Taking Abbott’s fig leaf seriously

Direct Action is seen as a charade and a smokescreen. But with some small tweaks it might be converted into real carbon market freed from its inadequate budget funding.

In trying to get thoughts on the Coalition’s Direct Action policy from people experienced in carbon policy, many are just too fatigued and exasperated to engage. You get this no matter whether they are from the clean or the polluting end of industry. 

They’ve spent nearly 10 years engaging in consultation processes over climate change policy and investing in systems and processes to comply with the assorted laws and programs. This was all meant to reach a crescendo with the carbon price. Instead it’s an anti-climax, and they’re just tired of it.

There’s this view that Direct Action is just a charade, a fig leaf, so why bother thinking about it. Some tell me that outside of ministers Greg Hunt and Ian Macfarlane, you just can’t usefully engage with Coalition ministers or their advisers on the difficulties of making the policy work.

“Their eyes just glaze over,” one big emitter’s government affairs manager told me. “You mention the word ‘baseline’ and you’ve already lost them,” she said. Another lobbyist said: “They haven’t got a clue how the thing will work and they don’t care. The extent of their thought hasn’t gone beyond the idea that government hands out money for planting trees.”

But some are willing to take the government seriously, or are just too passionate to give up. While some sections of industry, via the Business Council, are happy to just kick the can down the road for another year or two by referring the whole thing to a Productivity Commission review, a few are thinking the policy through.

Danny Price, an energy economist with deep experience in climate policy, still believes that the Direct Action Emission Reduction Fund can be made to work. Price’s support is a little perplexing given he helped design the world’s first legally binding carbon trading scheme – the NSW Greenhouse Gas Abatement Scheme, or GGAS.

But this support becomes more understandable when you consider that the DAERF, as articulated by Minister Hunt, will operate via granting credits to firms who outperform emission intensity baselines. This is exactly how the NSW GGAS scheme operated but with one critical difference. Rather than having government as a single buyer of abatement credits using taxpayers' money, abatement was driven by a legal obligation on several electricity retailers to achieve emission reduction targets. These retailers then traded with suppliers and intermediaries to obtain abatement credits, creating a market in abatement credits.

With just some simple tweaks DAERF could transition from being a grossly underfunded budget program with little hope of achieving the 5 per cent emissions reduction target, to a genuine market-based scheme in trading abatement credits, just like NSW GGAS. While Price maintains that the budget funding for DAERF is sufficient, this is based on 2010 Coalition election commitments that would provide nearly $10 billion to 2020. Climate Spectator confirmed with Hunt’s office during the 2013 election campaign that at best funding would be half that.  

So to achieve the 5 per cent target the DAERF must transition into a form of emissions trading where firms fund some of the abatement.

The Carbon Market Institute has provided a submission to the government which paints a picture for how this could be done, which still adheres closely to the policy Hunt has articulated.

The Coalition policy states that firms will be given emission baselines which if exceeded will incur fines. But if they go under they earn abatement credits which can be sold to the government’s DAERF. The institute proposes a simple tweak to this whereby firms that exceed their baseline can voluntarily opt to surrender an abatement credit to the government instead of paying the fine. Once you allow this, you instantly create the capacity for a market in carbon credits where firms, and not just government, help fund emission reductions.

Now, the extent to which this non-government market becomes significant depends critically on how stringently the government sets emission baselines. If baselines are weak and firms need to do little beyond 'business as usual' to go under the baseline, then few will ever face the prospect of paying a fine, and there will be little private sector demand for abatement credits.

Now, both Hunt and Abbott have said that fines will rarely apply, and Hunt has said they don’t expect the scheme to raise any revenue. But this doesn’t necessarily have to mean baselines are weak. If firms can opt to buy abatement credits instead of paying a fine for exceeding baselines, then fines will rarely be imposed, and little revenue raised.

In the past Hunt has said that baselines will be set based on historical emission levels, or best practice in the case of expansions. According to carbon and energy analysts Reputex, such a form of baseline is unlikely to be exceeded. That’s because the large majority of production plants tend to realise improvements in energy and carbon intensity over time as a standard business practice, without any government inducements.

Consequently, emission baselines based on historical levels would expose the emissions reduction fund to serious budgetary risks. It would mean business would create a large number of abatement credits they could sell to the government that represented no improvement over business as usual. The government would blow a large proportion of the DAERF handing windfall gains to firms, while getting no closer to their 5 per cent target.

Providing some hope that baselines could be tightened to avoid such a problem, Hunt gave a speech in October stating:

“...emission reductions must be ‘additional’ to business as usual. Projects paid for by the Fund must go beyond what would have occurred in the normal course of business.”

He also said:

“...one of the matters that the White Paper will address is the mechanism for dealing with emissions above the business-as-usual baseline … The mechanism will also help encourage co-investment by business and ensure that taxpayers get value for money. Ongoing government funding should not be necessary once technologies are mature and become business as usual.”

This seems to suggest the government is considering setting baselines that would decline over time, not be fixed on historical levels. Depending on the rate of decline it could mean a reasonable number of firms end up exceeding their baseline. The more that exceed their baselines, the less money the government has to spend to achieve its abatement targets, all the while not raising any revenue. So it can’t be accused of not axing the tax.