Xenophon's theoretical stick and Hunt's missing carrots

The government's Direct Action scheme will pass the Senate but it doesn't pass muster. Senator Xenophon reckons he's added some stick but there's no trigger to use it and Minister Hunt's still pretending he's got enough carrots.

The federal government has now managed to secure agreement from enough senators to pass the legislation to establish its scheme for taxpayers to pay polluters to reduce their carbon emissions.

Senator Nick Xenophon has been crowing that the amendments he has secured to the legislation have turned a dog into a beauty queen. But to borrow from Environment Minister Greg Hunt’s homely analogy from his mum, the scheme still doesn’t have a stick and is woefully underdone on the carrots.

Here’s the fundamental reality, polluting businesses pollute for a reason, it’s cheaper or easier than not polluting. So we’ve got two choices:

1) We can hand the polluters money taken from other taxpayers to reduce pollution (the carrots).

But the budget papers have revealed that Greg Hunt’s $2.55 billion (which was already inadequate to reach the 5% reduction target) has evaporated into just $1.15 billion over the next four years. The government claims the Clean Energy Regulator could commit to spend $2.55 billion if the abatement opportunities come up. But they obviously believe the regulator can only manage to acquire $1.15 billion worth of abatement otherwise why not lock in more in the budget?

Even if we imagine that the government’s scheme is spectacularly effective and can acquire abatement at an incredibly low cost of $15 per tonne of CO2, this $1.15 billion will only get them 77 million tonnes of CO2 abatement. To reach the minimum 5% emissions reduction target they need between 225 million tonnes (if you are highly optimistic and the government backs away from slashing the RET) or 421 million tonnes based on the latest Government emission projections. Now if we assume the government does spend its $2.55 billion, Reputex calculate the government could get between 80 to 130 million tonnes of abatement – still well short of their target.

2) We can financially penalise the polluters for polluting.

In this particular case Xenophon believes he’s achieved a great victory because he has got some amendments into the National Greenhouse and Energy Reporting Act which state that if firms pollute above their emissions 'baseline' they will have to either:

a) Acquire emission abatement credits from someone else to offset the emissions above their baseline; or

b) Pay a fine to the government which according to Xenophon’s amendments needs to be set by the Minister at a level that ensures the company by breaching its baseline does not derive any “financial advantage”.

This all sounds like progress but what’s the “baseline” and who does it apply to?

Here’s where it all unravels.

Firstly, the government’s white paper on their Direct Action scheme has left electricity generators out of any program of applying baselines – so that’s about a third of Australia’s entire emissions for which no penalty will apply.

Oh, and I forgot – transport that won’t have baselines either, neither will agricultural sources of emissions, or deforestation. So actually baselines will only apply to maybe a third of Australia’s overall emissions.

Secondly we don’t yet know whether these baselines will be set at a level of stringency that firms would ever exceed anyway, and Xenophon’s amendments say nothing about how the baselines should be set. Also they won’t be implemented until July 2016.

So far the government’s statements suggest they’ll be set at a weak level. Greg Hunt says the baselines are only about preventing companies from “going rogue” and a form of back-up. The government’s ERF white paper suggests they’d be set at a facility’s highest recorded emissions level over the past five years. So they don’t have to reduce their emissions at all, but they might face a degree of restriction if they needed to expand production beyond the levels they’d achieved in the last five years.

Now have you noticed any major industrial facilities in Australia like steel mills or chemical plants or oil refineries that have been talking about expanding?

According to Hugh Grossman, executive director of carbon market analysts Reputex, “We don’t see a whole lot of companies exceeding their baselines, maybe 20 to 30 might face some risk”.

In addition to the fact that existing polluting facilities face no pressure to reduce their emissions, any new facilities, and in particular new LNG plants, get gifted their own additional emission baseline entitlement.

An analysis of the government’s emissions projections data illustrates that they expect very little emissions growth from existing industrial facilities. Instead the growth is all coming from new LNG plants and recent expansion of coal mines. If these are not required to offset their additional emissions, and existing plants can emit up to past historical levels, then penalties for exceeding baselines will make little difference.

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