Preparation for climate risk
The Australian Labor Party has publicly reaffirmed its commitment to a 45% emissions reduction by 2030 for Australia
This is a challenging target to achieve and will have to involve a significant price on emissions
Businesses need to think about what this target may mean for them and incorporate this into scenario planning
I'm no psephologist but it would certainly seem that there's a reasonable change of a change of Government in Australia come the next election - that's what the opinion polls seem to indicate in any case. So what would a change of Government mean for climate policy in Australia.
A couple of weeks ago, Mark Butler - Shadow Minister for Climate Change and Energy appeared on Radio National, talking about the National Energy Guarantee for the most part. During the interview (which you can listen to here), the following point was made:
Our position is that you need, in accordance with the advice from the scientists; you need to get a 45 per cent cut in carbon pollution by 2030 if you are to have any hope of doing what we need to do to keep global warming below 2-degrees. That is the advice, that is the commitment that Malcolm Turnbull made when he signed onto the Paris Agreement on behalf of Australia in 2015.
Hamish McDonald, the presenter, then asks whether that is an "absolute rock solid guarantee" - with the Shadow Minister replying:
That’s right, we’ve been very clear about that and I think the industry understands that very clearly.
On the surface, this seems like a pretty innocuous comment - and it's in line with the ALP's policy position going into the last election in 2016, it could have quite a big impact on business however. It is not clear yet what policy structure the ALP will put in place (or keep in place) to achieve the target emissions reduction - but it can reasonably expect to include a price on carbon in some form. The current emissions reduction target is for 26%-28% reduction from 2005 levels by 2030. This is already a relatively challenging target without any additional policy. Between 836 and 934 Mt of cumulative abatement will be required to meet Australia's targets. The target being proposed by the ALP is close to double this - though it is in line with what the Climate Change Authority suggests is Australia's fair share under the Paris Agreement.
If the ALP elect to keep the Safeguard Mechanism framework, this can certainly be adapted to achieve the greater abatement ambition of 45%. The Safeguard Mechanism, as demonstrated in the Clean Energy Regulator's summary of 2016/17 compliance, has a requirement to surrender Australian Carbon Credit Units (ACCUs) when facilities exceed their baselines. In essence, this is a price on excess emissions - and can definitely be considered to be a functional carbon market. For the 2016/17 compliance year, approximately 450kt worth of ACCUs were surrendered (http://www.cleanenergyregulator.gov.au/NGER/Pages/News%20and%20updates/NewsItem.aspx?ListId=19b4efbb-6f5d-4637-94c4-121c1f96fcfe&ItemId=483).
If the ALP were to use this mechanism as a lever to achieve the 45% emissions reduction target, it could do so by incorporating facility baselines that decline over time. This would have the effect of increasing the volume of emissions exposed to a price for all facilities that are above the threshold for the Safeguard Mechanism. With a greater volume of emissions exposed across the economy, demand for ACCUs would increase, potentially leading to higher ACCU prices.
Another change the ALP may consider is to increase the coverage of the Safeguard Mechanism. Currently, the threshold for participation is 100,000 t CO2-e/a. As of the 2016/17 compliance year, there are approximately 200 facilities with baselines and total emissions from these facilities are approximately 130 Mt CO2-e/a. If the Safeguard Mechanism were to be expanded to include facilities with emissions in excess of 25,000 tonnes CO2-e/a, and these facilities were then also given baselines that decline over time, the rate of decline required to meet overall targets should be less as the abatement burden is shared amongst a higher number of facilities.
It's far too early to tell whether the NEG will be carried forward by the ALP should they be successful at the election. From an emissions point of view, the electricity sector is still covered by the Safeguard Mechanism, using a sectoral baseline approach, so this could also receive a revision in the baseline being applied to achieve emissions reduction goals. This could potentially be in conjunction with an extension to the Renewable Energy Target if desired - which would also result in an emissions reduction from the sector.
Finally, if adjustments to the Safeguard Mechanism are not the preferred option, the ALP (if they win the election) may choose to scrap it all together and clear the slate with regard to climate policy - before coming back with an emissions trading scheme, an emissions intensity scheme - or whatever policy direction they choose to take. This is politically a lot more difficult as it's likely to be much easier to adjust existing policy rather than create new policy. New policy, such as an emissions trading scheme will also take more time to implement - which will make reaching the nation's emissions reduction target by 2030 more difficult.
Regardless of the final policy positions taken to the election by both parties, businesses should take an opportunity to explore what a 45% emissions reduction target means to their operation. As mentioned previously, it can be reasonably expected that a 45% reduction in national emissions will have to come with a fairly significant price signal. Businesses should be looking at their forecast of emissions and including carbon prices consistent with this level of ambition. Scenarios such as a declining baseline scenario can be explored and the volume of emissions exposed to the carbon price calculated. Different potential policy options can also be examined such as a framework similar to the old Clean Energy Act.
This sort of scenario analysis should be part of the regulatory risk assessment - which is under the umbrella of transition risks when examining a business' exposure to climate risk. The 45% target mooted by the ALP is consistent with a 2 degree scenario, which should be a core consideration for business in any climate risk assessment being undertaken.