing definitions by activity has been touted as a good basis for the development of sectoral baselines to measure performance. This provides an excellent basis for sector baseline definition.

Here the considerations for business are how you perform relative to your sector’s baseline.

There are a number of sectors that currently fall outside of the EITE definitions due to the varied emissions intensity across the sector. Coal mining in particular will need special consideration if sectoral activity emissions intensity baselines are established.

The small step to baseline and credit trading

Following the establishment of robust and appropriate baselines, shifting straight into baseline and credit emissions trading makes sense and is relatively simple. This would be open to companies that create emissions reductions below their baseline. Under this model, they will be able to sell offsets into the ERF, provided the government is not the only buyer. 

As an emissions reduction policy it ensures abatement occurs domestically and reduces the risk of 'carbon leakage', where the current cap and trade scheme drives more emissions intensive activities offshore.

There are risks with this approach though. Without a strict cap on emissions there is also no guarantee that Australia will meet our 5 per cent emissions reduction target as ratified under the Kyoto protocol – yet alone any further reduction targets beyond 5 per cent reduction. Companies that can afford the penalty for emitting over the baseline are unlikely to make the behavioural changes necessary to reduce our overall emissions profile – is this equitable? Changes in consumer behaviour will be limited as there is no cost pass-through signal to drive the shift away from emissions intensive activities.

So will we see baselines adjusted to meet national and international targets? Will all be able to participate? Will this create a market based mechanism?

What does this mean for business?

On balance the most accurate and workable baseline is intensity-based. Better performers which have already worked to lower their carbon intensity are recognised and rewarded. Also, businesses focussed on reducing their emissions can create offsets from which they can derive a financial benefit. 

Sector-specific baselines also offer more benefits, especially as the administrative and regulatory burden is far less than opting for site-specific baselines. 

Regardless of the final mechanics, any scheme will need to be auditable, robust and documented to demonstrate the baseline and any changes.

On Tuesday, we will look at the other part of Direct Action, which is the support of projects that generate abatement for sale.

Emma Fagan is a consultant and Dr Peter Holt and Gordon Weiss are both principal consultants with Energetics.