IN FOCUS: Mind the (Australian Climate Policy) Gap

In this edition, we take an In Focus look at the government’s approaching post-2020 greenhouse gas emissions reduction target announcement, specifically the impact of current government policy on Australia’s long-term emissions reduction pathway, and the ability for policy to meet any forthcoming target.

The Department of Prime Minister and Cabinet has undertaken a full review of Australia’s post-2020 target, with the cabinet expected to sign off on a final position on the 14th of July, ahead of a public announcement between the 1719th of July.

Government leaks have suggested that Canberra is moving towards a similar position to the United States and Canada. The US has declared a 2025 emissions reduction target of 26-28 per cent on 2005 levels, while Canada has adopted a 30 per cent target on 2005 levels. In comparison, the Climate Change Authority has recommended a 36 per cent cut on 2005 levels by 2025, which it believes is a credible figure to take to the Paris Conference.

While pressure is building for Australia to adopt a more ambitious target, our latest Analyst Update suggests that current policy is restricting long-term abatement opportunities within the Australian economy, with only 280 million tonnes of abatement “realistically attainable” by 2025 – a cut of only 11 per cent on 2000 levels, or 18 per cent on 2005 levels.

This would create a significant gap to any post-2020 target, suggesting amendments will need to be made to strengthen the government’s Direct Action Plan, particularly the forthcoming Safeguard Mechanism.

BREAKING DOWN OUR MAC ANALYSIS

Analysis explored the emissions reduction potential of the Australian economy, analysing 88 separate opportunities to reduce emissions across six key sectors – power, forestry, industry, buildings, agriculture and transport – identifying activities to reduce emissions, the cost of action, and the ability of policy to unlock barriers to implementation.

Rather than reflect the “physical maximum” abatement potential of each measure, RepuTex analyses “realistic” emissions reduction potential, taking into account policy constraints such as the renewable energy target, the removal of carbon pricing, and the implementation of the Emissions Reduction Fund (ERF).

While significant emissions reductions are possible within the Australian economy, such as through greater fuel switching away from fossil fuel electricity, our analysis indicates that government policy – as currently designed – is unlikely to provide enough economic incentive for companies to implement these opportunities, leaving many abatement activities contained within our MAC curve “unlocked”.

RepuTex Marginal Abatement Cost (MAC) curve

Click Graph For More Detail. Source: RepuTex Carbon Analytics

As shown within the x-axis of our MAC curve, approximately 300 Mt of abatement is realistically attainable under current policy by 2030, equivalent to a 15 per cent emissions cut on 2000 levels by 2030, or 11 per cent of 2000 levels by 2025. Figures are relative to baseline BAU projections published in the government’s 2013 greenhouse gas projection.

Resultantly, even utilising the entire MAC would not provide enough abatement to meet the post-2020 target.

It is incorrect to conclude that meeting Australia’s post-2020 target is impossible. As previously noted, figures do not represent a physical maximum of domestic abatement in Australia. Instead analysis can be thought of as a “realistic” abatement profile, assuming motivation to reduce emissions would be largely driven by by cost savings and voluntary measures, rather than policy

From the perspective of a post-2020 target this tells us it is impracticable to only apply limited, voluntary -based policies, as they are insufficient in providing an incentive to implement a broader array of abatement activities at the scale needed to reach the target.

Therefore, further policy is necessary in order to achieve a credible emissions reductions target in an economically tolerable way.

CURRENT POLICY COULD BE STRENGTHENED

The Direct Action Plan is made up of the $2.55bn Emissions Reduction Fund and the government’s proposed Safeguard Mechanism. This safeguard mechanism is likely to establish emissions baselines for around 140 companies from 1 July 2016. However, the implementation of “light touch” baselines , without an economically sustainable policy to support continued investment by industry in low-carbon processes, will be too weak to have any significant effect.

As noted in our earlier updates, we forecast that the ERF will be fully committed as early as next year, which means that Australia’s cornerstone emissions reduction mechanism will stop supporting new emissions projects well before the 2020 target deadline, let alone any post-2020 target.

This suggests that business has a much shorter contracting window than initially expected. Any projects waiting on the sideline for a price signal from the first auction, or for their method to be finalised, should act quickly to become qualified and registered in time for the next auction, which we anticipate will take place prior to the end of the year.

With ERF funding expected to be fully exhausted by 2016, further funding will be needed in order to ensure that demand for the acquisition of emissions reductions remains in place.

As the only purchaser of Australian Carbon Credit Units (ACCUs), the government has placed the onus on itself to either extend its funding commitment and maintain demand in the market, , or establish a strong secondary market to support the ongoing creation of emissions offsets.

A secondary source of demand for ACCUs may be established via the government’s ERF safeguard mechanism, which will begin implementing emissions baselines on 1 July 2016. However – as presently designed – high point baselines and exceptions for new emissions are unlikely to safeguard emission reduction purchases, and will therefore fail to create significant demand for high emitting facilities to acquire carbon offsets.

Resultantly, should further ERF funding not be committed by early next year – or a more rigorous secondary market be firmly established – the development of new abatement projects will again face funding uncertainty that has plagued investment in this area since the beginning of the government’s emissions reduction policy.

So the key takeaways? Regardless of the ambition of any new post-2020 target, focus will shortly turn to ‘how’ emissions will be reduced, not just ‘what’ the goal is. At this point, the ‘how’ is still a gaping hole for the market.

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