The Direct Action deal - in detail

The Australian Government will successfully pass the first phase of its Direct Action Plan after reaching a deal with the crossbench to support amendments to the Carbon Farming Initiative Amendment Bill.

The details of the amendments have been set out in a letter from Environment Minister Greg Hunt sent to Clive Palmer, obtained by RepuTex.

We analyse these details and the market implications below.

Government to withdraw repeal bills for CCA, CEFC and ARENA

Subject to passage of the CFI Amendment Bill, the government will withdraw the Climate Change Authority (Abolition) Bill and provide the CCA with funding to enable it to undertake its functions. Funding will be agreed at departmental level.

The government will also withdraw its Clean Energy Finance Corporation (Abolition) Bill 2014 and the Australian Renewable Energy Agency (Repeal) Bill 2014 during the Spring 2014 parliamentary sittings.

In turn, the Palmer United Party will vote with the government to pass the CFI Amendment Bill with amendments.

Technical amendments to the Emission Reduction Fund

The government will move a number of minor technical amendments to improve the operation of the Bill, derived from public consultation and amendments proposed by Senator Xenophon.

Key amendments include:

-- The Emissions Reduction Assurance Committee's (ERAC) would have a veto power over methodologies, such that the Minister could not make or vary a methodology if the ERAC considered it inconsistent with the offsets integrity standards.

-- Savanna burning projects are proposed to have a 25-year crediting period, instead of a seven-year crediting period.

--The ERAC would have the function of advising the Minister whether to increase crediting periods in methodologies (as per Senator Xenophon's amendments).

-- The standard contract duration will be seven years, with longer contracts for projects with longer crediting periods (as per Senator Xenophon's amendments).

-- The Department of the Environment is working on methods nominated by PUP as priorities (early finishing of livestock, building lighting, street lighting, energy efficiency for low income households, transport emissions reductions, and Verified Carbon Standard private native forest management).

Special review by the Climate Change Authority – Proposed terms of reference

The Minister will instruct the CCA to undertake a ‘special review' to assess whether Australia should have an emission trading scheme in the future and what conditions should trigger the introduction of such a scheme.

The review is to consider:

-- Whether Australia's key trading partners (USA, China, Japan, South Korea and the EU) have established emissions trading schemes or equivalent schemes;

-- Australia's international commitments and undertakings under the United Nation's Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol;

-- Whether Australia should have an emissions trading scheme in the future; and

-- What emissions reductions targets Australia should agree to, and how any Paris Conference outcomes can be implemented.

The CCA will provide three reports, consisting of two draft reports and one final report by June 30, 2016:

-- Report 1: Draft report on what future emissions reduction targets Australia should agree to for public consultation by June 30, 2015.

-- Report 2: Draft report on an emissions trading scheme to for public consultation by November 30, 2015

-- Report 3: A Final report by June 30, 2016 (after Paris Conference) recommending what action Australia should take to implement outcomes flowing from the conference.

Safeguard mechanism

As per amendments proposed by Senator Xenophon, the CFI Amendment Bill will also  introduce a legislative framework for a safeguard mechanism to ensure the integrity and enforcement of the scheme. This framework will create a legislative timeline for the roll-out of the government's safeguard scheme and a framework for the Minister to design emissions baselines and penalties. The safeguard scheme is expected to be postponed to July 1, 2016. “Safeguard rules” will be established by 1 October 2015. More details on those amendments can be found here.

As we reported yesterday, the government will not support Senator Xenophon's proposed  ‘strategic reserve', which would have set aside up to $500 million to purchase international units to assist the market achieve its short and long term emissions reduction target.

Market implications

As noted in our earlier Market Updates, on its own, we project that the ERF will fall short of Australia's commitment to reduce emissions 5 per cent emissions on 2000 levels by 2020.

We estimate that the ERF will purchase 20-30 per cent of Australia's total greenhouse gas abatement challenge, or between 80 and 130 million tonnes of greenhouse gas emissions abatement. This is equivalent to a shortfall of over 300 million tonnes for Australia to meet its 5 per cent emissions reduction target of 421 million tonnes by 2020.

While the ERF alone will fall short of Australia's emissions target, the design of the safeguard mechanism will buy the government time to address any emissions shortfall. This mechanism will operate akin to a ‘baseline and credit' market, whereby companies will be assigned an emissions baseline, and be able to source offsets should they be above that baseline.

Following the rejection of Xenophon's ‘strategic reserve' proposal, the government no longer has a safety net to achieve its 5% target by 2020. This may have implications for the future design of more onerous emissions baselines for industry. To access our latest ACCU supply expectations, please click here.

Next steps

The government is expected to table its amendments in the Senate today, and will guillotine debate in order to expedite the vote on the CFI Amendment Bill, which is expected to be passed with the support of the Palmer United Party, along with senators Xenophon and Madigan.

*Our full Carbon Market Update will be released next week, outlining our expectations for the operation of the ERF in FY15 and through to 2020. This will include:

-- Updated expectations for the ERF in FY15 and through to 2020;

-- Forecast ACCU supply

-- Benchmark price discussion

-- Expected industry participation and considerations

Hugh Grossman is an executive director and Bret Harper associate director (research) at energy and carbon market analysis firm Reputex  

This article was originally published by Reputex. Republished with permission.