Special report: Hunt’s back of envelope foundations for Direct Action

Any way you look at it the Coalition’s Direct Action budget costing is built upon an incredibly optimistic back of the envelope foundation stone.

Yesterday, in part 1 of this special report into the Coalition’s budget costing for its carbon abatement policy, I provided the table below detailing the abatement economics assumptions which underpin its budgeting. 

Essentially the Coalition estimates in its 2010 election policy it needs to acquire 140 million tonnes of CO2 abatement for the year 2020 to reach the target of keeping emissions 5 per cent below the levels that prevailed in the year 2000. It expects to achieve the lion’s share of this abatement – 85 million – from enriching the levels of carbon held in the soil. The other 55 million comes from a variety of different sources and the Coalition doesn’t specifically distinguish the likely share of abatement from any individual source. 

Graph for Special report: Hunt’s back of envelope foundations for Direct Action

Source: Liberal Party 2010 Election Direct Action Climate Change Policy

Yesterday I explained that obtaining 85 million tonnes of abatement from soil carbon by 2020 is physically implausible. So then the issue comes down to whether these other sources might be able to bridge the gap and at what cost.

Firstly, as some background, Greg Hunt has stated publicly that the fund will only pay out monies for abatement after it has been delivered. He has also confirmed in correspondence with Climate Spectator that the fund will commence allocating money in 2014 with $300 million, which will then gradually build up to $1 billion in 2018 and an average of $1.2 billion for 2019 and 2020 as outlined in the 2010 election policy.

Given Hunt has said money will only be spent for abatement after it has been delivered, then one can assume that the $1.2 billion in 2020 will be purchasing the full 140 million tonnes of abatement required in that year (money spent in the years prior won’t be purchasing abatement to be delivered in the 2020 year).

So how much could that $1.2 billion buy him outside of soil carbon?

We aren’t actually working from scratch in terms of assessing these other abatement options as we already have had several years experience with the New South Wales Greenhouse Gas Abatement Scheme, the Victorian Energy Efficiency Target and the New South Wales Energy Saving Scheme, as well as the Carbon Farming Initiative. Each of these schemes help to give us a feel for what might be possible from waste coal mine gas, landfill, building energy efficiency and forestry.

Based on the experience from these schemes, as well as other costing estimates, the table below outlines the likely amount of abatement the Coalition could acquire at $15 and $25 per tonne of CO2, from what is commonly thought of as the low hanging fruit abatement opportunities. Further explanation is provided under the headings below for each abatement option.

In conjunction with Ben Rose’s optimistic assessment of 20 million tonnes of abatement from soil carbon, this suggests the Coalition would have spent up all of its $1.2 billion budget plus a bit more ($25 x 59 million = $1.475 billion) and would still fall 81 million tonnes of CO2 short of its 5 per cent emission reduction target.

Conceivable abatement by 2020 from low hanging fruit opportunities at $15 and $25 per tCO2
(millions of tonnes of CO2-e)

Graph for Special report: Hunt’s back of envelope foundations for Direct Action

These estimates do not take into account abatement opportunities in power generation or transport. But the Coalition admits transport abatement is likely to cost $40 per tonne. In addition electricity generation abatement is likely to cost at least $25 per tonne given that gas contracts are now being negotiated on the east coast market at prices above $7 per gigajoule. Achieving abatement in this sector without also increasing electricity prices (a Coalition requirement for eligibility under their policy) is highly problematic.

Now there are also abatement opportunities in industry, but these aren’t part of the Coalition’s budget costing estimates. To argue that something you haven’t accounted for might come to the rescue, doesn’t provide much confidence that their budgeting is sound and rigorous.

The reality is that the Coalition’s Direct Action budget costing is built upon an incredibly optimistic back of the envelope foundation stone.

Waste coal mine gas

Fugitive methane emissions from coal mining are expected to total 44 million tonnes of CO2-e in 2020, of which more than two-thirds are from underground mines where there is potential for capture and combustion of the methane.

