Government rhetoric – not policy – is key regulatory impediment

  • Ahead of the federal election, climate policy remains an Achilles heel for the Coalition, with Australia’s growing national emissions profile, and the prospect of a 9-12 month demand gap over 2017-18 , increasing pressure on the government to articulate a new climate policy approach.
  • While we believe a new policy statement is required to address long-term uncertainty, calls for major policy detail to be released ahead of the federal election are unlikely to be heeded, with the government reluctant to jump the gun prior to its 2017 review, which has broad support within the Coalition party room.
  • Despite the uncertain policy environment, we currently view ‘government rhetoric’ – not policy design – as the key impediment to local market confidence.
  • Even should current policy remain the same, we believe that the government may be able to restore certainty to the market by simply changing its rhetoric and more clearly communicating its existing policy to the market.
  • In doing so, we believe the government has an opportunity to position its Direct Action Plan – particularly the Safeguard Mechanism – as a “soft start”, fiscally responsible scheme, whereby the flexibility provided to companies (as currently designed) may be utilised to prepare high emitting companies for future compliance obligations.
  • Such an approach would be comparable to markets such as the Europe, the eastern United States, California and China, where ‘Phase I’ policy was intentionally set with low compliance obligations to provide companies with time to “learn by doing” ahead of the future scale-up of policy.
  • As noted in earlier updates, we do not believe that the Australian market currently requires a ‘high ambition’ or high cost policy. Given Australia is able to increase its emissions and still meet its Kyoto commitment, we believe that a “soft start” scheme is far more befitting the current political and economic climate.
  • On the face of it, the government’s Safeguard Mechanism – as currently designed – shares similarities with “soft start” ETS policy in markets such as the EU ETS, the RGGI and California’s Cap-and-Trade Program.
  • Critically, in these markets, the timeline for the scale up of compliance obligations was clearly communicated from the beginning of the scheme, providing market participants with certainty over the long-term direction of the market, even though the detail and design of subsequent ‘market phases’ was set at a later point.
  • Such an approach may suit the Australian market, whereby the Coalition may be able to maintain its current policy, yet simply provide greater transparency on the long-term direction of its Safeguard Mechanism. This may be done by communicating ‘market phases’ that more accurately match the design of its existing policy, as outlined within this Market Update.
  • Moreover, this may buy time for the government to defer the detail of its policy, such as rules, trading, ambition, etc, to a later consultation process (such as the policy review), while enabling it to immediately restore confidence in the market, without any change to its policy.
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