A review of the federal Coalition’s Emissions Reduction Fund, the centrepiece of its Direct Action climate policy, has conceded that the scheme may not deliver as much domestic carbon abatement as hoped, and warned that other policies would need to take up the slack – and soon.
The review, published on Monday by the Climate Change Authority, coincides with the news that Australia’s emissions over the past year were the highest on record, according to estimates by the carbon consultancy NDEVR Environmental. Notably, this excludes emissions reductions from land use – which make up nearly two-thirds of the ERF scheme’s contracted abatement – due to their relatively unreliable nature.
The CCA review of the ERF says the voluntary, auction-based scheme has been “generally performing well” since its establishment by the Abbott government in October 2014, in place of the carbon pricing mechanism it had axed in July of that year.
Over that time, five auctions have spent a total of $2.23 billion contracting 189 million tonnes of emissions reductions at an average price of $A11.83/t, across sectors including manufacturing, commercial buildings, landfill, coal mines, transport, and carbon farming, with around $300 million left in the kitty. The results of a sixth auction, held last week, are not yet available.
But the CCA report does little to assuage concerns that have dogged the scheme since its inception, including that it was essentially tipping government money into projects that were going ahead anyway, delivering “windfall rents” to project developers.
“On the crediting side, the perennial risk is that the methods and resulting projects fall short of the ERF’s offsets integrity standards, particularly for additionality,” the report says.
And it points to the “vital role” of the Emissions Reduction Assurance Committee (ERAC), as the gate-keeper of the ERF’s integrity, and in ensuring that methods and projects remain additional as the scheme matures and projects and methods come up for a possible extension of their crediting periods.
Another major cause for concern is the make-up of the abatement awarded under the scheme. As you can see in the chart below, a huge 65 per cent of contracts were awarded to vegetation management projects, which credits carbon storage from the regrowth of vegetation by removing stock or fencing off land, or from preventing land clearing.
As the report notes, there is a “significant risk” attached to this variety of abatement, with the potential for the reversal of carbon stored in the 139 million tonnes of vegetation and other soil projects in the scheme, through natural events like floods, bushfires and droughts – all becoming increasingly common and severe in Australia.
Barely any reductions, meanwhile, were contracted to the transport sector, which The Australia Institute’s September National Energy Emissions Audit showed has been one of the main offenders for driving up national emissions.
Another major risk the Authority points to on the purchasing side of the scheme, is that it may not deliver as much domestic abatement as anticipated.
“This risk could eventuate if policy uncertainty causes an investment chill for new projects, a low auction price drives low levels of uptake in some sectors and a lack of transparency in the secondary market hampers its ability to create an investment signal if shortfalls in supply emerge,” the report says.
And ultimately, the consistently underwhelming auction results have failed to answer criticisms that the administrative complexity of the ERF has created a barrier to participation, particularly for the high emitting companies that should be opting in.
The CCA report concedes that The ERF is complex, but says some of this “may be unavoidable” if it is going to deliver genuine abatement.
Hugh Grossman, the executive director of energy and carbon markets at RepuTex Advisory, said the CCA had been “bold” in describing the scheme as a success, considering Australia’s current emissions profile.
And Grossman said his firm believed the sixth ERF auction would also be undermined by negative sentiment, with low participation resulting in lower volumes of abatement being contracted.
“The success of the ERF is ultimately measured by the sum of its two parts – the ERF and the safeguard mechanism – with tighter controls needed to curb emissions growth from covered sectors,” Grossman told RenewEconomy.
“Until that occurs, emissions growth will continue to outpace abatement purchased under the ERF, so it would be bold to call the scheme a success.”
Tristan Edis, a director of analysis at Green Energy Markets, is similarly sceptical about the scheme’s achievements.
“I think the Climate Change Authority’s board members have been rather generous in describing the ERF as “generally performing well,” Edis told RenewEconomy in emailed comments on Monday.
“The scoreboard that matters is Australia’s overall emissions, and in spite of the ERF having spent a large chunk of its budgeted funds, emissions have been on the increase since 2013, as the figure below from the government’s own emissions inventory reveals.
“The Government themselves recognise in their own 2016 emission projections that emissions grow considerably even after taking into account the effects of the ERF,” he said.
“The only thing saving our bacon is the closure of Hazelwood and enthusiastic uptake of solar PV for which the ERF provided precisely no role.
“In spite of the Authority’s attempts to give the government gold stars for effort, in their own words they too recognise, “other policies will need to take over from ERF purchasing to decarbonise Australia’s economy and deliver structural change”.
But the final word goes to the CCA, which winds up the report by stressing that he role of the ERF should be wound back, and other policies ramped up to meet the challenge of Australia’s Paris climate commitments.
“The Authority remains of the view that ERF purchasing of emissions reductions will need to perform less of Australia’s emissions reduction task over time,” the report says.
“Other policies will need to take up the challenge of decarbonising Australia’s economy to deliver structural change.”
Could the National Energy Guarantee come to the rescue? …Jury’s out.
“It would be premature for the Authority to offer much commentary on the Guarantee at this stage,” the report says. “That said, the Authority remains strongly of the view that there is a pressing need for investment certainty in the energy sector and the Guarantee offers a viable pathway towards this goal.”