The key policy question yet to be addressed is the role of a market based mechanism to reduce the cost of compliance.  Looking across submissions, we see suggestions that carbon trading is not only the most pragmatic response, but also the most cost effective. Questions are also raised about the role of complementary measures.  For example, how does an ERF work with other energy policy measures such as the Renewable Energy Target?

Different approaches taken by ERF submissions

With such a diverse collection of stakeholders, a variety of submissions was to be expected. Some examined the specific elements of the ERF relevant to them, while others chose to address more general issues. For instance, the submission by the Property Council prepared by ACIL Allen Consulting provided a comprehensive review of the many issues that the Government must address in the design of the ERF. In particular, their submission provided detailed recommendations on the operation of the reverse auction to ensure efficient operations and price discovery. However, the submission did not make recommendations about baselines and penalties despite discussing the issues to be addressed. ClimateWorks and the Minerals Council of Australia (MCA) also framed their submissions in more general terms.

ClimateWorks explored the likely sources of abatement that could be purchased by the Fund, and noted that “the major focus areas include capture of waste methane from coal mines, increased deep retrofitting of commercial buildings and industrial facilities, and carbon farming and forestry. These could represent over 140 MtCO2e of annual abatement in 2019-20 with the right mix of incentives.” They also highlighted the importance of other policy measures to complement the Government’s Direct Action plan to effectively reduce emissions in each sector of the economy. Energetics has highlighted this same issue in our own revision of the national greenhouse emissions forecast , where we stressed the importance of existing measures and especially the Renewable Energy Target in delivering abatement.

In this paper we consider the submissions made by the major stakeholders as outlined in Table 1. Certainly the National Generators Forum, the Business Council of Australia, the Australian Petroleum Production and Exploration Association and the Minerals Council of Australia represent organisations that are responsible for most of Australia’s greenhouse emissions.

Table 1: the submissions review​ed

We also reviewed the Clean Energy Finance Corporation’s (CEFC) submission.

Key issues to be resolved

Is the ERF meaningful without penalties?

Many of the submissions looked at the question of penalties for exceeding baselines. Some stakeholders strongly supported penalties, and saw them as an essential part of the operation of the Fund. For instance, The Climate Institute believes that baselines should be binding and penalties for non-compliance should apply. Pacific Hydro also believed that the ERF must include penalties.

Several other stakeholders gave qualified support for penalties but highlighted the challenges confronting the Government. Both the BCA and the AIGN noted challenges with the setting of business-as-usual baselines. The AIGN noted that “‘business-as-usual’ encompasses a diverse variety of commercial activity and can be assessed in various ways; establishing a business-as-usual baseline is perhaps more complex than it first appears. There are numerous options for baseline measurement. All potential options, including absolute emissions and emissions intensity, present different opportunities for industry sectors, and different administrative costs.”

In their submission, the Minerals Council stated that the use of business-as-usual (BAU) baselines for the levying of penalties must not see firms lose international competitiveness. The use of NGER reporting provides a useful tool for Government, but should not be seen as the sole criterion for an economy-wide emissions management regime. MCA sees a range of measures that will influence the business-as-usual baseline such as declining ore grades, deeper operational requirements and changing geological profiles that will not be captured by NGER.

Many other stakeholders saw specific problems that must be addressed. For instance, the ESAA noted that using site level baselines risks penalising early movers. APPEA raised a number of points related to setting appropriate baselines for new facilities with specific reference to LNG production. In this case, there are a limited number of LNG trains in the world and so even establishing industry best practice will be difficult. APPEA also suggested that the mechanism to apply to emissions above the threshold should be consistent with the Government’s stated objective of applying it only to emissions above business-as-usual, and not as a mechanism for raising revenue. This could mean implementing a process of warnings, followed by a request to explain how compliance will be achieved and only if the response is unsatisfactory would penalties be applied.

The EUAA questioned the use of NGER. They believed that large industrial energy users would prefer to have thresholds based on scope 1 emissions and be site/facility based rather than industry based. Concerns also relate to the use of emissions intensity factors. The relationships between various emissions intensity factors are not correlated and variations could occur from other factors – a baseline should account for these variations. The CEFC also saw challenges with adapting NGER to equitably recognise growth, changes in product mix and existing energy efficiency performance (perhaps focussing on emissions intensity).

Sustainable Business Australia (SBA) commented that an emissions baseline should be established for each sector, typically on a CO2/unit of production basis. The participants would earn credits if emissions were below their baseline and surrender credits if emissions exceed the baseline. SBA effectively recommended the use of a trading scheme.

Protecting international competitiveness

Most submissions support Australia reducing global greenhouse gas emissions in line with global efforts and require the mechanisms to support Australia’s future economic growth and maintain the global competiveness of Australia’s industries. Further, the ERF must provide for reductions in greenhouse gas emissions at lowest cost.

Not surprisingly, stakeholders that represent Australian businesses see the protection of international competitiveness as a key consideration in the design of the ERF. This theme was addressed by the AIGN who believe that Australia’s climate policy approach should not disadvantage operations in Australia by exposing trade-exposed industries to costs not faced by competitors in other countries. Others who adopted this position included the Ai Group and the Minerals Council.

