carbon price

Green Paper: cracks of light?

The Minister for the Environment, the Hon Greg Hunt MP, released the long awaited Green Paper on implementing the Emissions Reduction Fund (ERF) on 20 December 2013.

The paper centres around three design principles:

The Australian Government's Emission Reduction Fund Green Paper

The Australian Government's Emission Reduction Fund Green Paper

  • lowest cost emissions reductions
  • genuine emissions reductions
  • streamlined administration.

To seek the lowest cost emissions reductions, the Government has signaled its intention to allow a ‘menu of emissions reduction projects’ expanding from the land sector and landfill into energy efficiency and industrial facilities. To achieve this expansion, the ‘positive list’ of allowed activities may go and additionality, or which projects go ahead only because of the credits they receive, may be handled in methodologies, or the rules for activity types.

For industry type activities, this means additionality is all about the baseline or the starting point from which improvement is measured. At this stage we don’t have colours on the mast but just options: absolute baselines considering overall emissions of a facility, and/or emissions intensity baselines which look at the efficiency of a facility. There are three devils and a dingo in calculating emissions intensity baselines.

Activities will be credited through auctions run by the Clean Energy Regulator (CER). Decisions will be based on price and prequalification by projects on eligibility etc. To choose projects, the CER will set a secret ‘benchmark price’ with only bids below that price to be considered. Am I the only one worried about the CER making value judgments on which projects to fund according to a secret price which will surely leak out? I am uneasy about the regulator choosing which projects it regulates according to secret parameters. I thought the whole point of markets was transparency – how can you have a market if no one knows the price?

CFI credits to date: the land sector has contributed only 6% of credits. Source: Clean Energy Regulator and Carbon Market Institute

CFI credits to date: the land sector has contributed only 6% of credits. Source: Clean Energy Regulator and Carbon Market Institute

Reputex thinks all this might make it a bit tough for the land sector and Bloomberg New Energy Finance thinks 5 year contracts will make the scheme unfinanceable. And it’s a real concern given only 6 per cent of CFI credits currently come from the land sector – the vast majority are from landfill – projects which are essentially bolted on to existing operations. Very few genuinely new projects have been incubated and this is the challenge to deliver abatement well into the future.

Still, like always, there might be some cracks of light for Aboriginal projects: simplifying methods by using the national accounts might make methodology development simpler for rangelands and new savanna methodologies. Risk based verification might reduce the costs of implementing projects. A ‘make good’ provision for industrial projects might create a secondary market for land credits where business projects fail and need to buy credits from steady land projects. A permanence condition of 25 years might ease the minds of traditional landholders (although query the environmental integrity).

But my favourite is aggregation. At present, the land requirements for CFI projects are relatively strict and landowners, rightly, are cautious about signing away their land or carbon rights. This makes aggregation of larger sequestration projects difficult. A simpler consent approach, similar to consent required for interest holders now, may make it a lot easier to bundle a whole of projects into a super project – this might be the way to make an irresistible case to the Government to get behind what would otherwise be a lot of smaller fragmented projects. Given there is a proposal for minimum size bids into the ERF, this might be essential.

The next steps will not be easy with legislation definitely required to implement this platform. However, if things get tricky, the Government could simply expand the scope of the CFI by regulation – leaving the complex stuff of baselines etc to methodologies.

More to say but see it at The Conversation, Climate Spectator and Renew Economy. Our Direct Action page is updated. Submissions close 21 February 2014.

The future is uncertain, but not certainly bright.

Jeremy

Anything coming from international COPs?

Today I attended a Sustainability Business Australia forum on the direction of international climate negotiations.

Are these negotiations doing anything?

So far there have been 18 conferences of the parties, or COPs, with mixed results (I remember writing a thesis on COP3 when I was at uni!) The COPs have led to Kyoto, an agreement to agree, a roadmap to comprehensive agreement, and other indifferent results.

So will COP19 in Poland be a good COP or a bad COP?

It is worth remembering that Australia was hailed last year after implementation of the carbon price. It probably won’t be the same this year as the mood of today’s meeting was certainly that Australia is swimming against the international tide of action. In fact, 75% of people on the planet are now covered by some kind of laws to reduce emissions and this fact will help rather than hinder negotiations.

