The Emissions Reduction Fund (ERF), the central pillar of Australia’s Direct Action climate policy, continues to attract a fair bit of derision with its credibility said to be “hanging by a thread”. Is it really that bad? Probably.
Now that environment minister Greg Hunt has released a Green Paper for the Emissions Reduction Fund, let’s look at just three aspects: comparable global action, the proposed baseline and credit system for business, and implications for the land sector.
World abandons carbon pricing?
In the Green Paper foreword the environment minister introduces the ERF as one of the two major global policies of emissions reductions. The main policy is a price on carbon, like ours to be removed in July this year.
But the minister dismisses this because of “considerable uncertainty and policy instability within many of these schemes”. Is this correct?
True, there have been problems with European Union’s falling carbon price due thanks to an oversupply of carbon permits, causing the price to drop to around €5. But the EU last week agreed to postpone sale of 900 million carbon permits to increase demand and price.
The OECD says that to be serious governments must price carbon, and their latest list shows the growing number of countries and regions where emissions trading is being implemented. Rest assured emissions trading is alive and well.
As for policy instability, look no further than home. Australia is the only country in the world dismantling a working carbon price: one that has, in its short life, already reduced emissions by nearly 40 megatonnes CO2 equivalent.
Paying to reduce
The other global approach is “purchasing abatement”. Instead of paying to emit, polluters are paid if they reduce emissions below a threshold.
This is the model the ERF nominally follows, founded on part of our current carbon policy known as the Carbon Farming Initiative. The initiative, designed to work with a carbon price, rewards landowners for reducing emissions with carbon credits that can be traded and bought by polluters.
The United Nations Clean Development Mechanism (CDM), cited in the ERF Green Paper, is the global example. The CDM allows developed nations to buy emissions reductions in developing nations to help meet their emissions reductions targets under the Kyoto Protocol.
The CDM is not a stand-alone scheme. It is voluntary program dependent on the Kyoto Protocol to function. Take away the compliance aspects of the Kyoto Protocol and you would be left with a voluntary scheme with nowhere to go.
It would be like, well, dismantling our carbon price and leaving only the Carbon Farming Initiative.
The UK model
The ERF also cites the United Kingdom Non Fossil Fuel Obligation Scheme. Operating between 1990-98, the scheme encouraged private investors to invest in nuclear power, but also subsidised all forms of renewable energy.
The scheme was funded through a fossil fuel levy, not out of the public purse as with the ERF. Each year the scheme was allocated the equivalent of A$2.2 billion, more than the entire allocation of the ERF. The scheme is said to have incentivised the shift to renewable energy in the UK.
Competing bids for funding under the scheme were also price-banded so that different technologies could compete. The ERF makes it clear it is only interested in the lowest-cost abatement.
Baseline and credit, or simply credit
But let’s not quibble. Using an expanded, streamlined Carbon Farming Initiative to generate carbon credits might well work.
But for it to have any integrity it must be linked to a baseline and credit system that manages companies’ emissions. The ERF Green Paper calls this “safeguarding emissions reductions”. It would be self-defeating, for instance, if the government purchased emissions only to see business increase emissions.
The guts of any baseline and credit scheme is that there is a baseline for emitting activities. Credits are awarded for activities that emit below the baseline, and costs apportioned to activities that emit above the baseline.
The ERF, however, “is designed to allow businesses to continue ordinary operations without penalty.” “Ordinary” is not defined but clearly means as long as businesses contribute to economic growth. This is the real baseline of the ERF, underscored by the statement that entities that consistently exceed their baselines will be “rare cases”.
Actually businesses will have difficulty exceeding ERF baselines. They will be set “flexibly” that is to say they will reflect a “high point” in emissions using data from the current National Greenhouse Energy Reporting Scheme .
If a business did actually manage to exceed its generous baseline then flexible compliance arrangements would kick in including a transition period during which compliance would not apply. Consistently high polluters could actually be rewarded with investments in emissions reductions funded by the ERF.
Almost by definition this is not a baseline and credit scheme. It is simply a credit scheme.
Modelling from carbon consultancy Reputex shows that up to 75% of credits could be of this kind, potentially leading to a windfall of A$2 billion over the first four years.
In any case, a recent survey shows that three quarters of Australian businesses have assumed they’ll be charged a carbon price to run their business.
Big global businesses have long priced carbon into their investment decisions with prices ranging from A$8 to A$60 per tonne CO2 equivalent. But instead the ERF could provide a windfall.
Biodiversity abandoned again
Paradoxically, the one thing a streamlined and expanded Carbon Farming Initiative under an ERF will not do is fund abatement across the land sector, as originally intended. Instead emissions reductions will be achieved at the lowest cost, and this will cut out the land.
Gone too is the focus on soil carbon “as the lowest cost of CO2 emissions reduction available in Australia on a large scale”. Given the methodological difficulties associated with measuring soil carbon that’s really no surprise. But that’s not the only flaw.
Players working across the landscape in the ecosystem sector are generally small. They will find it difficult to bid into the ERF. The Green Paper suggests a minimum bid size is likely to be adopted. The government does not, however propose a maximum bid size.
Purchasing emissions reductions at the lowest available cost also means that other objectives like biodiversity conservation, reducing salinity control and improving water quality won’t count. The Green Paper says in fact that these could raise costs, “as Australia would have to forgo lower-cost emissions reductions projects” to deliver them.
Alongside the ERF is the government’s 20 Million Trees plan, to aide carbon storage and reforestation. It sounds grand, but 20 million trees amounts to a area just 200 kilometres squared, and less than half that that if we’re talking about rainforest.
And even if we do meet our 5% reduction goal through the ERF, government modelling show emissions soaring after 2020 to 23% above 2012 levels.
Reverting to fossil fuels, phasing out of renewable energy incentives and increasing deforestation levels to accommodate expanding agriculture explains most of this. Which begs the question of Australia’s government: are you serious?