The government body charged with managing the Emissions Reduction Fund – the key plank of the Abbott government’s Direct Action policy – says it is not designed to meet Australia’s 2020 emissions target.
Instead, says Chloe Munro, the head of the Clean Energy Regulator, the ERF will simply buy as much abatement as it can with the funds available. Some of that abatement will be delivered after 2020.
Munro’s comments may add to the controversy around Direct Action, and whether the Abbott government is serious about meeting the current abatement target of a 5 per cent reduction in emissions by 2020.
Environment Minister Greg Hunt has said he is confident that Direct Action will meet the target. Others disagree, particularly after electricity emissions jumped sharply in the first two months after the repeal of the carbon price.
Munro says, however, that while the ERF is expected to make a “substantial contribution”, it is not designed to meet a specific target.
“Our goal is simply to buy as much abatement as we can for the funds available,” Munro told RenewEconomy ahead of a presentation to the Sustainable Business Association in Sydney on Thursday.
“We don’t have a target quantity or price or even a timeframe. The contracted abatement does not all have to be delivered before 2020.”
Indeed, while some “mechanisms,” such as energy efficiency and avoided deforestation, may be able to deliver abatement quite quickly, others will take several years to deliver their first abatement. And given that the contract period could be five years or more, then some, or even the majority of abatement in some projects, will be delivered after 2020.
Munro also warned against assuming that the government had a target price in mind for the abatement “auctions”, which will take place up to four times a year. The first could be held towards the end of 2014, should the legislation pass the Senate.
“To say the likely price for ACCUs will be $8 – $12 is making an assumption that is just plain wrong,” Munro said.
“We have no such preconception about what prices will be offered in the market or what we will be willing to pay.
“We expect to purchase at a range of price points because of the diversity of projects that will be required to commit all of the funds available. The average could be higher or lower than the range mentioned. It all depends on what projects come forward.”
The ERF is designed for payment on delivery of actual abatement, rather than upfront. Some “methodologies” have been approved, but others are yet to go through the system.
The proposal by Bernie Fraser this week, for instance, that closures of coal powered stations be funded by the ERF could not happen now without a policy change, and a methodology being approved.
(One question is whether paying one coal-fired power station to close would simply allow more production from another power station with similar emissions. In that case, has any abatement taken place?)
Munro conceded there was a “lot of skepticism” about the ERF. But she said some of this was misplaced because it was based on the wrong assumptions of how it would work. The CER also runs the Renewable Energy Target and other market-based schemes.
In her presentation to the SBA, Munro outlined how the ERF was envisaged to work:
The Emissions Reduction Fund will operate through three mechanisms:
› Crediting genuine emissions reductions – projects are eligible to participate if they meet some basic additionality tests – they’re new, they go beyond standard business activities and they are not required by regulation or funded by other government programmes. They also need to comply with a method which allows the abatement to be measured. When an eligible project submits a report on the abatement it has achieved, it receives one ACCU for each tonne of CO2 equivalent of sequestered carbon or avoided emissions. This is exactly how the Carbon Farming Initiative works today
› The ERF will be open to a much wider range of methods. In addition to the existing land- based activities covered under the Carbon Farming Initiative, the scheme will apply to a wide range of productivity-enhancing activities such as: upgrading commercial buildings, improving energy efficiency of industrial and other facilities, capturing landfill gas, and upgrading vehicles and improving transport logistics, and many others
› the legislation simplifies entry and reporting requirements. We are developing streamlined processes to reduce transactions costs and encourage participation. We’ve held preliminary consultations with interested parties through workshops arranged for us by the Carbon Market Institute.
› We’re also involved, with business, in the technical working groups on each new method to ensure the rules can be applied in practice and give the appropriate level of confidence in the abatement that can be achieved.
› Purchasing emissions reductions – we will enter into contracts with project owners to purchase ACCUs from them over a period of years. We’ve already consulted with stakeholders on the standard form of these contracts – they’re on straightforward commercial terms based on payment for delivery against an agreed schedule.
› Purchasing takes place through a simple reverse auction which selects between offers purely on price. The White Paper specifies a simple single-round sealed bid process for the initial auctions. We will have the flexibility to adapt the process as the market develops. There is some interest in whether we would make spot purchases and there is an opportunity for a secondary market to develop to give contractors more flexibility in how they fulfil their scheduled deliveries.
To participate in an auction, you’ll need to have an eligible project and agree to the contract terms in advance. We’ll assess the credibility of your proposed delivery schedule, before you can register for the auction. This will prevent the auction from being distorted by offers based on highly unrealistic assumptions or projects which have no hope of proceeding. We’re planning this step now and we will consult on the minimum information necessary and the best way to capture it.
› Safeguarding emissions reductions –the third leg of the stool is a mechanism to lock in the gains made through the purchasing mechanism by constraining growth in emissions elsewhere in the economy. The safeguard mechanism will apply only to the largest emitters and will work through the NGER reporting framework. Businesses covered by the safeguard will be required to keep their emissions below a set baseline. Consultations are underway about how baselines will be set and about compliance options.