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Australian policy comparison

April 8, 2019

Below is a reprint of my recent article in AustCham Singapore's Access Asia magazine - April/May edition. It's a summary of the climate policies of the Australian major parties in the lead up to the next federal election.

 

Since this article was written, there has been some additional information made public on the Australian Labor Party's climate change policies. In addition to the renewable energy policies outlined in the article below, the ALP has announced plans for:

 

Electric vehicle policy - a national electric vehicle target of 50% of new car sales by 2030 with financial support to roll out charging infrastructure; plus emissions standards for other vehicles

Transition support - support in transitioning to a renewable energy based electricity system including aspects of the National Energy Guarantee policy, a requirement for large generators to provide three years' notice for closure and the establishment of a Just Transition Authority to help regions and workers affected by the energy transition

Support for industry - special treatment for large emitting industries that are trade exposed  and establishment of a Taskforce to support strategic industries through the energy transition

National hydrogen plan - investment in hydrogen research and development via the Clean Energy Finance Corporation and the Australian Renewable Energy Agency

Extension of the Safeguard Mechanism - the Safeguard Mechanism will be strengthened and extended to include emitters over 25,000 t CO2-e/a and reduce baselines over time, in line with national targets on a sector by sector basis - international permits will also be allowed in certain circumstances to allow for flexible compliance by liable entities and increase the depth of the permit market.

 

The key difference between the two parties is the emissions reduction targets being set by each. The Government is committed to a 26% reduction on 2005 emissions levels by 2030, while the opposition has announced that they will pursue a 45% emissions reduction target.

 

In the context of action by businesses, it is important for companies to understand their exposure to climate change risk and demonstrate resilience to a 2 degree scenario (this is closer to the 45% emissions reduction target). The potential of a change in Government and therefore a change in target will increase both the likelihood and consequence of some of these regulatory risks materialising.

 

Climate policies of Australian Major Parties

It should be no surprise by now that 2019 is an election year in Australia. Although the election itself hasn’t yet been called, the Federal budget has been scheduled for April 2, which most pundits suggest points to an election in May – either May 11, 18 or 25. In any case, an election will be taking place in coming months, driven by a requirement for a half senate election prior to terms expiring on 30 June. With this imminent, it’s a good time to reflect on the climate change and energy policies being put forward by the major parties. There are indications that climate change policy, and policies to manage Australia’s energy supply system (and energy pricing) will be a key battleground for the election. This has also spurred action from some high profile independent candidates in some seats.

 

The global landscape

Climate change itself is a global issue, that requires a global response and Australian policy shouldn’t be considered in a vacuum. To give proper consideration to the parties’ policies, they have to be looked at in the context of global action.

 

Since 1992, when the United Nations Framework Convention on Climate Change (UNFCCC) was developed, there have been a number of global agreements to deal with climate change. The most important for current domestic policies in all countries however was the recent Paris Agreement, signed in Paris in 2015 and coming into force from 2016 – when the minimum 55 countries, covering at least 55% of global emissions ratified the agreement. As of March 2019, 185 countries have ratified the agreement.

 

The Paris Agreement has a headline goal that is often referred to – the goal of limiting temperature increase globally to well below 2°C from pre-industrial levels by the year 2100, and to pursue efforts to limit the temperature increase to 1.5°C. Below this headline, there are a number of additional aims of the agreement that support the temperature goals.

 

To help analyse current and future domestic policies, what’s important is how the Paris Agreement works in practice. In the first instance, the aim of peaking emissions as soon as possible and achieving net zero (and even negative emissions) by the second half of the 21st century is the thing that will achieve the stated temperature goals. Note, this is “net zero” where the amount of GHG emissions being removed from the atmosphere (e.g., by trees) is equal to the amount being emitted. All decarbonization pathways to the stated temperature goals show net zero emissions between 2050 and 2070, with developed countries having to decarbonize at a slightly faster rate than the developing world.

 

Functionally, the Paris Agreement works by individual countries pledging to reduce their emissions within a certain timeframe. Countries are free to set their own goals, balancing the economic and environmental needs of that country. There is an expectation, though not a requirement, that countries increase their ambition as part of the five yearly review cycle of country level targets. The only legally binding aspects of the Paris Agreement are that countries must develop targets, and review them every five years. There’s no legal requirement to actually meet those targets (though there will be diplomatic and social pressure to achieve targets).

