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Australia's long awaited policy review

December 19, 2017

 

The Australian Government (specifically the Department of Environment and Energy) has released its long awaited 2017 Review of Climate Change Policies. Throughout 2017, the Department consulted widely with industry and other stakeholders to get views on future policy direction on energy and climate change. The terms of reference for this review were set some time ago and the review was to include:

  • 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 emissions projections for Australia were also released and referred to in the review. Now Australia has a target of a 5% reduction from emissions in the year 2000 by 2020 (the Kyoto second commitment target, part of the Doha Amendment) as well as a 2030 target of 26% - 28% reduction on 2005 levels (the Paris Agreement target - Australia's Nationally Determined Contribution). The emissions projection report reflects that Australia will meet its 2020 target.

Australia uses an overall emissions budget approach to determining its performance to target. That is, a trajectory to the target has been drawn between 2013 and 2020 and the cumulative performance to target over that time period is tracked. Since Australia's actual emissions in the 2013 - 2016 period were much lower than the required emissions trajectory, Australia will still achieve its overall 2020 goal on a budget basis. As shown above, the new emissions projections have also shown a reduction in the amount of abatement required to meet the 2030 targets. A reduction in the abatement task of 122 Mt of CO2-e is now projected, leaving an overall abatement task of between 868 and 934 Mt of CO2-e. Given the make up of Australia's economy - with a reasonable proportion of heavy industry and resources extraction, which has relatively small amounts of low cost abatement compared to other sectors - this abatement task is not insignificant.

 

So the policy review itself discusses how Australia's current, and potential, policy suite may be able to help the country achieve its longer term goals. The bulk of the review discusses what Australia is doing on the international stage and then discusses the domestic policies that are in place, before a short discussion on next steps - which is the section likely to be of most interest to Australian emitters.

 

Australia's domestic policy suite consists primarily of:

  • The Emissions Reduction Fund - existing policy whereby Australian Carbon Credit Units (ACCUs) that are generated by abatement projects are purchased under contract by the Australian Government

  • The Emissions Reduction Fund Safeguard Mechanism - existing policy, established under the National Greenhouse and Energy Reporting Act which acts to set a baseline for facilities. If facilities have emissions above their baselines then they have a number of compliance mechanisms available - including the purchase of ACCUs to offset this emissions exceedance.

  • The National Energy Guarantee - a proposed policy, limited to the electricity industry, that will have both a reliability guarantee (ensuring the right level of dispatchable energy to meet customer needs is delivered) and an emissions guarantee (ensuring an average emissions level for the industry is met over time).

  • The National Energy Productivity Plan - The NEPP is a package of measures that sit under the Council of Australian Government (COAG) Energy Council. The aim of the NEPP is to improve energy productivity by 40% from 2015 levels by 2030. The NEPP uses largely energy efficiency measures such as minimum performance standards for appliances, minimum building efficiency standards, improvements in the energy markets etc.

  • Phase down of hydrofluorocarbons - Legislation, passed in June 2017, now covers the gradual phase down of HFC imports. Starting from January 2018, the amount of imported HFCs will be steadily reduced, until an 85% reduction from 2013 levels is achieved in 2036.

Possibly the most important part of the policy review is the outline of plans by the Government for future policy amendments. Unfortunately, detail is still scant on some of the potential changes that may occur - and many of the decisions have been further pushed out. When the review was announced, it was expected that it would include some detail on changes to the safeguard mechanism - and potentially reflect policy outcomes recommended in the Finkel review.

 

Notably, the Clean Energy Target mechanism discussed in the Finkel review has been replaced with the National Energy Guarantee as previously foreshadowed by the Government. The policy that could indeed be effective at maintaining both energy security and emissions reductions, depending on the detail of the policy settings, which have not been presented in this review. The 2017 policy review states that the National Energy Guarantee consultation will commence in the first half of 2018; with a view to implementing the reliability guarantee portion from 2019 and the emissions guarantee portion from 2020. This is worth watching closely as the design of the national energy guarantee will provide insight into the emissions reduction that will come from the electricity sector - which then is reflected in the amount of abatement that needs to come from other sectors. Abatement from other sectors may not necessarily be the lowest cost abatement in the economy.

 

The changes to the Safeguard Mechanism discussed in the policy review are relatively minor. It was considered that more aggressive baselines, or baselines that decline over time may be introduced. This is not the case however. What is discussed in the policy review is reflection on the fact that the use of historical emissions and production to generate facility baselines may not necessarily reflect current operations. The Government appears to be considering adjustment of baselines to reflect changes in production that are lower than the 20% increase threshold currently in the Safeguard Mechanism Rule. In this instance, baselines would move over time as production changes - increasing for production increases and decreasing for production decreases. Reading between the lines, this will have an effect of "resetting" baselines such that they are reflective of current operations and will phase out the baselines that are based on historical data (the "reported baseline" in the legislation). It could actually be argued that this is the first step in having baselines that could be ratcheted down over time. Any facility that has a baseline well in excess of current emissions will be unaffected by declining baselines but if they were initially reset to be something more akin to a calculated baseline then a declining baseline policy would be more effective. In the end, the Department has stated that consultation on these changes will take place in the early part of 2018, with a view to implementing these changes in the 2018/19 reporting year.

 

Following these changes in the early part of 2018, the next review of the safeguard mechanism is scheduled for 2020. Then, the Government has announced that the entire suite of climate change and energy policy levers will be reviewed on a five yearly cycle, to align with ongoing updates of Australia's NDC under the Paris Agreement.

 

As far as the ERF, the Safeguard Mechanism and the National Energy Guarantee go, there is no real detail provided in the policy review, or - in the case of the ERF - no change is currently discussed or proposed. There are two areas in the policy review that reflect announcements in new directions for the Government however. The first is the potential for using international credits for compliance purposes in the Australian market. The policy review states that the Government supports in principle, the use of international permits - obviously with the caveat that they are quality units with high integrity. This leaves the door open for the use of such permits in the future though this is dependent on the outcomes of decisions under Article 6 of the Paris Agreement. The policy review does state that it is not appropriate to finalise any detail until the Article 6 market rules are established.

 

The other item in which the Government has provided some steer to industry is in the area of vehicle efficiency. They have referred to consideration of vehicle efficiency standards to be implemented for light vehicles in the country. This would bring Australia into line with other developed nations, who already have vehicle emissions standards.

 

Finally, the terms of reference of the review discussed a long term (post 2030) goal for Australia's emissions. On this, the Government has taken a wait and see approach - basically stating that they will work on a long term strategy for emissions reductions, rather than prescriptive targets. Development of the strategy will begin in 2018, with a view to releasing it in 2020. The strategy itself will explore the transition of Australia's economy to a lower emissions economy - in the context of the Paris Agreement and presumably the commitment of other nations.

Overall, there will be many things to watch in coming months and many things to keep track of. The policy review has pushed most of the detail off into the near future. Although the detail is lacking in this review, it is clear that change will have to occur soon. The abatement that is required by 2030, even taking into account the reduced emissions projection this year, is still relatively large and will not come easily. The longer it takes to effect this change, the larger the abatement task will be by 2030 - especially given that emissions are projected to continue to increase for the foreseeable future. Obviously the other thing to watch closely is the next Australian election. Should the opposition manage to get elected, they have already stated that they're aligned with more stringent targets for emissions reduction. At the last election, they campaigned with targets of 45% reduction on 2005 levels by 2030 and net zero emissions by 2050. The current targets will already be challenging with the current suite of policies - more stringent targets will require more change, and a much higher effective carbon price.

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