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An Emissions Reduction Fund could work, if well designed

The Abbott Government’s Direct Action Plan (DAP) - its substitute for Labor’s carbon tax - could be made to work if imagination, innovation and leadership are applied to its design. Submissions on its…

Direct Action could help businesses reduce emissions, if the government is prepared to innovate. AAP Image/Lukas Coch

The Abbott Government’s Direct Action Plan (DAP) - its substitute for Labor’s carbon tax - could be made to work if imagination, innovation and leadership are applied to its design. Submissions on its main feature, the Emissions Reduction Fund, closed on Monday.

My submission is founded on a belief that our generation must make the most of every opportunity for effective action on climate change.

So far, the government has provided little detail about how Direct Action or the Emissions Reduction Fund would work. Given there is a lot of room to move within the rough guidelines provided, I have tried to develop a submission that builds on the spirit of Direct Action to create an economically rigorous framework for emissions reduction.

The key to making Direct Action work, I believe, lies in little publicised advice by the Coalition’s consultant, Frontier Economics.

Danny Price, Managing Director of Frontier Economics (Australia), told ABC Lateline that “the direction (sic) action policy has always had a penalty included in it”. The penalty would apply to an emitter that went over its limit on carbon-equivalent emissions (CO2e).

This reflects the Coalition’s Direct Action Plan (available on Minister Hunt’s website) which states: “Businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty. The value of penalties will be on a sliding scale at levels commensurate with the size of the business and the extent to which they exceed their ‘business as usual’ levels.”

By building on those limits and penalties we can develop governance arrangements for the plan’s central feature, the Emissions Reduction Fund (ERF).

The Emissions Reduction Fund would be used to buy up and thereby reduce CO2e emitted by those businesses required to report emissions: the “big emitters”. These yearly reports have been required by law since the Howard years. Under the Emissions Reduction Fund governance arrangements, emissions in 2012-2013 would form the baseline limit. This means businesses should not emit more than they did that year.

We know that emissions from electricity generation have been falling overall in recent years at least partly as a result of significant efficiency gains and major expansion of renewable energy. This makes it easier for the government to reach its target: reducing CO2e emissions by 5% of the year 2000 levels by 2020 (the “5% target”).

If CO2e emissions did not fall fast enough in any particular year for the 5% target to be reached, each big emitter’s baseline limit would be reduced as needed to progress to that national 5% target.

I suggest that to help individual big emitters move to their adjusted baseline limits, a non-government “emissions exchange” would be licenced for emitters to buy or sell part (or all) of their baseline limits. New or expanding businesses could buy baseline limits through the emissions exchange.

In addition, big emitters could sell baseline limits to the Emission Reduction Fund, as announced by the government.

As now, emissions reports would be subject to independent audit to prevent fraud.

As suggested by Frontier Economics, there must be incentives for big emitters to stay under the ceiling of their annual baseline limit. It must not be profitable to break the law or the ethical obligation to protect the atmosphere from pollution. Those who breached their baseline limits must face penalties.

There is also room for more conventional direct action. Remember Malcolm Turnbull’s initiative to ban conventional, inefficient light bulbs? It was a simple piece of regulation to which we all adapted effortlessly.

The business case is clear too. A Melbourne cold storage business has massively reduced energy waste by replacing hot incandescent light bulbs with LEDs; it is now easier to keep coolrooms cool and cost is recovered under two years.

Yet, more can be done. The ERF governance arrangements should include simple regulations for such thing as more efficient cars, solar-efficient house design, low energy heating and cooling, smarter industrial buildings and many more proven, economic solutions to unnecessary pollution of our atmosphere.

A number of the proposals I have suggested lend themselves to implementation by states, territories and local government, consistent with government policy. This should be applied in all practicable instances.

States, territories and local government should be “contracted" to implement these governance arrangements, through inter-governmental agreements. This would be most important in respect of Direct Action emission standards. It would be most important that the Commonwealth set clear standards to be met in implementation.

Each of these suggestions is consistent with the advice from Frontier Economics that underpins the government’s Direct Action Plan.

These suggestions take a step back from the strident opposition to the Direct Action Plan. Rather than oppose a policy to which the government is fervently committed, I take environment minister Greg Hunt at face value when he says that he wants input on the design details to achieve the 5% target.

It also accepts that the published policy - a single-page outline - really does fully describe the policy framework as it now stands, incomplete and waiting to be fleshed out without preconceived ideas about how the system could work. Most of all, it accepts a moral obligation to do as much as possible as soon as possible rather than wait for a change of policy.

If however, the public Direct Action policy is not a true reflection of government policy, these suggestions may not be welcomed.

Join the conversation

20 Comments sorted by

  1. Brad Farrant

    Adjunct Research Fellow in Early Childhood Development at University of Western Australia

    As recently pointed out by the Climate Change Authority the 5% by 2020 target is nowhere near our fair share and is both ethically and economically irresponsible.

