INSIGHTS: Wide scope for climate policy review – Key considerations

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The Federal Government today released the Terms of Reference (ToR) for its climate policy review, with industry consultation to be held in February ahead of the formal reporting process from June-November 2017.

The Terms of Reference (TOR) is wide in its scope, focusing on Australia’s 26-28 per cent emissions reduction target and the role of key policy mechanisms including the Emissions Reduction Fund (ERF) and safeguard mechanism, the National Energy Productivity Plan (NEPP) and the electricity sector. Notably the ToR refers to the challenges of reducing emissions on a sector-by-sector basis, with the review expected to consider the introduction of an emissions intensity trading scheme (EITS) for electricity generators and the alignment of the safeguard mechanism compliance market with Australia’s 2030 emissions reduction target.

Consultation will consider the potential role of “credible” international units in meeting Australia’s emissions targets and the interaction with domestic offsets.

In this On Point Analysis, we summarise the key aspects of Terms of Reference and outline key considerations for stakeholders as they prepare to engage in the consultation process.

Summary

As noted, the government’s ToR indicates that the government will take a broad consultative approach to its 2017 policy review, with a focus on the design of policy settings to meet Australia’s 2030 target and Paris Agreement commitments.

The key aspects of the ToR include:

  • the opportunities and challenges of reducing emissions on a sector-by-sector basis;
  • the impact of policies on jobs, investment, trade competitiveness, households and regional Australia;
  • the integration of climate change and energy policy, including the impact of state-based policies on achieving an effective national approach;
  • the role and operation of the Emissions Reduction Fund and its safeguard mechanism;
  • complementary policies, including the National Energy Productivity Plan;
  • the role of research and development and innovation;
  • the potential role of credible international units in meeting Australia’s emissions targets; and
  • a potential long-term emissions reduction goal post-2030.

The review will monitor and be informed by developments in international climate policy, and include a focus on electricity prices for end users. The review will build on parallel processes, including the Finkel review of the National Electricity Market, and the work of the Ministerial Forum on Vehicle Emissions.

Consultation will commence in February 2017 with the release of a discussion paper, with the formal review and reporting process expected to run from June-November 2017.

Reaction and Key considerations

The climate policy review process will be a litmus test for the Turnbull government, specifically its ability to design a workable climate policy framework to meet Australia’s current (and future) emissions reduction targets, while managing internal divisions within the Liberal-National Coalition.

The wide-scope of the ToR is a positive development, as is the reported participation of a number of senior Ministers and portfolios in the design of the ToR and review process.

Below we summarise key considerations for stakeholders as they prepare for the consultation process.

Australia’s greenhouse gas abatement task to 2030

The government’s most recent estimate of greenhouse gas emissions to 2030 were released in March 2015, projecting a national emissions trajectory rising to 724 Mt in 2030, an increase of 22 per cent above 2005 levels, or 36 percent from 2015 (red line in Figure 1).

If we apply this emissions projection as the reference for calculating Australia’s cumulative abatement task between 2020 and 2030 the result is task of over 2 billion tonnes of CO2-e.

While this appears to be a significant effort, the scale of the task is largely a product of outdated economic forecasts and policy assumptions. For example, the government’s March 2015 projection assumes no reductions from the ERF, or current state and federal renewable energy targets, while applying strong economic activity driven by high export sector demand, along with electricity consumption. Resultantly, we do not view this scenario as a reliable emissions reference.

Figure 1: National emissions inventory and emissions projections to 2020/30

As noted in earlier updates, our Reference Case for national emissions indicates that Australian emissions will grow at a relatively moderate pace through to 2020 and 2030, well under government projections, driven by the Land-use and Energy sectors, particularly the return to broad-scale deforestation.

As shown in Figure 2, applying updated assumptions for current policy and economic activity, we lower the government’s 2021-30 abatement task from more than 2 billion tonnes to less than 1 billion tonnes, underpinned by a significant decrease in land-clearing rates and electricity sector emissions, driven by lower electricity consumption and the inclusion of proposed policy such as state-based Renewable Energy Targets in the ACT, Queensland, South Australia and Victoria.

Figure 2: Government emissions projection versus RepuTex reference case


Source: RepuTex Carbon

Applying this reference case, national emissions will need to be reduced by approximately 10 million tonnes of CO2-e (Mt) annually to meet Australia’s 26 per cent emissions reduction target by 2030. This is an achievable reduction, yet is becoming a larger challenge in the context of Australia’s emissions growth, at time when the rest of the world has committed to reduced emissions under the Paris agreement.

View our full emissions forecast, and target scenarios, within our 2030 Energy & Climate Policy (ECP) Tool. The RepuTex ECP Tool is available in four editions, including a free edition for public use and more detailed subscriber versions. To access the tool now, please click here >>

State initiatives will act as “policy floor” for climate action

State based policy is projected to play a large role in shaping the development Australia’s national climate policy framework, with the ToR referencing the integration of state-based policies into a national framework.

