Xenophon pushes Direct Action in the right direction

If a number of the changes proposed by Senator Nick Xenophon to the Carbon Farming Initiative Amendment Bill 2014 are implemented, the prospect of meeting Australia’s international emissions reduction targets would be significantly increased.

The combination of the Emissions Reduction Fund to finance domestic abatement, a well-designed safeguard mechanism to help limit emissions growth of major emitters and a strategic reserve to purchase eligible international units – all working in concert – could translate to an effective suite of polices that will enable Australia to meet its minimum 5 per cent by 2020 emissions reduction target.

Carbon Market Institute members are strong supporters of the Australia’s domestic offset scheme, the Carbon Farming Initiative, and active engagement and support from senators for the passage of the legislation is a very positive step to ensure the CFI remains viable. Continuity of the CFI means jobs and investment in carbon abatement activities also continue.

The amendments made by Senator Xenophon include changes that will be welcomed by proponents looking to bid into the ERF. These include the alignment of contract periods with crediting periods and the prospect of securing additional crediting periods for projects.

A very interesting proposition is the inclusion of a strategic reserve to purchase eligible international units to help meet international climate change targets.

The exposure draft legislation has also set out the framework for the operation of the ERF’s safeguard mechanism. The proposed amendments relating to how the safeguard mechanism would operate are broadly consistent with market-based baseline and credit design principles.

With regard to the specifics of the proposed amendments, I make the following comments:

Objects

– Including the term ‘successor agreement’ to capture future international climate change agreements will ensure the Act is relevant to meeting the targets that will be set under the Paris 2015 Climate Change Agreement.

Contract duration

– The main benefit of aligning the seven-year crediting period for projects with a seven-year contract period is the ability to spread project costs over the effective life of the asset.

– Having the ability to negotiate contracts for longer than seven years for projects that have longer crediting periods is welcomed.

Renewal of crediting period

– The option to renew the crediting period for specific methodologies is strongly supported.

Safeguard mechanism

– The key rules that will need to be set following the passage of the legislation that will determine the effectiveness of the safeguard mechanism in limiting emissions growth include: determining the coverage, the methods and process for setting baselines and the nature of the penalties for exceeding compliance.

– The proposed framework design has more detail than was presented in the ERF White Paper and provides a good starting point to develop the rules around coverage, baseline setting and penalties.

– Although it will take time to consult with business to set the rules for the safeguard mechanism, the newly proposed start date of July 1, 2016 is a significant delay and could impact Australia’s ability to meet its emissions reduction target.

– Incorporating the safeguard mechanism as an extension of the NGER (National Greenhouse and Energy Reporting) Act is supported.

– Civil penalties for companies exceeding allocated baselines will help to ensure strong compliance and stimulate private sector investment in abatement activity.

– Penalties should be in the form of purchasing domestic offsets, international units or a combination of both.

– A viable secondary market for eligible offsets could be established to help companies covered under the safeguard mechanism to meet compliance at least cost and stimulate market activity.

– Baselines should be set to decline over time in line with future emissions reduction targets.

Strategic reserve

– I support the establishment of a ‘strategic reserve’ of eligible international carbon units.

– Under the current policy setting, a strategic reserve could be used in three ways:

1. As a top-up to ensure the 2020 emissions reduction target can be met – Purchasing sufficient quantities of international carbon units will cover any gap between domestic emissions reductions and Australia’s minimum five per cent target. This would ensure Australia meets its internationally recognised commitments.
2. As a source of credits to be drawn upon where there are no domestic credits (ACCUs) available in the secondary market for ERF proponents with make-good requirements – Proponents of projects within the ERF which under-deliver on contracted abatement will be required to make-good on this under-delivery by purchasing sufficient credits to acquit the deficit. The strategic reserve could provide the necessary liquidity for proponents in the event the supply of ACCUs in the secondary market has been exhausted.
3. As a source of compliance for companies that exceed their allocated baseline under the safeguard mechanism – Under the safeguard mechanism, covered companies that exceed their allocated baselines could purchase credits from the strategic reserve to offset excess emissions. The strategic reserve could act as a source of credits whether compliance is voluntary or mandatory.

– The early establishment of a strategic reserve will provide the liquidity necessary for the ERF and the safeguard mechanism to function effectively. 

– In establishing a strategic reserve, Australia can draw on models used by other countries and private sector institutions to develop a mandate that suits Australia’s specific policy requirements and emissions reduction goals.

Peter Castellas is chief executive officer of the Carbon Market Institute. CMI is an independent membership-based not-for-profit organisation which aims to assist Australian businesses in meeting the challenges and opportunities associated with market-based approaches to emissions reduction and the transition to a low carbon economy.