UPDATE: Australia’s Post-2020 Emissions Task – The Hard Road?

Pledging Australia to an emissions target of between 24-28 per cent below 2005 levels by 2025 – emulating the targets of the United States and Canada – would signal a change for the Abbott government on climate policy, resulting in a ‘substantial’ emissions reduction task of between 1,500 and 1,600 million tonnes (Mt) over 10 years. This is equivalent to an average of 150-160 Mt per annum (p.a.) relative to government business as usual (BAU) emissions projections.

In our Carbon Market Update for July, we take a closer look at Australia’s BAU emissions profile and examine whether Australia is “on track” to “breeze past our target for 2020”, per Greg Hunt’s expectations, or whether the market will face a significant emissions reduction challenge, in line with Department projections.

In undertaking our analysis, we present our ‘current policy’ emissions forecast as an alternative baseline to the government’s BAU emissions projections, which is inappropriate as a yardstick for national emissions due to underlying assumptions of strong economic growth along Australia’s historic emissions intensity pathway.

Applying RepuTex’s baseline forecast, we instead calculate Australia’s abatement challenge may fall between 1,000 and 1,200 Mt over the next 10 years – still a substantial task – subject to a series of commodity price, energy demand, and economic activity assumptions.

The design of compliance policy to achieve this task – and the timing of its implementation – will be of critical importance to market participants.

Should rigorous emissions baselines be delayed until 2020, this would further jeopardise emission reductions progress. Without maintaining this progress, analysis indicates Australia would face an acute emissions reduction slope to 2025 placing the local market under pressure to reduce more emissions in less time. This would be more disruptive and expensive than implementing a more gradual emissions reduction trajectory sooner.

Subsequently, while current government policy may provide short-term lenience, this approach is likely to drive the compliance market down “the hard road”, rather than a more manageable “low road” to meet Australia’s new post-2020 target.

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