This is reinforced by the increasingly important role of the Council of Australian Governments (COAG) Energy Council, with federal and state energy ministers agreeing to an independent review of the national electricity system to provide a blueprint for reliable energy supply, while ensuring Australia is able to meet its international emissions targets under the Paris agreement.

A new era of decentralised climate policy development is emerging in Australia, driven by ambitious renewable energy targets in the Australian Capital Territory (ACT), Queensland (QLD), South Australia (SA), and Victoria (VIC), with the States now emerging as the dominant player in the national climate policy debate.

Analysis indicates that state climate and energy policy has reached a national tipping point, with initiatives such as state renewable energy policy now surpassing federal policy ambition. RepuTex modelling indicates that renewable energy targets in the ACT, Queensland, South Australia and Victoria have overtaken the federal Renewable Energy Target (RET), with 55 terawatt hours (TWh) of new renewables generation forecast to enter the market by 2030.

Utilising our 2030 Energy and Climate Policy (ECP) Tool we forecast renewable generation will grow from 38 TWh under the Coalition’s current federal RET, to 93 TWh by 2030, driven by new state policy. This is equivalent to increasing the federal RET to 35 per cent by 2030, from its current base of 23 per cent by 2020.

In some ways, Australia is progressing towards a United States (US) style of policy development, with states implementing ambitious policy as they seek to reduce emissions and capitalise on investment, in a similar way to California and the North-eastern states. In effect, state-based initiatives may act as a ‘policy floor’ should the federal government’s policy review not enact an effective framework to meet Australia’s 2030 target. Inversely, the federal review may be able to ensure that a nationally co-ordinated policy approach is established, rather than a piecemeal regulatory framework.

What ‘policy mix’ will meet Australia’s 2030 target?

Whether descending emissions baselines are implemented under the safeguard mechanism, or whether uncovered sectors such as Agriculture and Land-use are targeted for large-scale emissions cuts, there is no ‘wrong’ policy pathway for Australia to meet it’s 2030 target.

Recognising that the overall objective of the Paris Agreement is to achieve deep decarbonisation of the economy by mid-century, the design of a durable and integrated policy framework could be achieved by distributing the emissions reduction effort among a broader range of sectors, positioning all sectors to contribute in the short-term in a way that scalable over the long-term as policy ambitions change.

Such an approach would enable policy to begin to unlock emissions action in strategic sectors that may otherwise not be prioritised due to political or economic barriers.

For example, focusing solely on “least cost” abatement that, for example, only targets efficiency and waste reductions, may lead to aggressive reform in the appliance and vehicle standards. However, this may result in delayed investment in more “expensive” abatement sources that are also needed to transition the Australian economy, such as the land and renewable energy sectors.

Similarly, applying descending baselines under the safeguard mechanism, or topping up the Emissions Reduction Fund, without the support of complimentary policy measures may also limit Australia’s clean energy transition, placing an ever increasing burden on high emitting industries.

Subsequently, the design of a durable, integrated policy mix must balance the cost of emissions reductions with longer-term strategic objectives, ensuring key sectors are positioned to deliver future cuts through balanced effort-sharing, and the contribution of strategic sectors such as electricity generation, energy, and land-use.

The RepuTex 2030 Energy & Climate Policy (ECP) Tool

As policymakers and businesses begin to explore policy development, the RepuTex 2030 Energy & Climate Policy (ECP) Tool provides users with an interactive view of Australia’s progress to the 2030 emissions target, and the distribution of emissions reductions across economic sectors.

Users are able to construct their own pathway to meet Australia’s emissions reduction target by selecting from pre-built policy scenarios, or by customising underlying state and federal policy assumptions including renewable energy targets (state and federal), energy and vehicle productivity, the decarbonisation of the electricity sector, ERF funding, as well as land clearing regulation.

RepuTex 2030 ECP Tool – Climate policy matrix

reputex-ecp-tool_policy-matrix
(Click to enlarge)

The RepuTex 2030 ECP Tool helps firms to understand:

  • What is the size of Australia’s abatement task to 2030?
  • What impact could a scaled up target (45-63%) have?
  • How will state Renewable Energy targets in the ACT, QLD, SA and VIC interact with federal policy?
  • How far will ‘current policy’ take us?
  • What policy settings are needed under the ERF, Safeguard Mechanism, NEPP, RET, land-clearing and state policy, to meet our 2030 target(s)?
  • How will reductions be distributed across economic sectors?
  • What role will the safeguard mechanism play?

To access the free edition of our 2030 ECP Tool now, please click here >>

Next steps

The government’s climate policy consultation will commence in February 2017 with the release of a discussion paper. The formal review and reporting process is expected to run from June-November 2017.

To arrange a private briefing, or to learn more about our energy and carbon services, please contact RepuTex Client Services team via +61 3 9600 0990 or email subscriptions@reputex.com

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