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Time for the climate policy review we had to have

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It’s time to get serious about climate policy, raise the level of maturity of the political debate, and set Australia up to be an economy that optimises its position from the zero carbon transition, that is undoubtedly underway.

carbon-pricing

Any informed industry participant or government representative will be aware that if Australia is to meet its Paris targets of 26-28 per cent reduction on 2005 levels by 2030, the climate policy suite currently under review by the Government must evolve significantly to drive the below business as usual emissions reductions required.

There is widespread recognition in the business community that domestic policy settings will have to tighten in the near future, and that this will inevitably include a form of emissions trading and a carbon price signal.

It is important to take into account in this Review that these emissions reduction commitments under the Paris Agreement are a floor, as the targets will be reviewed and strengthened in line with a formal Global Stocktake and Review process that countries agreed to in Paris. Australia will need to scale up our Paris Agreement targets over time and report on how it will strengthen policy implementation efforts in the years ahead.

The Carbon Market Institute submission to the Review outlines options, considerations and recommendations on what the Government needs to do so the existing policies will meet the 2030 target and provide the policy stability needed to stimulate the necessary private sector investment to transition to a net zero carbon economy.

  • We need an effective Safeguard Mechanism that does the heavy lifting for our emissions reduction task.

In its current form, the Safeguard Mechanism is unlikely to make a significant contribution to reducing emissions below business as usual levels.  If this mechanism is to be one of the primary components of the policy tool kit then the Review should determine the specific contribution in terms of the quantum and/or percentage of emissions reductions the Safeguard Mechanism is to make to Australia’s targets and define the conditions and the criteria to adjust and decline the baselines accordingly.

Let’s be clear. The Safeguard Mechanism in its existing regulatory form, is actually a type of emissions trading scheme. If covered facilities exceed their baselines they are required to purchase emissions, in the form of Australian Carbon Credit Units (ACCUs) from the domestic offset market. This involves trading emissions. Under the Emissions Reduction Fund (ERF), ACCUs are currently being traded by project proponents to meet Government contracts for delivery of abatement. Emissions trading is happening now.

For the electricity sector the Government could ratchet the sector-wide baseline down over time or remove the sector baseline altogether in 2020 and each generation facility would need to meet individual baselines. These individual baselines will decline in relation to other baselines on other covered facilities from 2020. So, in effect, the electricity generation facilities could be subject to the same baseline adjustment and emissions management options as facilities in other sectors.

The Government needs to reduce absolute emissions in order to meet its 2030 target. Transitioning the Safeguard Mechanism to an effective trading system that can limit and then reduce emissions from covered facilities, will enable the mechanism to become a long term and stable instrument which underpins lowest cost emissions reduction across the economy and effectively prices carbon.

  • We need a viable domestic offset scheme that can scale up supply.

The Government purchasing of abatement through the ERF has played a valuable role in maintaining the domestic abatement industry, in the transition from the Carbon Farming Initiative.

Of the initial $2.55 billion, over $2.2 billion has been contracted in the first five auctions. More than $300 million remains in the Fund, with further auctions yet to be scheduled. However, with no further allocations of funding confirmed, there remains uncertainty over the future demand for domestic abatement under the ERF.

If, as expected, Safeguard Mechanism baselines tighten over time, there will be an increased requirement for a viable supply of domestic offsets to be purchased by facilities emitting above their baseline. If there is a shortage of domestic units, the cost of compliance will be higher than if there is adequate supply and a liquid secondary market. Therefore, ensuring the continued development of the domestic supply of carbon credits will be a critical factor in ensuring we meet the emissions reduction targets at lower cost. The Safeguard Mechanism and the ERF are, therefore, inextricably linked.

Under the assumption that demand for domestic units under the Safeguard Mechanism will increase in a post 2020 environment (enabling a transition to private sector funding of abatement), then ERF funds for government auctions will still be required for the years 2018 – 2020.

  • We need to be connected to international carbon markets

It will be important that entities covered by an effective Safeguard Mechanism have the flexibility to access low-cost, high quality abatement from international sources, if they are available. This will become increasingly important as baselines under the Safeguard Mechanism become more stringent.  However, there is no certainty that there will be an available supply of low cost international units available in the post 2020 period.

The Kyoto Protocol is likely to draw to a close in 2020, and consequently the future of the underlying Clean Development Mechanism (CDM) and associated offset credits (CERs) remains unclear. Going forward, Australia will also increasingly compete with demand for international abatement from other countries also looking to meet their emission reduction targets under the Paris Agreement.

Taken together, the emergence of new sources of demand and declining supply, will have strong bearing on the future price and availability of international units. The supply of units will be further impacted by the Chinese ETS – which is set to cover approximately 5 billion tonnes of CO2 and be the world’s largest market – coming online in 2017.

The policy approach adopted in Australia should evolve in parallel with developments in other international markets. The Review should consider how the balance of international and domestic units can be determined and what quantitative and qualitative restrictions are important for maintaining a domestic abatement industry and the international competitiveness of Australian business. Key to establishing this will be to understand the rules of trading being developed under the Paris Agreement.

Over 90 countries have identified the possible use of carbon markets in achieving their Paris Agreement commitments. As Australia’s major trading partners implement policies to achieve deep emissions reduction cuts, we should also examine the pathway to open up market opportunities for the transfer and export of ACCUs into other markets. A potentially significant export market exists for Australian carbon credits.

It will be important to consider how key trade exposed industries in Australia can remain competitive in a carbon-constrained world. One possible option is to potentially ‘staple’ ACCUs or other units to energy intensive exports that could be used in their customers jurisdictions. This could potentially give exporters of emissions intensive commodities an important new tool to stand out from competitors, and could finance a major expansion of carbon abatement activity in Australia.

Our government and private sector needs to be actively engaged in the development of the rules of international carbon market interactions.

The government has a massive responsibility to ensure the outcome of this Review is meaningful and impactful – and business has a huge responsibility to provide constructive, authoritative input. This is the review we had to have, and now we have to make it count.

Peter Castellas is CEO of the Carbon Market Institute, which is at the centre of climate change policy and business in Australia.

Independent and non-partisan, we bring business, policy makers and thought leaders together to drive the evolution of carbon markets towards a significant and positive impact on climate change.

Engaging leaders, shaping policy and driving action, we’re helping business to seize opportunities in the transition to a low carbon economy.  

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  • George Michaelson

    What I find strange is the opposition some right-leaning politicians have to this, because its not a truly global market. Surely, early entry into any derivative market infers advantages in and of itself? I would have expected that the finance/investment industry would look at this situation and see opportunity as well as risk. We seem collectively to be focussed on the cost side, and not enough on the advantage side: a market which emerges and has Australia as an early play has Australia as a significant presence which confers status: the market could operate in our timezone. Our finance industry could sell products associated with it. We could form trade blocs and positions to our advantage.

    Why do we only every see discussion from the ‘finance’ side of politics which discusses the downsides? The contradictions here are huge. On the same reductionist positions, almost all financial derivative incomes earned by the finance sector industry made no logic at some stage in their life, because they too were ‘not global’ in the same sense.

  • howardpatr

    Over the dead bodies of the many RWRNJs in the LNP; like Joyce, Abbott, Frydenberg and the hypocrite, Turnbull.

    • john

      Very true they will ignore any mention.
      Keep the tame voters fed with the usual football news and other diversions to keep the dull heads half awake.