 

So far, countries have set a range of different types of targets with different base years, different target years and different calculation bases. Australia’s target is currently a 26% - 28% reduction in absolute emissions from 2005 levels by 2030. Other targets in use are intensity related targets such as Singapore’s, which is a 36% reduction in emissions intensity (measured in tonnes of greenhouse gases per unit of GDP) from 2005 levels by 2030 – or business as usual targets such as South Korea (37% reduction on BAU levels in 2030), which sets a target of a reduction against a projected forecast. In general, Australia’s target is comparable to that set by other developed nations, when compared on a like for like basis. It’s certainly not the lowest target and, given the structure of the Australian economy with a reliance on relatively high emissions extractive industries, a potentially challenging target to achieve purely domestically.

 

The United Nations takes these national pledges and develops a view on the gap to target, that target being the desired temperature outcome. What’s clear in the emissions gap report is that there is a significant gap between national pledges and what’s required to meet the temperature goals of the Paris Agreement. Climate Action Tracker only rates 5 countries as having targets compatible with 2°C goal and 2 countries with targets in line with the 1.5°C goal. This indicates that there will be some pressure on countries to increase their level of ambition in coming years – which will mean that domestic policies will need to be tightened.

 

Current Australian policy framework

In Australia, there are some key policy levers currently in place to drive action on climate change and help with meeting current global commitments. These are the Carbon Farming Initiative, the Safeguard Mechanism and the Emissions Reduction Fund. In addition, the Renewable Energy Target is an energy related policy that will have an impact on decarbonization of the energy generation system.

 

The Carbon Farming Initiative, which was set up by the ALP during the time Australia had a carbon price, sets a number of methodologies whereby companies can generate carbon credits (called Australian Carbon Credit Units – ACCUs) from emissions reduction projects. These projects include forestry projects, industrial efficiency projects, fuel switching, landfill gas recovery and others. The policy defines what projects are considered to be emissions reduction projects, the verification requirements and the issue of ACCUs for that project. Once received, companies that complete projects can use these ACCUs for a few different purposes.

 

The Emissions Reduction Fund is a fund that has been set up by the Government whereby they can purchase ACCUs from emissions reduction projects under contract, using a reverse auction process. The Government has a money set aside in the budget to purchase these ACCUs and effectively lock in those abatement projects. The contracts for purchase of emissions abatement come with a number of caveats around actual supply of permits and verification that the abatement actually occurred. Selling abatement to the Government is the first option for companies that generate credits under the Carbon Farming Initiative. To date, the Government has purchased 193 million tonnes of abatement at an average cost of $12 per tonne in eight auctions.

 

The Safeguard Mechanism presents a second opportunity for companies that have ACCUs to sell or use them. Under the Safeguard Mechanism, large facilities (those that have GHG emissions greater than 100,000 tonnes per year) are given an emissions baseline, which acts as a cap on emissions. If actual emissions for a reporting year exceed that baseline, one of the options for the facility is to acquire ACCUs to cover those excess emissions. Companies may get ACCUs from doing their own offset projects outside of the facility or they may purchase them on the secondary market from companies that have them. This is effectively a functional carbon market in Australia. In the 2017/18 reporting year, 259,000 ACCUs were surrendered to cover emissions exceedances.

 

Finally the Renewable Energy Target, which sets a target for large scale renewable energy generation by the year 2020. The target is 33,000 gigawatt-hours of renewable energy. To meet this target, it was estimated in 2016 that an additional 6,000 MW of large scale renewables were required. As at January 2019, there was 4,757 MW accredited by the regulator, with a further 5,499 MW of commited capacity and 1,504 MW of probably capacity. It would appear that this target will be easily reached, driven largely by large reductions in the costs of renewable energy and relatively high prices for electricity.

The question now is what stays and what goes under the major parties as we move into the next election cycle.

