Emissions scheme has major flaws

Recent history is littered with examples of grant-based schemes for which the fiscal pressures became too great.
Recent history is littered with examples of grant-based schemes for which the fiscal pressures became too great. Photo: Glenn Campbell
by Nathan Fabian

Investors seek transparency, longevity and predictability from governments, but the proposed Emissions Reduction Fund (ERF) would leave the market guessing about future climate policy. This would delay the investment trigger for structural reform and send investors offshore for low carbon investments.

Recently the Climate Change Authority recommended a 2030 emissions reduction range for Australia of 40 to 60 per cent below 2000 levels. Given the CCA’s assessment of current and likely progress by other nations, this indicates the stark abatement task facing Australia.

Based on the government’s green paper, the ERF will focus on purchasing short-term abatement without driving the necessary long-term emission reductions. The ERF is a taxpayer-funded government grant scheme, seemingly incapable of making the fiscal or abatement distance to 2030 and perhaps not even to 2020.

Grant schemes are subject to budget pressures, which can prevent them from increasing in scale. From feed-in tariffs to carbon capture and storage funds to the NSW Greenhouse Gas Abatement Program on which the ERF is modelled, recent history is littered with examples of grant-based schemes for which the fiscal pressures became too great.

Due to their voluntary nature, under-participation or under-use of grant schemes is a common risk. The ERF attempts to encourage abatement but provides no guarantee of delivery, as opposed to the legal obligation on emitters to abate under the currently legislated Emissions Trading Scheme (ETS).

Grant schemes limited

Grant schemes are also limited in their reach, targeting specific projects but doing little to support structural adjustment. To achieve reductions of 40 per cent or more in just 16 years the energy, industrial, property, transport and agriculture sectors will all need to reduce their emissions intensity.

Despite the policy limitations, investors would still take up ERF opportunities if they were financially material. But the green paper tells us that the ERF is not investment grade.

The five-year contract period, small financial scale of projects and low carbon prices likely to be on offer all fall short of investor requirements.

Further, the transaction costs for project aggregators and many proponents are likely to be prohibitive under the ERF. Reverse auctions might work when customers need standard essential services like electricity and water, but for emissions reductions, the process will add expense and administrative complexity, which runs counter to the voluntary nature of the scheme. Without material changes, the ERF provides substantially less abatement incentive than the ETS. The government’s approach will lead to under-investment in low-carbon assets, just as the rest of the world is moving ahead.

In a recent analysis of 66 nations’ progress on climate legislation by GLOBE International, Australia was the only nation seeking to unwind its policies.

Long-term commitment needed

While some argue that Australia can pause before implementing a substantial abatement policy, this underestimates forecast emissions growth outside the centralised electricity generation sector and the level of adjustment that would later be required across the economy.

To redress this trend and provide real incentive for low-carbon investment, Direct Action would need a makeover.

Core requirements are a cap on emissions, and obligations for companies in major emitting sectors to participate in the scheme. Company baselines could be used to establish a scheme cap as long as they were reduced over time. Linking to international markets to provide short-term cost relief to emitters also makes economic and environmental sense.

Such changes would indicate government commitment to substantial, long-term emission reduction policies.

Without changes, the government’s approach will delay the investment trigger for structural reform and delay the transition of Australia’s economy to higher emissions productivity. The limitations of the ERF compared to an ETS would remain, and Australia would be left wanting for transparency, longevity and predictability in its climate policy.

The Australian Financial Review