But a little bit behind Australia’s adulation was a lower key event about savanna burning in the north of Australia. This event seems to have been quite a hit and has led to a project led by UN University and the North Australian Indigenous Land and Sea Management Alliance (NAILSMA) to internationalise the savanna burning methodology. African countries in particular are very interested as the work done to develop the Australian methodology overcame earlier work in Africa. The positive story of COPs perhaps rests with the innovation and ideas from these side events.

Our discussion suggested that COP18 last year managed to declutter the process towards a comprehensive agreement, but what will COP19 deliver? Maybe the groundbreaking CFI will get a run in the margins. Hopefully Australia won’t be announced as the first country to introduce then remove a carbon price.

Australia’s negotiating position is due to be announced next week.

Jeremy

 

State of the carbon market

Industry body Carbon Market Institute has released a report on State of the Australian Carbon Market 2013.

What did they find?

Well, in the first year of the market there were 287 million carbon units at a market value of $6.58 billion. About half the units were given away in free industry allocations, but this will reduce over time. Interestingly, about 40 million units were sold to the Clean Energy Regulator under the buy-back scheme and a further 35 million were traded on the secondary market (that is, traded to other entities after issue rather than just surrendered to the Regulator).

That's quite the show! And gives a good impression of a functioning market?

State of the market report by Carbon Market Institute

State of the market report by Carbon Market Institute

What about the CFI?

21 CFI projects were issued nearly 1.8 million credits (or less than 1 per cent of the market). Credited projects were reforestation (12,000 credits), piggeries (8,000 credits) and savanna burning (26,000 credits), with the remainder being landfill. In fairness, as the CMI notes, many of the landfill projects transitioned from the former Greenhouse Friendly program and sequestration projects have a longer set up and return time. So the imbalance in crediting should square up in years to come.

In good news, 97 per cent of the CFI credits were sold to companies with a carbon bill to pay - the biggest buyers were Great Energy Alliance Corporation Pty Ltd, Stanwell Corporation Limited, CS Energy Limited and EnergyAustralia Yallourn Pty Ltd. Interestingly, while a 5 per cent cap on CFI credits applies while the fixed price period is in place, no one broke that mark this year. CFI credits typically traded just below the fixed price of $23.

So what does this mean?

Well, the CFI has made a slow but encouraging start, with many projects transitioning in to the CFI boosting the numbers of credits sold so far. And it's good news that CFI credits are finding the market and being sold - the bigger companies have an incentive to make savings by buying CFI credits just below the fixed price.

But it will be interesting to see if the base of projects broadens in the second year - hopefully we will also see a few more Aboriginal projects. It will also be interesting to see if any Aboriginal or other projects are able to market their credits at a premium because of the broader community and environmental benefits they are delivering. It's certainly a nicer story buying credits from a land project than paying the bill from the Regulator.

Better get to it.

Jeremy

PM: emissions trading from 2014

UPDATED: The Labor Government has decided to change from a fixed carbon price to a floating emissions trading system a year earlier.

The change will mean that instead of the Government setting the price (currently $24), credits can be bought and sold at whatever price the market chooses.

This likely means that the Australian price for credits will drop: if we link to the Europe emissions trading scheme in 2014, rather than from 2015, this could mean a price of around $10 per ton.

Many like Mick Keogh from the Australian Farm Institute think the decision will hurt investment in the CFI.

Still, we need to chill, the longer term plan has always been to link with global markets and this announcement just brings things forward a year. Markets go down and up, the European price could change.

More immediately though, the Government has decided to cut $213 million from the Biodiversity Fund and $143 million from the Carbon Farming Futures program. This is a fair hit just as carbon farming is getting going and will make it harder to corner a market for high quality Australian credits which support Indigenous communities.

The Government will need to confirm the Europeans are willing to link a year earlier than planned and also the arrangements for CFI credits - the Europeans are luke warm on land sector credits and the sale of CFI credits into Europe is still the subject of further discussion - see this fact sheet for more. 

The decisions over emissions trading and linking will have implications for the CFI, so we need to keep watching! More to come.

Jeremy