 

Coalition policy

The Coalition has released some detail on their proposed climate policy. The Climate Solutions Package is a $3.5b program to be delivered over the next 10 years and support Australia in meeting its Paris Agreement targets. The amount of abatement required to meet the 26% absolute emissions target is based on forecasted projections of emissions and is currently estimated at 328 million tonnes of GHG reduction (total abatement over the period) by 2030. Importantly, this abatement task includes an allowance where previous performance against Kyoto Protocol targets (where Australia performed better than target on an average basis) is carried over against the Paris Agreement targets. This carry over of 367 million tonnes of abatement is a point of discussion in the media and may be a point of distinction between the two parties.

 

The Climate Solutions Package consists mostly of the Climate Solutions Fund – which is essentially a rebadged and rebudgeted Emissions Reduction Fund. The budget for the Emissions Reduction Fund has been extended by $2b over the next 10 years. Other aspects of the Climate Solutions Package are funding for energy storage projects, improvements in household energy efficiency and a national electric vehicle strategy.

 

The focus on energy storage enables greater penetration of renewable energy into the grid. There is no indication as to what happens to the Renewable Energy Target after 2020 but, given economics of renewable energy, it’s likely that installation of renewable energy will continue without policy intervention. Energy storage will act to minimize the impact on the grid. The package from the Coalition refers to both Snowy 2.0 (using the Snowy River hydroelectric plant for energy storage and additional generation) and the Battery of the Nation project. This project involves construction of a new power line between Tasmania and Victoria and work to utilize new hydroelectric and pumped storage capacity in Tasmania.

 

With regard to the Safeguard Mechanism, there is work underway to make improvements to the baseline setting process and the policy package does state that there will be a review of this policy in 2020. The Safeguard Mechanism has always been a potential way to at the very least, put a cap on emissions rising in high emitting industries and at most a way to manage emissions in these industries so this will be something for businesses to watch. The Safeguard Mechanism is the area in which Australian businesses will be most exposed to climate change policy going forward. Any changes to the Safeguard Mechanism are covered in the column marked “other sources of abatement” in the waterfall chart shown below.

ALP policy

ALP climate change policy does currently lack firm detail in many areas though it has been hinted during some interviews and articles that they do not intend to abandon policy such as the Safeguard Mechanism, which could be amended to achieve emissions reduction goals. One very large difference between the ALP and the Coalition however is the emissions reduction target. The ALP have stated on many occasions that their emissions reduction target in 2030 will be a 45% reduction in emissions from 2005 levels. This is clearly much higher than the Coalition target and will be at the top end of emissions reductions from the developed world. The origin of the target is a report made a few years’ ago by the Climate Change Authority which indicated that a 45% emissions reduction target represents Australia’s fair share of a global commitment to 2°C temperature rise by 2100. So, the ALP target is considered to be in line with Paris Agreement expectations.

 

The ALP has also hinted that they may not use the carryover permits from the overachievement against Kyoto Protocol targets. This is consistent with the position of other countries though a final decision by the party hasn’t been made. Not including these obviously makes the abatement task harder – and a 45% target will already be quite challenging.

 

The ALP released some detail on energy policy in November 2018. Under their policy, there would be an extension of the Renewable Energy Target to 50% renewables by 2030. To support this, they have announced expenditure of $15b over the next five years that will be used to support large scale renewable energy projects, provide grants for installation of home battery systems and provide funding for commercial and industrial energy efficiency projects. The proposed expenditure also covers upgrades to the electricity transmission and distribution networks.

 

Differences in opinion

It’s clear that the main difference between the two parties is the emissions reduction target that is proposed by each. Globally, there appears to be a trend towards increasing the level of decarbonization ambition from different countries and at the recent climate change conference in Katowice, Poland in December the Secretary General of the United Nations urged countries to be prepared to increase ambition as soon as this year. What’s not yet clear is what the cost of increasing ambition will be, both to businesses and on an economy wide basis.

 

One item for both sides of politics to consider is potentially the use of international permits and international abatement projects to help Australia achieve its goals. There is a section in the Paris Agreement to deal with this and negotiations in this area are continuing into 2019. Given Australia’s economy, this access to international abatement may prove to be useful to allow Australian businesses to take advantage of opportunities – particularly in the ASEAN region – and to allow for flexible compliance mechanisms.

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