21 October, 2015
The issue for Australian business as we look towards the Paris Summit later this year, is what will Australia's carbon policy future look like? What mix of policies are future Governments going to pursue in order to achieve our 2030 target?
As we approach the Paris Climate Summit in November 2015, a number of national developments in various countries are shaping the climate policy landscape. China announced that its national emissions trading scheme will commence in 2017. The United States has provided further details on its ambitious Clean Power Plan and in Australia, on 14 September, we saw Malcolm Turnbull become the new Prime Minister. Whether and what changes there will be in the Australian Government's policy direction remain to be seen.
What do these developments means for the prospect of reaching an agreement in Paris and how will carbon policy in Australia need to develop in order to meet our 2030 targets and beyond?
Paris Summit
In November 2015, most of the world's leaders will gather in Paris for the United Nations Climate Change Summit. The Paris Summit is charged with the task of reaching a global agreement on the reduction of greenhouse gas emissions, in order to keep the increase in global temperatures to below the 2 degree target which was set at the 2010 Climate Summit in Cancun, Mexico.
The task these leaders face is significant. The emissions reductions necessary to achieve this target are large and will require a rapid transformation of the economic foundations of the modern economy if the target is to be achieved. The Paris Summit will be the most significant international climate change summit since the Copenhagen meeting in 2009. The lead-up to the two events are in stark contrast. Copenhagen was burdened with a degree of expectation that, in hindsight at least, was unreasonable given the complexity of the issues and the distance between the starting positions of the key players. Mindful of the lessons of Copenhagen, commentators and policy makers have generally been cautious in their predictions regarding the likely outcome of the Paris Summit.
However, the climate policy landscape has moved significantly since Copenhagen. Most notably, the Chinese position has been transformed from one of opposition to any type of constraint on Chinese emissions growth to an increasing position of global leadership. The shift in China, and the increasing ambition of the United States position under President Obama, means that it is now increasingly plausible, some might say likely, that an international emissions reduction agreement will be reached in Paris later this year.
While current indications suggest that a Paris Agreement, assuming one is struck, may not be ambitious enough to put the world on track to achieve the 2 degree target, it is likely to see significant contributions from all of the major emitting nations, including the emerging economies.
With the exception of some European economies, the emissions reduction targets being foreshadowed by key countries are more ambitious than current policy settings are capable of delivering. This suggests that the period beyond Paris is likely to witness a renewed wave of carbon policy innovation, with clear implications for business, and particularly the energy sector.
Australia's emission reduction targets
The Australian Government recently announced a 2030 emissions reduction target of 26-28% based on 2005 levels. This figure has been cautiously welcomed by many commentators as both meaningful and achievable but has also been criticised as inadequate by others. By most measures it places Australia at the back of the field in relation to other comparable developed countries, and so is likely to represent a floor under Australia's 2030 target, but not necessarily a ceiling. The Labor Opposition has indicated they are likely to increase the ambition of this figure to somewhere in the range of 40-60% if they return to Government (either in 2016 or subsequently).
Notwithstanding the criticism made of the Australian Government's target, it still represents a significant reduction in Australia's emissions trajectory. To meet this target, Australian emissions would need to fall from approximately 565 Mt CO2-e in 2014-2015 to between 438-450 million tonnes per annum in 2030. The Australian Government's own emissions predictions, published in March 2015, suggested that on the basis of the current policy settings Australian emissions would likely increase to approximately 724 Mt CO2-e by 2029-30, some 280 Mt CO2-e per annum more than the target now adopted by the Australian Government.
The cumulative emissions task for Australia to meet its 2030 target is approximately 1.5 billion tonnes of CO2-e abatement. While Australia's emissions reduction target, expressed as a percentage reduction from the 2005 baseline, may put it at the back of the developed economy pack, given the otherwise predicted strong upward trend in Australia's emissions, the actual volume of abatement required to achieve Australia's target is greater than that of many other countries that have committed to steeper emissions reductions in percentage terms.
It follows that in order to achieve the Australian Government target, Australian emissions need to fall to an annual figure approximately 120Mt CO2-e below our current annual level or about 280 Mt CO2-e per annum below where the Government itself predicted in March 2015 our emissions would be by 2030.
Emission reductions of this scale are unprecedented in the Australian context and will not be achieved without significant actions in each of the major emitting sectors of the Australian economy. It is clear that in the long term Australia's energy and climate policies will need to be closely aligned, just as they are in other major economies notably the US, China and Europe.
It may, of course, be possible to access significant volumes of international abatement in order to address a portion of Australia's abatement challenge. The unknown in this context is the price at which such abatement may be available in the period beyond 2020.
Given the increase in global emissions reduction targets, and the consequential significant increase in demand that can be expected for abatement, it is far from certain that the current very low prices of international abatement will persist.
Australia's climate policy
It is clear that significant domestic policy development will be required for Australia to achieve its current emissions target. The Government signature policy, the Emissions Reduction Fund, is budgeted to spend
$2.55 billion to acquire the 420 Mt of CO2-e abatement estimated for Australia to meet its 2020 emissions target of a 5% reduction of emissions based on 2000 levels.
