Inching towards action

Direct Action still has inquiries and political hurdles to face, but the government's green paper has at least given some decent options around the key issue of measuring baselines.

RepuTex Market Insider

The start of the New Year for the Australian emissions markets represents the start of ‘the race to July 1’ – the point at which both the Emissions Reduction Fund and FY15 compliance year of the Carbon Price Mechanism are due to commence, and the point at which the ALP and the Greens will lose control of the Senate; and with it, the ability to preserve their clean air legislative package.

In a market where emissions regulation has struggled to maintain a foothold, there is a certain irony to the notion that from July 1 two competing emissions policies may co-exist for a period of time, with the government proposing to regulate the roll out of its ERF should support for Direct Action legislation not be forthcoming, while in parallel, the repeal of the Carbon Price Mechanism is unlikely to progress through the current Senate prior to the end of June.

As we touched on in our December policy update, the ability of the government to repeal the CPM in the new Senate prior to ‘point of no return’ on September 1 (the opening of the Clean Energy Regulator’s ‘buy-back’ window) remains a moving feast, and will be influenced by the Western Australia Senate re-election and the input of minor party Senators.

On the face of it, the CPM repeal in the new financial year remains achievable, but uncertain given the short period of time for the new Senate to review the repeal bills prior to the September 1 deadline – only two sitting weeks.

Given the game of Russian roulette facing the Coalition in the new Senate, and the risk of the ALP-Green’s climate legacy being eroded from July 1, one of the key watches for the market over the first half of 2014 will be the potential for a compromise to be negotiated between the major parties in the current Senate.

Green shoots emerging in Direct Action?

While a significant gulf exists between the major parties on the preferred mechanism to regulate emissions, the government’s newly released Green Paper appears to soften the ground on some key parameters of the Direct Action Plan, potentially indicating a broader objective to environmentally optimise the scheme, while preserving the Coalition’s design principles – to incentivise domestic emissions abatement, maintain growth and limit the use of penalties.

Notably the Green Paper takes a significant step forward with respect to emissions baselines, with discussion of ‘absolute’ baselines being applied in place of or in parallel to ‘emissions intensity’ baselines. Such a change may enable the scheme to be calibrated to achieve an emissions reduction target (be it now or later), and would overcome the risk of liable entities reducing their emissions intensity, while continuing to increase their absolute emissions levels, to the detriment of the national emissions reduction target.

Combined with the proposed use of flexible safeguards (penalties), companies would be able to manage their exposure over time, much like the roll out of the EU ETS in 2005, or Australia’s own CPM (and CPRS), which provided deferred liabilities for some sectors, and compensated others to facilitate a transition to the scheme, and to encourage participation.

The Green Paper also outlines the potential development of a 'make-good' provision to enable liable firms to manage their exposure over time via a secondary market – which may also be used to enable participants to trade among each other in order to deliver abatement to fulfil ERF delivery contracts. Such a mechanism would lead to additional demand for Australian Carbon Credit Units (ACCUs) and may be designed to support investment into sectors such as land-use, while also taking Direct Action one step closer to a traditional ‘trading’ mechanism.

For detailed analysis of the impact of these new design elements on the operation of the ERF ‘market’, refer to our latest Market Update, which is available for free download here.

How decisions are made on these design elements may ultimately determine how closely Direct Action resembles a true market-based ‘baseline and credit’ scheme, and how environmentally effective the scheme is likely to be. On the face of it, the Green Paper takes a big step forward, however, whether these ‘green shoots’ make the final cut remain to be seen.

Should it take such a course, the draft scheme may provide enough flexibility to bridge the divide between the Coalition and the ALP/Greens, with the latter likely to push for a binding emissions cap and a more scalable market – both of which could be incorporated into a baseline and credit scheme, particularly one that incorporated ‘absolute’ emissions baselines. Whether the major political parties are open to a compromise remains to be seen, and is tempered by four years of political divide on clean air policy.

Watch this space

All eyes now turn to the commencement of the autumn session of Parliament on February 11 and the reporting of the Senate inquiry into the government’s Direct Action Plan on March 24 – just three days prior to the end of the autumn session, around the time of the government’s White Paper release, likely to take place in late March-April (for RepuTex's full policy calendar, click here).

How the design of the new Direct Action impacts industry exposure, risk management opportunities and the supply of abatement (from ‘activities’ and ‘facilities’) remain fundamental inputs as firms begin to analyse their own liability to, and participation in the new market.

Let the countdown begin. 

RepuTex’s Market Insider is a fortnightly review of the key issues shaping the Australian emissions market. It was originally published by RepuTex under its Australian emissions markets research service. For more information, please click here.