Why Direct Action is still a dud - Part 2

Minister Hunt says he's confident Direct Action will easily achieve the government's emissions reduction target. Here's two reasons why he must be smoking something pretty potent to be so confident.

A few days ago in part 1 of the series, I explained that now we’ve seen the White Paper for the Coalition’s Emissions Reduction Fund, it's beyond doubt that it’s a dud. Part 1 explained that this is because the scheme: a) doesn’t have enough budget funding to buy the amount of abatement required to get remotely close to the government’s emission target and b) there’s no stick to drive companies to reduce emissions off their own bat.

But they’re not the only reason why it’s a dud. Besides there being inadequate carrot and stick to drive demand for abatement, there are two other fundamental problems that will undermine businesses’ willingness to supply abatement:

  1. The short duration of abatement purchasing contracts the government is offering of five years means you can pretty much knock out supply of abatement from big, capital-intensive projects such as in power supply, or energy-intensive heavy industry and mining. These usually take around ten years to payback the upfront investment so a five year contract paying little more than $10 per tonne of CO2 probably isn’t going to get these guys falling over themselves to spend billions of dollars on new kit.
  2. At the same time, the scheme won’t do much to stimulate abatement from the smaller, less capital intensive projects in the areas of residential and commercial building energy efficiency either, because it refuses to pay for abatement upfront on project completion. These projects often already achieve paybacks of less than two or three years but still don’t get up. Offering to pay extra money for these projects a few years in the future just isn’t going to make a difference when decisionmakers are so focused on upfront cost rather than net present value.

Climate Spectator has highlighted these problems with the Emission Reduction Fund in a number of prior articles (see here for why five year contracts are too short, and here for why small-scale energy efficiency projects need payments for abatement to be front-loaded).  In addition, a significant number of businesses and industry groups have gone to the effort of explaining these issues to the government in their submissions.

Indeed, the chair of the government’s expert advisory panel on the Emission Reduction Fund, Danny Price, articulately explained to me the need for a two-pronged approach of providing long-term incentives to address emissions from long-lived energy supply and heavy industry plant and equipment, as well as more short-term, low-transaction cost incentives for small-scale energy efficiency.

Just a few weeks ago I’d written a hopeful piece suggesting that Direct Action might do something useful because the government appeared open to the need to front-load abatement payments from smaller-scale energy efficiency projects.

My hope was misplaced.

Greg Hunt says he’s confident Direct Action will achieve the government’s emission reduction targets and not just that, but "do it easily".

Everyone else is wondering what he’s been smoking and where they can get some.