Why Direct Action is still a dud – Part 1

Greg Hunt's mum is apparently keen on carrots not sticks, but the problem with his Emission Reduction Fund White Paper is that he hasn't got enough carrots and he's abandoned the sticks.

Now you can make climate change policy pretty complicated if you want to, but Environment Minister Greg Hunt boils it down to a homely analogy of being about either carrots or sticks.

According to his mother carrots are much better than sticks at changing behaviour.

But I’m sorry to say that after reading over the White Paper for his emission reduction auction scheme, Hunt is lacking in both the carrots and sticks departments. Unless he can bolster either one or the other but ideally both, his scheme will fall well short of the government’s emission reduction target.

There’s not enough money - so there aren’t enough carrots

The arithmetic is pretty simple on this.

To meet its target as detailed in the Kyoto Mark II protocol, the government says it needs to buy 421 million tonnes of CO2 abatement between now and 2020.

The government has said it has $2.55 billion to spend over 2014-15 to 2017-18.

It has left it vague as to what it will allocate for the remaining two years. However prior to the federal election I sought clarification from Greg Hunt’s office on what the funding allocation would be for the remaining years. I was told that there was no change from the prior 2010 election policy. This set out that annual funding for years five and six would be $1.2 billion. I actually then sought to confirm the annual funding would remain at $1.2 billion and was told ‘yes’ by one of Hunt’s spokespeople.

So $2.55bn 1.2bn 1.2bn equals $4.95 billion. 

Until I hear otherwise from the government that’s the budget number you can assume is the maximum the government has to spend in the emission reduction fund.

This means the government can only afford to spend an average of $11.75 per tonne of CO2.

Now go out and talk to people engaged in developing carbon abatement projects and ask them what they could deliver for $11.75 from the government for a tonne of abatement. I can tell you from more than a decade of talking to people across sectors -- from tree planting to power generation to industrial and residential energy efficiency -- that you’d struggle to get yourself a few million tonnes of abatement, let alone 421 million tonnes. 

The two markets which probably reflect the lowest cost abatement available -- the NSW and Victorian Energy Savings Schemes -- have never traded their certificates at prices equivalent to $11.75 per tonne of CO2 or lower. And these schemes are delivering volumes of abatement of just a few million tonnes, not even close to the 421 million tonnes the government needs.

Leading carbon market analysts and brokers including Bloomberg New Energy Finance, SKM-MMA and RepuTex also confirm that the government has Buckley’s chance of reaching its target with the allocated budget.

The sticks to penalise polluters to do something have gone walkabout

We’ve known for a long time that the government didn’t have enough money, but there was a hope that polluters would face an additional incentive to reduce emissions via penalties for exceeding their historical levels of emissions.  Unfortunately the government has elected to put this into the ‘deal with later’ basket.

The white paper continues to state that polluters will face an emissions constraint known as an emission baseline, above which they would face some kind of penalty or requirement to offset their emissions above the baseline. 

The good news is that these baselines will be based on a production facility’s absolute levels of emissions rather than emissions per unit of production. This will be vastly simpler to implement and administer. Also, a baseline based on absolute emissions is in theory more likely to be exceeded by a firm than one based on units of production (because efficiency tends to improve over time) and so provides a greater chance of polluters becoming an additional source of demand for abatement credits beyond just the government’s inadequate budget.  

But the bad news is that the government seems keen to do its best to make these baselines ineffective.

According to the white paper, the government will consider a facility’s emissions over the years 2009-10 to 2013-14 and set the baseline based on the financial year in which emissions were highest.  In the lead-up to the election Greg Hunt had said it would be based on the average across the years, rather than the single year when emissions were most elevated.

Secondly, the government has said it will defer the application of baselines to firms until midway through next year.

Thirdly, the white paper seems to be suggesting that electricity generators could be completely exempted from having to comply with baselines. 

And fourthly, the white paper canvasses a range of loopholes it might create to allow firms to get around their baselines. For example it floats the idea that a facility might be exempted from requirements surrounding complying with their baseline if its emissions per unit of production had improved.  Also, facilities are able to have their baseline amended upwards if they were to upgrade their plant. In addition the baselines will only apply to the direct emissions associated with the plant and not the emissions associated with use of electricity. This allows for gaming where plants could substitute electricity for other forms of energy while actually increasing emissions.

Read part 2 here.

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