A related question is the use of international offsets to address Australia’s obligations. Several stakeholders felt that international offsets can be used to offset emissions when a business exceeds its baseline (Ai Group, AIGN, CMI and APPEA). Ai Group added the qualifier that international offsets cannot be bought by the ERF. The National Generators Forum thought that the ERF should include as many abatement options as possible, including international permits to maximise the opportunity for low cost abatement.

BCA felt that the Green Paper should examine the role that domestic versus international abatement could have in reducing Australia’s emissions.

The Minerals Council (MCA) noted the challenges ahead in designing the ERF and the importance of delivering abatement in an economically efficient manner. They saw the need to position Direct Action “in the context of a comprehensive and integrated energy policy; that is, integrated with the development of the proposed Energy White Paper and the review of the Renewable Energy Target.” Importantly, the MCA saw a role for the Productivity Commission in providing guidance on a design for Direct Action that is at lowest cost and does not adversely impact the competitiveness of different sectors of the economy. This position was supported by the Ai Group, The Climate Institute and the Business Council of Australia (BCA). It will be interesting to see how the Government responds to this recommendation, given its criticism of the previous Labor Government’s failure to refer the NBN to the Productivity Commission.

A key message repeated across a number of submissions was that whatever is implemented, it must allow Australia to meet its international emissions reduction commitments at least cost. This was sought by the Ai Group, APPEA and SBA, all of which supported a trading scheme.

Simplicity in the operation of the scheme

Most stakeholders recommended that the ERF be simple. For instance, the Institute of Chartered Accountants believed that the Fund needs to strike the right balance between robustness and simplicity. APPEA noted that the CFI is not a good model for the ERF as it is too cumbersome and the Government must streamline the process. The MCA used the current NGER scheme as its benchmark and it felt that a more streamlined version of the existing NGER measurement, verification and auditing arrangements should be a default method for pre-qualification for auctions or compliance requirements post-auction.

Making it all work

A closer look at types of abatement

Of those submissions that dived into the detail on how the mechanism could work, two areas received particular attention:

• Banding of emissions reduction. Banding would mean that separate pools of funds would be available for different sources of abatement. This was approached from both ends of the spectrum, where for instance, the CMI suggested that the ERF should incorporate banding to support a diverse portfolio of low cost abatement projects, whereas the Australian Local Government Association advocated banding to ensure that long term projects such as landfill capture are competitive in the reverse auctions.
• The challenge of supporting long term abatement and promoted contracts for abatement that extend well beyond 2020.

For the purpose of gaining widespread coverage of emissions sources, the CEFC and others thought banding could be used to address concerns about non-delivery of contracted abatement. By offering separate auctions for ‘guaranteed’ and ‘non-guaranteed’ abatement, provision is made for the more speculative projects to still participate in the auctions but in a way that does not distort the price of abatement offered for more certain abatement. So ‘guaranteed’ abatement would include make-good provisions should abatement fall short, and because it reduces the Government’s risk, result in high auction prices.

Recommending a trading scheme

Many different stakeholders acknowledged the value of a trading scheme in reducing the burden to be carried by the ERF. The CEFC proposed a scheme that would include the ERF for the funding of voluntary actions to reduce emissions and a mandatory baseline and credit scheme derived from NGER. The Carbon Markets Institute remarked that a baseline-and-credit mechanism linked to the ERF should provide incentives for companies to operate below their baseline and costs for companies exceeding their baseline. Any penalties could be in the form of purchasing ACCUs, a cash contribution to the ERF or purchasing international permits.

Others promoting a trading scheme included the Ai Group and AGL (at the least, trading within corporate groups) and the ESAA.

Many submissions advocated the use of recognised offsets to reduce the level of emissions reported by organisations. Offsets should include Australian offsets generated under the CFI including the use of Australian Carbon Credit Units (ACCUs) purchased on market. For example, this position was supported by the AIGN, APPEA and the ESAA.

The ESAA suggested that a range of provisions could be used to meet targets, including trading of offsets generated when emission levels or the use of credible international emissions reduction units.

Australia has been debating its response to climate change for more than a decade, and fighting elections over climate change for much of that time. The Direct Action plan is the latest chapter in this story. The government insists it has a mandate to implement the Direct Action plan. Within the principles laid out in Direct Action, there is potential for a scheme that addresses the concerns of business for equity and certainty. A baseline and credit scheme could provide robust mechanisms to meet the national abatement target and ensure that Australia maintains its global competitive advantage for future generations.

No single policy will, in isolation, enable Australia to meet its 2020 emissions reduction target. The Carbon Markets Institute (CMI) felt that the ERF needed a variety of complementary measures such as a baseline-and-credit mechanism, private sector investment and the possible purchase of international units to meet the target.

The Emissions Reduction Fund’s terms of reference

The Direct Action plan, published by the Coalition prior to the 2010 Federal election defined a set of principles that the now Coalition Government will seek to implement through the Emissions Reduction Fund and the other complementary measures discussed in the Plan.

In late 2013, the Department of Environment sought business and community views on the design of the Emissions Reduction Fund (ERF). Areas of interest included the likely sources of low cost, large scale abatement, the potential role of the ERF in facilitating the development of abatement projects, including through expanding the Carbon Farming Initiative (CFI) and questions around the design of the auction process and the governance of the scheme. The Commonwealth was also interested in understanding the views of stakeholders on the design and operation of a mechanism applying to emissions above the business as usual baseline i.e. the role of penalties.