Under the NSW Greenhouse Gas Abatement Scheme (which recognised projects across all the NEM Grid states) we saw a total of about four million abatement certificates created per annum with a price in the realm of $10 to $15. But of this, two million were from projects that were already in place prior to the scheme’s enactment. So the $10 to $15 brought forward about two million tonnes of abatement.

The government, in its emissions projections, expects about 9.8 million tonnes of abatement, although this was with a much higher carbon price averaged at $26.

Based on this information the Coalition’s numbers aren’t out of the ballpark and it seems conceivable that four million tonnes might be forthcoming at about $15, but it’d be unlikely to get eight million. However if the Coalition was prepared to spend around $25 then 9.8Mt is conceivable.

Landfill gas

According to government projections the entire waste sector will be responsible for about 13Mt in 2020 without a carbon price. So the Coalition expects that it can reduce these emissions by 50-70 per cent within the space of six years.

This appears to be incredibly optimistic considering there have been incentives available to reduce methane emissions from landfills for some time. Destruction of methane from landfills has been recognised under the government’s voluntary abatement credits program known as Greenhouse Friendly since 2002.

Under the NSW GGAS, which recognised methane destruction via power generation across the NEM, they only managed a touch above three million tonnes of abatement certificates in a year. Of this two million was from new projects. Lastly the Carbon Farming Initiative also provides carbon credits for legacy landfills that allows for a value close to the $23 carbon price. However since commencement of the CFI in January 2012 only 393,451 carbon credits have been issued.

Considering many of the biggest landfills and sewage farms in the country already have methane capture in place and incentives in the realm of $10 to $15 per tonne have existed for some time it seems pretty unlikely that the Coalition could achieve a further 50 to 70 per cent reduction. 

Replicating the two million tonnes of GGAS might be possible at $15 but given the poor uptake under the CFI, you’d think to get to even four million you’d need a price closer to $25.

Energy efficiency

It is true that energy efficiency offers very large potential for abatement at low economic cost. That’s because the apathy of consumers means they pass-up opportunities that would be in their own best financial interests. 

But unless you do it by regulatory mandate, it costs money to overcome this apathy. 

The Coalition is costing this at $10 to $15, but there are energy efficiency incentive schemes already in place which suggest a higher cost.

Under the NSW Energy Saving Scheme, abatement certificate prices have been trading between $20 and $33 – and that is just to deliver two million abatement certificates. Under the Victorian Energy Efficiency Target, abatement certificates have traded between $17 and $25 over the past 12 months to create about 10 million certificates.

Critically, both the Victorian and NSW schemes provide credits for future abatement upfront at the time a product is installed (known as deeming). These abatement certificates do not represent abatement for a single year but over several years in advance. Greg Hunt has said the Direct Action scheme will not provide deeming. This would suggest a much higher price would be required to induce a similar level of energy efficiency.

Twenty million tonnes of annual abatement from buildings might well be possible but without deeming the Coalition will need to budget something closer to at least $25.

Forestry

The problem with abating carbon in trees is that there are lags involved and the Coalition only has six years to play with. For the first three or four years of a plantation’s life very little carbon is sequestered. On top of this you add the need for land acquisition, site preparation, financing and you’ve got very little time for new plantings to have an impact by 2020.

The GGAS scheme at its peak only generated about 700,000 abatement certificates per annum from tree carbon sequestration (although it was restricted purely to NSW). Most of this was generated by the state government’s NSW Forests for plantations they’d established before GGAS had been unveiled.

The Department of Climate Change’s projections expect that increase in forestry abatement due to the government’s carbon price would be just 200,000 tonnes of CO2 in 2020. And that was with a $26 average carbon price.

If you wanted to be exceptionally generous you might say that what occurred under NSW GGAS could be replicated across each state as well as the Northern Territory, so that’s about five million tonnes at $15. However because of the small amount of time we now have left, getting more than this, even with a higher price on offer, would seem unlikely.