ON POINT: Release of climate policy review – Industry emissions key roadblock

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On Friday the federal government released a discussion paper for public consultation as part of its 2017 review of climate change policies. Consultation will be held over the next 6 weeks on the ability of existing policy to meet Australia’s 26-28 per cent emissions reduction target by 2030.

In this article, we discuss the key considerations likely to shape the 2017 climate policy review, focusing on the role of the ‘safeguard sectors’ in contributing large-scale emissions reductions to meet Australia’s 2030 target.

Analysis indicates that under current policy, high emitting facilities are projected to contribute over 55 per cent of Australian emissions by 2020, with emissions from these facilities projected to grow 6 per cent between 2020-30. Significant increases in emissions from large industrial facilities therefore represent a key roadblock to achieving Australia’s 2030 emissions reduction target. To this end, Australia’s international commitment under the Paris Agreement will not be met unless industry emissions are more tightly controlled.

As the only remaining policy in Australia’s ‘toolkit’ able to deliver large scale emissions reductions from the sectors driving Australia’s emissions growth, the safeguard mechanism is emerging as a key policy cog for the government, with the likelihood of declining emissions baselines no longer a matter of ‘if’ but ‘when’.

Release of climate policy discussion paper

The government’s discussion paper introduces a 6 week public consultation process through to May 5, 207. The review aims to ensure government policy remains effective in achieving Australia’s 2030 target and Paris Agreement commitments.

The discussion paper is broad in its scope, largely in line with the Terms of Reference for the review. The discussion paper therefore seeks feedback on:

  • 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 build on parallel processes, including the Finkel review of the National Electricity Market, and the work of the Ministerial Forum on Vehicle Emissions.

‘Covered sector’ emissions a key roadblock to 2030

The government’s latest emissions projections indicate that emissions will grow to 592 Mt in 2030, a 10 per cent increase from 2016 levels (538 Mt). Under current policy Australia will therefore fall short of its 26 per cent reduction target (on 2005 levels) of 440 Mt, facing an cumulative abatement task of 990 Mt between 2020-30 to meet its target.

Activity related to fossil fuels underpins Australia’s national emissions growth to 2030, notably emissions from large industrial facilities emitting over 25,000 tonnes per annum reporting under the National Greenhouse and Energy Reporting (NGER) scheme.

Emissions covered by NGER rose 2.2% over 2015-16 to 334 million tonnes (Mt), 60 per cent of Australia’s total emissions. The electricity sector remains the largest contributor to total emissions, accounting for more than half (54 per cent) of all reported emissions, driven by an increase in black and brown coal-fired electricity generation. The mining (20 per cent) and manufacturing sectors (17 per cent) accounted for the bulk of reported scope 1 emissions, with a 1.4 per cent increase in emissions from the chemicals and petroleum/coal products (manufacturing) sector, driving the total spike in NGERs emissions.

Chart 1: Covered sectors (safeguard mechanism) versus uncovered sector emissions

Source: RepuTex Energy and Climate Policy (ECP) Tool

As shown in Chart 1, growth in NGERs emissions is is also reflected in projected emissions from covered sectors under the safeguard mechanism (facilities emitting over 100,000 tonnes of CO2e per annum), with high emitting ‘covered’ facilities forecast to contribute over 55 per cent of Australia’s total emissions in 2020.

Emissions from safeguard sectors are projected to increase 6 per cent from 2020-30, underpinned by increased transport and direct combustion emissions, while near-term emissions growth will be driven by the development of new Liquefied Natural Gas (LNG) facilities in the Northern Territory and Western Australia. This is reflected in increases in emissions for the direct combustion sector through to 2020.

Applying this scenario, 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, and the expected future scale up of Australia’s emissions target to better reflect the ambition of the Paris Agreement to limit global warming to less than 2 degrees.

In this context, growth in industrial emissions represents a key roadblock for policymakers – whereby Australia’s 2030 target will not be met unless these emissions are capped or offset, with Australia ultimately needing to reverse its emissions growth profile.

Chart 2: Australian emissions projection (current policy) versus 26-63 pc targets by 2030 

The role of the safeguard mechanism

As the only remaining policy able to deliver large scale emissions reductions from the sectors driving Australia’s emissions growth, the safeguard mechanism is emerging as a key policy cog for the government. In this context, we view the implementation of declining baselines as not a matter of if, but when.