    Is there any evidence that the Abbott government's Direct Action policy can be ramped up to meet the required targets of 25% by 2020 and 40-50% by 2030? Every analysis that I have seen says it is not possible for Direct Action to produce reductions of this magnitude.

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    1. Alice Kelly
      Alice Kelly is a Friend of The Conversation.

      sole parent

      In reply to Brad Farrant

      Two aspects of it can't be effective; soil carbon is limited by soils themselves in Australia. Trees have to remain in place for 30-40 years. What happens if soils blow or wash away, and those trees burn in the mean time. These two according to the CSIRO are valid enterprises, but complimentary measures to decreasing emissions. The other point is that it's more prudent to protect Australia's forests, rather than cut them down and plant some more. Newly growing trees use more water in both instances.
      AS Brad says, how do we get to 80-100% emissions cuts by 2050? We should be doing far more in as many ways as possible, and that includes confronting market mechanisms currently in place.

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    2. Mike Swinbourne

      logged in via Facebook

      In reply to Alice Kelly

      Is it just me, or has anyone else worked out that soil carbon and forest sequestration actually doesn't reduce our emissions by one gram? They may lock up some of the CO2 after it has been emitted, but surely we should be doing something to reduce those emissions in the first place.

      The No Action Policy does little to nothing in that regard.

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    3. Brian Westlake

      Common Sage

      In reply to Alice Kelly

      The answer is quite simple: Nuclear fission !

      This of course is only a stopgap measure until we fire up the first Nuclear fusion reactor sometime around 2050. This is no doubt the smartest way forward that guarantees prosperity for your children and your children's children. Just think of how much desal water we could pump into the Red Centre turning it into a green oasis. Only problem is that we would probably need to unlock some more fossil fuels to meet the carbon demand.

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    4. Ken Coghill

      Associate Professor at Monash University

      In reply to Brad Farrant

      The Conversation post is necessarily a very brief summary of the submission. Email me at Monash University for a copy of the full submission which provides a clearer explanation that covers Brad's query.

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    5. David Arthur

      resistance gnome

      In reply to Brian Westlake

      The answer is simple: 100% solar PV coeverage, with full battery storage, plus 100% transport fuels from biofuels, plus wind plus solar thermal.

      Nuclear power may be acceptable where there are large stand-alone applications requiring "baseload" power eg 1 develop Weipa and Nhulunbuy bauxite/alumina operations developed to full aluminium metal production, eg 2 replace North Asian blast furnace CO2-emitting iron and steel making with Port Hedland Molten Oxide Electrolysis (analogous to aluminium smelting) as currently being researched by Donald Sadoway's MIT group.

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    6. Alice Kelly
      Alice Kelly is a Friend of The Conversation.

      sole parent

      In reply to Mike Swinbourne

      It can work, with many limitations, so can't work, according to the CSIRO report Greg Hunt uses as a basis. He doesn't refer to the limitations. And in the study, the conclusion is that in no way should these two measures be used exclusively. Which leaves us now with what will be the biggest rort. Paying large emitters. And none of the measures to change behaviour, putting a price on carbon, and increasing our use of renewable energy energy sources.

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    7. Jeremy Culberg

      Electrical Asset Manager at Power Generation

      In reply to David Arthur

      David, unless there have been some breakthroughs I haven't seen in the last month, battery technology still isn't sufficient for some of the bigger baseload city based systems - sewage, hospitals, emergency response, lights, telecommunications to name a few. That doesn't include those factories / businesses that run on a 24 hour cycle (even if the night shift is reduced personnel shift).
      Rather than go for the big nuclear power plants, my preference would be to use a model being proposed in the…

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    8. David Arthur

      resistance gnome

      In reply to Jeremy Culberg

      Thanks for this information, Mr Culberg.

      Batteries are under development, and arguably improving. It may even be that batteries, such as Vanadium-redox batteries (http://en.wikipedia.org/wiki/Vanadium_redox_battery). I think it likely that batteries will be widespread before nuclear fusion plants.

      Perhaps urban power transmission networks could draw power from domestic battery banks (metered, of course) and deliver it to large night-time users. Mind you, with medical evidence on the health…

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  2. Peter Evans

    Retired

    Does this mean that in essence we have a carbon tax on emissions over the "business as usual level"? It would also be useful if author could include some guidance on cost to budget of an Emissions Reduction Fund that meets the target set. This is vital as I understand there is a set amount. So will it work within this budget allocation? I am setting the question of whether the Fund can actually achieve the size of reductions actually required aside as the next step after these points are addressed.

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  3. John Newlands

    tree changer

    A couple of serious problems. Who decides the baseline? An efficient industry could get penalised while a profligate industry gets to keep its padding. Secondly in some cases we may be paying more taxes for less GDP and fewer jobs. Take cement manufacturing for example. If they get bought out under the ERF what replaces it? Presumably we then pay top dollar for cement made in Asia but the CO2 doesn't appear in our books. But our GDP and employment is down.

