On these numbers, Australia’s emissions auction won’t get the job done

The wrong track? The biggest emitters, such as power stations, were largely absent from the government’s first round of greenhouse reduction contracts. AAP Image/Dan Peled

Last Thursday, the Abbott government announced the results of its first reverse auction of emissions-reduction projects. Using A$660 million drawn from the A$2.55 billion Emissions Reduction Fund (ERF), the government has purchased 47.3 million tonnes of carbon dioxide, as a first step towards reducing greenhouse emissions under its Direct Action plan.

Federal environment minister Greg Hunt proclaimed the auction to be a “stunning result”, claiming that the ERF alone will get the government to achieve its existing Kyoto target.

The Australian newspaper’s triumphant front page headline hailed the outcome as a “direct hit on carbon target”, with national affairs editor Sid Maher writing:

The Abbott government has claimed vindication for its Direct Action policy, saying the first auction in the scheme has put Australia on track to “more than meet” its carbon-reduction target at a “fraction of the cost” of the carbon tax.

But how effective has this first auction really been, and what might we expect in the future?

Maths and myths

Closer scrutiny of the package of contracts is impossible at this stage, and some of the answers won’t be clear until the projects begin to deliver (or not) emissions reductions over time. Even so, there are plenty of grounds for concern.

Part of the answer comes down to crude arithmetic and some rather dry number-crunching. Once all factors are taken into account, Australia needs to cut its CO2 emissions by 236 million tonnes to meet its official target, agreed under the Kyoto Protocol, of cutting emissions by 5% below 2000 levels by 2020.

Let’s assume, for argument’s sake, the going rate for carbon emissions will remain at the average of almost A$14 per tonne of CO2 paid in this first reverse auction. If so, the A$1.89 billion remaining in the ERF’s coffers will buy another 135 million tonnes of emissions.

Assuming all the 47.3 million tonnes bought in the first auction are delivered, and the price per tonne of carbon remains the same, then the total emissions reduction bought by the ERF will be around 182 million tonnes of CO2. This is 54 million tonnes (or about 23%) short of Australia’s overall target.

Source, Author provided

However it is likely that this first auction has picked most of the “low-hanging fruit” – emissions-reduction projects that are easy or cheap to implement or already under way. In future, the number of “emissions-reduction-ready projects” may decline, and the cost per tonne of emissions reductions increase. If the average price rises in subsequent auctions – or if Australian energy use and emissions continue to grow – the overall shortfall will increase still further.

Devil in the detail

The story doesn’t end there. The auction’s 107 participants have varying deadlines for delivering their projects. Surprisingly, only 1.5% of the contracts (by volume of CO2 to be reduced) are set to end within 3-5 years, within the target deadline of 2020. Meanwhile, 40% of emissions reductions are set to be delivered over seven years, and the remaining 58% over ten years.

It’s hard to know when many of the contracted projects will produce their cuts. Without access to the detail of specific contracts, it is hard to assess when each contract will “mature”. About half the contracts (again, by volume of CO2) are “forest protection” projects. These can be assumed to deliver results immediately. A further 15% are vegetation regeneration and soil carbon projects, which also are likely to come “online” pretty quickly.

But some 35% are industrial schemes – projects to capture waste methane from landfills or piggeries – which may take one or two years to become fully operational and start delivering results. If so, this could mean that these projects will contribute more emissions reductions towards the end of their contracts than at the start. In other words, emissions reduction from industrial projects is likely to be lower before 2020 than a simple annualised estimate would allow. (It’s also worth noting that no major emitters in the energy and resource sectors are among the successful first-round bidders.)

The best we can do here is estimate the annual abatement promised by each project across the lifetime of its contract. This indicates that only 28 million tonnes of emissions – around 60% of the 47.3 million tonnes lauded as the outcome of this first auction – will be have been cut by 2020.

Unfortunately, our shortfall just increased to 73 million tonnes, or to 30% short of Australia’s overall target.

Are these really emissions reductions?

Last, and not least, there is the issue of the “quality” of the emissions savings. Almost half of the projects (by emissions volume) involve “forest protection”. These are rural projects, mainly related to the previous Carbon Farming Initiative (now subsumed into the ERF), which generate carbon credits by paying farmers to stop the destruction of native vegetation for which clearing permits had already been issued (so-called “avoided deforestation”) or to enhance sequestration of carbon in soil and vegetation.

Most people paying superficial attention to the workings of the ERF would expect public money to be spent on cutting “real emissions”, for instance by moving our industries onto renewable energy sources, rather on paying rent to rural landowners to avoid activities that may release emissions in the future. Useful though these projects are, one wonders whether they should constitute the core and bulk of Australia’s flagship climate policy.

All up, on the evidence so far, Minister Hunt has greatly overstated the auction’s achievements. If this is to be the main mechanism used during the remaining five and half years before the 2020 emissions target deadline, then – short of economic downturn and a dip in emissions from the energy sector – Australia won’t meet, let alone exceed, even its very weak 5% reduction target.

The ERF would need well over A$3 billion to buy all the emissions needed to meet Australia’s present target. And that is not to mention the parallel debate about whether Australia needs to adopt tougher targets.

Moreover, the ERF’s reverse auction approach seems incapable of driving a national transition to renewable energy or encouraging substantial emissions-reducing activities by major industrial emitters. It is certainly unable to meet more ambitious post-2020 targets, of the sort recommended by the Climate Change Authority, which are the minimum that will be required if Australia is to do its fair share in combating global warming in the future.