Seemingly from out of the blue, Treasury launched a consultation process on relaxing financial regulations around the ERF. Now, out of the blue, regulations have been passed ensuring that an ERF contract is not a financial product. Are you keeping up?
True to faithful form, the Minister for the Environment, the Hon Greg Hunt MP, fronted the CMI Emissions Reduction Summit and Marketplace in Melbourne 5-6 May 2014. Whatever you might say, the Minister turns up!
Did the Minister have anything new to say? Not really.
The Minister gave his pitch on innovation with incentives to transform our economy, rather than the carbon price approach.
The Minister attempted to put his approach in an historical perspective. In the 1850s London was threatened by typhoid and cholera. Later, around 1900, city streets were clogged by horse manure. Later still, in the 1980s, the ozone hole threatened turn Australia into a barbecue. Technology and innovation overcame these problems. And so the Emissions Reduction Fund aims to catalyse technology and innovation to reduce emissions.
The Minister then summarised his approach thus: we will keep the CFI, keep the Clean Energy Regulator and keep NGERS (the national carbon accounting system). He will add $2.5b of incentives, stir and the pick up the pipeline of the cheapest abatement. As for big business, the Minister said that safeguards (read penalties) will apply to 130 emitters from 2015 but that no revenue had been budgeted (doesn’t sound too tough).
One telling question was asked: given the ERF is not an effective market scheme, how can it be scaled up for the longer term task? With no backward steps, the Minister asserted that the ERF is a market system that can be scaled. We will look in 2015 at the targets for beyond 2020. Staying on the front foot, he noted EU Emissions Trading Scheme had not worked with reductions only coming from economic collapse.
This is true enough, but if the absolute measure of the EU ETS is meeting targets, then it has 100% succeeded. And we know from recent price hikes in Australia, that pricing electricity results in emissions drops.
The Minister turns up.
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:
- 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?
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.
The future is uncertain, but not certainly bright.
Tucked into our santa sacks was the Government’s half year financial outlook, MYEFO.
Unfortunately, it was a litany of cuts to the carbon price and related programs as energy and climate policies took a heavy pounding.
The Indigenous Carbon Farming Fund did not escape – the program will be closed by 30 June 2014. All other land sectors programs, including the Biodiversity Fund, will also close. I’ve updated our funding page to reflect these official changes. I’ve also tallied all the relevant funding changes in this document.
This is not an unexpected result and many still have grants to check out opportunities on their land. Indications to date are that existing grants will run for their contract period. Keep at it.
Still, the extent of cuts certainly leans in one direction and takes wind out of the sails. Investment in land sector abatement is still soft and no new encouragement is offered.
Tucked away are a couple of curly ones. At this stage, no funding has been allocated to the Emissions Reduction Fund, although the Green Army to plant trees was funded. It also shows the extent of revenue lost if the carbon price is abolished – estimated to be $13 billion over the forward estimates.
Fortunately most of the fruit from the Clean Energy Future package is out there. For the moment, Aboriginal carbon farmers will have to use what we’ve got. Will be watching the budget with interest.
As part of reorganising the chairs, the Government has now placed Climate Change and Environment under one roof but where is Indigenous Affairs going?
At the moment, Indigenous Affairs is largely in FaHCSIA, but also has many outposts in Environment, Employment, Education etc. Places like Working on Country and Indigenous Policy in Environment are important to support Indigenous land projects.
So while it might look like Indigenous CFI will all be under Environment, this might not be the case. We need to wait to see how Caring for Our Country and Working on Country are transformed into Clean Land. But we also need to wait to see how the transfer of Indigenous programs to the Prime Minister's Department plays out. Will everything go? Or will some parts stay where they are because it makes sense?
Let's wait and see, but I thought there may be some benefits for Aboriginal carbon farmers from Direct Action, Working on Country and other Indigenous land support being in the same Department.
We might know more by the end of the year.