Hunt's unfinished climate bill down to two?

Reputex Market Insider

With the Federal Budget confirming that $2.55 billion in funding will be allocated to the Emissions Reduction Fund via appropriations – with $1.1 billion to be paid out in the first four years – attention now turns to the implementation of the scheme, with the Coalition favouring a legislated approach in order to grant broader powers to the Clean Energy Regulator to oversee the auctioning and contracting functions of its policy.

The Carbon Credits (Carbon Farming Initiative) Amendment Bill 2014 is expected to progress through the House of Representatives prior to June 26, enabling the Bill to be received by the new Senate during the extended winter sitting from July 7-17.

It remains to be seen how the government will negotiate with the minor parties in the new Senate, with Environment Minister Greg Hunt optimistic of striking a deal with crossbench senators to implement the Coalition’s key climate policy.

With the ‘safeguard mechanism’ yet to be designed, how Senators Madigan and Xenophon will respond to the ERF component of the policy remains unclear, with the environmental success of the scheme likely to be a key focus, suggesting that pressure may come to extend the funding for the scheme (see below), or introduce the use of international offsets.

As noted in earlier research, a compromised outcome may therefore be the only way for the government to progress via legislation. (You can view our full analysis of the government’s road to 39 votes here.)

The government’s ability to bypass the Senate and implement its ERF via executive power remains an ‘ace in the hole’ should lower house support not be forthcoming. Such an approach would however lead to administrative issues for the operation of the scheme, notably the ability of the regulator to enter into contracts. (For more on the design of a ‘regulated’ scheme, you can read our latest Market Update here.)

Around the market

– Supply of Australian carbon credit units (ACCUs) has passed 5 million, with three waste and four vegetation projects receiving credits from April 3 to May 21, taking the total issue of ACCUs to 5,272,944.

– The federal budget forecasts lower cash flow of $1.1 billion over the first four years of the ERF, which is likely to raise eyebrows, however as we discussed in our budget update, on paper this changes little, with the minister indicating that the Clean Energy Regulator will be free to enter into contracts up to $2.55 billion at any point over the next four years, with the annual promise of $300/500/750/1000 million previously detailed in the White Paper to be paid out as abatement is produced over a period beyond the forward estimates.

– On Monday a Senate estimates hearing was told by Parliamentary Secretary Simon Birmingham that additional money for the ERF remains a possibility, with the government not closing the door to seeking more money if it becomes clear that it will be unable to meet the 5 per cent emissions reduction target by 2020.

– The hearing was told that the department is unclear on how much the ERF will contribute to the 5 per cent target due to the ongoing design of the safeguard mechanism and participation in the ERF yet to be fully understood prior to the commencement of initial auctions.

– Environment Minister Greg Hunt has suggested that while he is optimistic of striking a deal in the new Senate, he is open to amending the government’s policy to allow it to pass. The minister has held discussions with independent senator Nick Xenophon, DLP senator John Madigan and PUP leader Clive Palmer, with horse-trading set to take centre stage, potentially tying the passage of the ERF legislation to broader policy such as the deficit levy, petrol excise indexation and the proposed GP levy.

Watch this space

As we discussed in our latest Market Update, with the countdown to July 1 ticking towards one month, it now appears that ‘ready or not, the ERF is coming’ to the Australian market, be it via regulation-executive power, or legislation.

Given the continued operation of the Carbon Pricing Mechanism true up through to February 2015, analysis indicates that few businesses from the land use sector will bid into the ERF under $22, with these firms likely to bid high or bypass the ERF early auction rounds in favour of selling offsets to CPM liable entities.

Low participation from the land sector in FY15 may inversely provide an opportunity for early movers outside of the CFI, such as high emitting industries, to secure higher priced contracts in place of CFI participants while supply is low.

RepuTex’s Market Insider publication is a monthly review of the key events and activity shaping the Australian emissions markets. It was originally published by RepuTex under its Australian emissions markets research service. For more information please click here.