    It's also unclear how the auction…

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    1. David Arthur

      resistance gnome

      In reply to John Newlands

      Mr Newlands raises a couple of serious problems with the notion of emission capping and permit auctioning.

      It would be much more straightforward to simply replace a proportion of the current tax take with a fossil fuel consumption tax (FFCT), then continually increase the rate of that tax until everyone has weaned their operations off fossil fuel use altogether.

      Of course, there may need to be some other adjustments, such as a clean energy fund of some sort, assistance to carbon-sequestering forestry operations, and so on; but that's the sort of thing you generally need to do whenever you adjust a tax system to guide and inform future actions and choices.

      Best of all, such a tax change can be implemented unilaterally, and through its border adjustment provisions (ie similar to GST) it can be trade-neutral, or even trade-positive, since it would encourage domestic manufacturing rather than pay FFCT border adjustment on the fuel used to import goods from overseas.

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  4. Ian Alexander

    Reader

    "The Abbott Government’s Direct Action Plan (DAP) ... could be made to work if imagination, innovation and leadership are applied to its design..."

    Ken, Ken, Ken...

    "Imagination, innovation and Leadership" and an Abbott government are mutually exclusive. The Coalition are doing everything they can to destroy the talks in Warsaw and are simply lapdogs for the oil and mining industries. 'Minister' Hunt is a feeble yes-man, doubly damned because he actually does understand the science but is too weak and cowardly to act.

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  5. john byatt

    retired and cranky at RAN Veteran

    “Businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty"

    I am fairly certain that "business as usual" is the problem

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  6. David Arthur

    resistance gnome

    Thanks for this article, Prof Coghill.

    As a member of the ALP, maybe you can get this message to them. Any carbon pricing scheme that is based on setting aggregate caps on emissions is fundamentally flawed, and economically sub-optimal. This was first shown by Weitzman in his seminal 1974 paper on pollution regulation, "Prices vs. Quantities", (http://scholar.harvard.edu/files/weitzman/files/prices_vs_quantities.pdf).

    Elsewhere on TC, I have posted the following comment:
    "If the climate…

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  7. Sam Adeloju

    Professor

    I agree with Ken that direct action could work if designed properly. It only stands to reason that the best way to tackle a problem is to directly address the problem and not by using indirect and punitive measures. If those (industry) generating the bulk of the CO2 emission are held to account, given incentive to act to reduce, and be penalised if they fail to stay within agreed limits, you have a pretty good chance of achieving a reduction. But as Ken indicated, the DEVIL is in the DESIGN of the direct action strategy by the government.

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  8. Doug Hutcheson

    Poet

    "The Abbott Government’s Direct Action Plan (DAP) - its substitute for Labor’s carbon tax - could be made to work if imagination, innovation and leadership are applied to its design." Anyone else spot the oxymoron in the first line of the article? Abbott ... imagination, innovation and leadership. On the basis of this proposition, Direct Action has not a snowball in Hades of succeeding.

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  9. Doug Fraser

    policy analyst at UNSW

    On reading this through a couple of times over, it strikes me that what Ken is suggesting is essentially a very roundabout and convoluted way of implementing something that works like an ETS, without actually calling it an ETS.

    As Ken would be well aware, this is exactly the kind of thing that would have happened in my day if the Government had simply handed over the empty policy shell to public servants and told them to get on with it and produce something that worked. It is more typical than…

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  10. James Hill

    Industrial Designer

    Nothing that the Abbott "government" attempts will eventuate, simply because the conservatives have systematically destroyed "government", in order to "supposedly" save it, according to their weird conservative "religion".
    The government "bus" is now up on blocks, the wheels have been removed, and the "adults" are sitting in the driver's seat making engine noises.
    It must be that "Hope" thing which is being invoked for this article.
    Reward and opportunity?
    Not in prospect, at all.
    Petitioning these treacherous political clowns for anything at all is just a waste of time, and the sooner this truth is realised the better for all concerned.

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  11. Drew Morris

    Environment Officer

    Thanks for the article. Looks like the general public can also comment on the green paper as of a few days ago:
    http://environment.gov.au/topics/cleaner-environment/clean-air/emissions-reduction-fund/green-paper

    "If CO2e emissions did not fall fast enough in any particular year for the 5% target to be reached, each big emitter’s baseline limit would be reduced as needed to progress to that national 5% target."

    - so there's a 'cap' on emissions of big emitters? And if they exceed this 'cap' they'll have to pay a fee.

    Just as well we got rid of the carbon tax, this sounds completely different, and is not a big tax at all.

    Your submission included a recommendation to include an emissions exchange either between businesses or government. It feels like we're taking the long, scenic route, to come back towards implementing an emissions trading scheme.

    Anyway, i'm off to have a look at the green paper myself. Wish me luck.

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