Given that Australia's cumulative 2015-2030 emissions abatement task represents approximately 1.5 billion tonnes CO2-e, and the constrained position of the Australian budget, the prospect of any Government obtaining an electoral mandate to utilise public funds on the scale necessary for an Emissions Reduction Fund to achieve Australia's emissions target seems improbable.
The other key plank of the Australian Government's carbon policy is the so-called Safeguard Mechanism. The Safeguard Mechanism is explicitly intended to stop "rogue companies", to coin Minister Hunt's phrase, from increasing their emissions in circumstances that would undermine the achievements of the Emissions Reduction Fund. The Safeguard Mechanism will operate by imposing a facility level emissions baseline on facilities with direct emissions of more than 100,000 t CO2-e per annum.
If a facility exceeds its baseline (and, in the case of the grid-connected electricity generation sector, a sector wide baseline is also exceeded) there is the potential for a penalty to be imposed on a facility operator. However, the manner of setting the baselines, including the rules that will apply to new facilities, expanded facilities and facilities that experience emission fluctuations unrelated to production levels, and the absence of a mechanism for reducing baselines over time, means that the Safeguard Mechanism is demonstrably not designed to drive emission reductions from covered facilities.
The ERF and Safeguard Mechanism, coupled with a 33,000 GWh RET are not capable of delivering emissions reductions on the scale required to meet Australia's 2030 target. In many ways this fact is all the more notable for the failure of the Australian Government to publicly acknowledge that the 2030 target it has adopted can only be met by the adoption of a suite of new policies.
What are the key issues for business?
The issue for Australian business as we look towards the Paris Summit later this year, is what will Australia's carbon policy future look like? What mix of policies are future Governments going to pursue in order to achieve our 2030 target?
As we head towards an election in 2016, it seems increasingly likely that carbon policy will be a defining feature of the election campaign for the fourth federal election in a row.
The Labor Opposition has already announced its intention to scrap the ERF (while honouring existing contracts), increase Australia's renewable energy target to 50% by 2030 and to reintroduce an emissions trading scheme. In many respects, an increase in the RET and the reintroduction of carbon pricing (albeit with a likely move directly to a flexible price set by the market) represents a return to the carbon policies of the Rudd/Gillard Government.
The position of a future Coalition Government is less certain. Malcolm Turnbull's personal views on climate change policy are well known. He supports carbon pricing as the most effective form of reduction. However, it is also clear that as part of his deal with the National Party to secure the renewal of the Coalition agreement (and consequently his Prime Ministership), he promised not to alter the Coalition's existing policies. Therefore, the Government remains publicly committed to the ERF and the Safeguard Mechanism for the time being. However, this will need to evolve significantly to result in the emission reductions required for Australia to meet its targets and to be internationally credible. The 2017 review of the Safeguard Mechanism is shaping as an opportunity to begin a policy review process.
Where to from here?
The most coherent policy trajectory for the Coalition to adopt would see the Safeguard Mechanism evolve into a true "baseline-and- credit" trading scheme. The Safeguard Mechanism already contains many of the key features such a scheme would require, although critically it lacks both a mechanism for reducing facility baselines over time or a mechanism for the operators of facilities whose emissions are below their baseline to create and trade permits. While a baseline-and-credit scheme has the potential to give rise to the same issues regarding international competitiveness that complicated the design and implementation of the Clean Energy Act 2011 (Cth), the fact that under a baseline-and-credit scheme a facility operator is only required to acquire and surrender permits to cover the gap (if any) between its facility baseline and actual facility emissions, will decrease the financial impost of the scheme on liable entities. The fact it may be introduced in the context of increasingly widespread global effort to reduce emissions, including among many of our key competitor nations, may also limit the competitive impact of such a scheme.
The ALP Opposition has provided little more than a skeleton of what their future policy may look like but a promise to reintroduce an emissions trading scheme suggests they may seek to re-legislate the Clean Energy Act, albeit moving directly to a flexible pricing mechanism.
A third policy option which has attracted surprisingly little public comment to date is the direct regulation of emissions at source. The failure of the Obama administration to secure the support of Congress for a national market based response to climate change has seen President Obama rely on the range of executive powers he has to direct the Federal EPA to regulate emissions at source. The Clean Power Plan, which sets emissions standards for both new and existing power stations, exemplified the President's approach. Each of Europe, Japan and the US also have significantly stricter new vehicle emission standards than currently apply in Australia. The end of local vehicle manufacturing in 2016/17 is likely to increase the political willingness to contemplate stricter standards in Australia. Building energy efficiency is another area where significant, relatively low cost, emissions reductions are available. It remains to be seen whether our politicians will consider these sector specific opportunities to drive emissions reductions.
The post-Paris period is shaping as an important period for climate change policymakers. If a global emissions reduction agreement is reached, the pressure from industry and civil society to offer a credible policy road map to achieve our international targets is going to grow quickly.
For further information, please contact:
Jeff Lynn, Partner, Ashurst
jeff.lynn@ashurst.com