The Climate Change Authority (CCA) as proposed that a number of changes be made to strengthen the government’s safeguard mechanism, including that baselines for covered facilities be set to decline at a uniform rate consistent with meeting Australia’s INDC. While the CCA did not quantify what a baseline rate of decline should be, it was argued that the commencement of emissions cuts from safeguard facilities was critical to position these sectors for further emissions reductions likely to be needed beyond 2030 under the Paris Agreement.

In determining the contribution of safeguard sectors as part of its policy review process, the government has a range of options, for example:

  1. Use the safeguard sectors to meet the target – assuming 100 per cent of the abatement task is distributed to covered sectors under the safeguard mechanism via a linear baseline decline across high emitting facilities. This is applied as a ‘high’ exposure scenario within our 2030 ECP Tool.
  1. Relative or equal share allocation – assuming safeguard and non-safeguard sectors contribute an equal share of abatement to meet the 2030 target (i.e. 50-50), or allocate share effort based on ‘relative contribution’ to national emissions (i.e. covered sectors contribute 55 pc of national emissions, therefore contribute 55 pc of emissions reductions).
  1. Indicative policy pathway – assuming policies in other sectors (such as the ERF, NEPP, state based RET schemes, etc.) are incrementally scaled up between 2020-30, leaving a ‘remaining abatement task’ that is allocated to safeguard sectors in the form of a linear annual reduction in emissions baselines.
  1. Early action or flexible period – assuming a small initial baseline decline is allocated to safeguard sectors in 2018, e.g. around 1 per cent per annum, enabling industry to begin to curb emissions growth and access offsets under controlled ‘soft start’ conditions, subject to a further review of emissions and tighter baseline controls from 2020.

Subsequently, the final design of the rate of decline for emissions baselines to align with Australia’s 2030 target may depend on the strength of policy for uncovered sectors, such as state Renewable Energy Targets (RETs), the Emissions Reduction Fund (ERF) and the National Energy Productivity Plan (NEPP). In this context, the safeguard mechanism is able to act as a ‘catch all’ by filling any gap in Australia’s remaining abatement task, ensuring the 2030 target is met.

We estimate that a small reduction in emissions baselines of as little as 1-2% p.a. from 2018, combined with the scale up of the ERF, NEPP and state RET schemes may suffice to enable Australia to meet its 2030 target. This reflects the modest size of Australia’s current emissions reduction task, and the ease of meeting our 2030 target should growth in industry emissions be controlled.

To enhance the safeguard mechanism, the CCA also recommends a range of other regulatory changes, including reducing the threshold for covered facilities from 2018 from 100,000 to 25,000 t CO2-e, increasing the coverage of the scheme and its capacity to reduce emissions in line with Australia’s Paris Agreement obligations. This may also be accompanied by access to international units, supported by a quantitative limit to ensure the domestic transition to a lower carbon economy.

Setting the rate of industry baseline decline

The RepuTex 2030 Energy & Climate Policy (ECP) Tool provides users with an interactive view of the contribution of ‘covered’ and ‘uncovered’ sectors to meet Australia’s 2030 target, and the distribution of emissions reductions across economic sectors under a range of policy scenarios.

Users are able to customise the strength of individual policies, including state and federal RET schemes, the National Energy Productivity Plan (NEPP), Emissions Reduction Fund (ERF) and the electricity sector (clean energy scale up, coal fired retirement, electricity demand, solar PV penetration).

Users are also able to analyse scenarios for the annual decline in emissions baselines and stress test the potential scale up of emissions targets to a 1.5-2 degree trajectory (45-63 pc) in order to understand which sectors, and policies, may carry the obligation to reduce long-term emissions.

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To request a free trial of the RepuTex 2030 Energy & Climate Policy Tool, please click here >>

For more information about our 2030 ECP Tool, 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.

Next steps

The government’s climate policy consultation has now commenced, with the input sought from industry and the community through to May 5, 2017. To view the discussion paper, please click here.

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

To learn more about our 2030 Energy & Climate Policy (ECP) tool, please click here

Kind Regards
The RepuTex Team
Australian Emissions Markets

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