Final Report for Climate Change Authority’s Special Review

The Climate Change Authority has released the third and final report for its Special Review into Australia’s climate targets and policies.

The report, entitled Towards a Climate Policy Toolkit (Policy Report), recommends policies for Australia to deliver on commitments arising from the climate change negotiations in Paris last year. It recommends building on the Government’s existing policies and incorporating new policies in a ‘phased transition’.

The Policy Report draws on modelling commissioned by the Authority which assesses the impacts of various emissions reduction policies on the electricity sector and broader Australian economy. The Authority published the results and its analysis of the modelling in a separate report (Electricity Report).

In both reports, the Authority is generally supportive of market mechanisms, noting that if well-designed, these mechanisms can achieve emissions reductions in a manner which is cost-effective, scalable, and equitable.

The Authority compares two mechanisms which it considers to be best suited for adoption in Australia: a cap and trade scheme and an emissions-intensity scheme, with a focus on principles of economic efficiency, environmental effectiveness and equity.

It concludes that the schemes would be similar in terms of emissions reductions and cost effectiveness, but that the emissions-intensity scheme would have a lower impact on electricity prices, meaning less impact on lower-income households, greater community acceptance, and would therefore, more likely  be a durable and stable policy in the long-term.

The Paris Agreement provides that members will come together every five years, commencing 2023, to participate in a ‘global stocktake’, revising commitments based on the latest science.

The Policy Report recommends adopting a five-yearly review cycle for domestic policies, commencing in 2022, so that domestic reviews immediately precede reviews under the Paris Agreement.

The Authority considers that the electricity sector is best suited for a market mechanism in the near term, being characterised by quantifiable emissions, a small number of larger emission sources, and generally competitive markets.

The Policy Report recommends the adoption of an emissions-intensity scheme for the electricity sector, to be introduced in 2018.

Under such a scheme, the Government would set a target emissions-intensity baseline (e.g. tonnes of carbon dioxide per megawatt hour of electricity produced) for the sector and electricity producers would receive a free allocation of permits per unit of production.

The Policy Report does not set out a detailed plan, but recommends that emissions-intensity baselines decline linearly to reach zero ‘well before 2050’ and that the scheme allow facilities to purchase offsets, but only domestically-sourced, energy efficiency offsets (see ‘Energy Efficiency’ below).

The Authority notes that its modelling shows that although residential spending on electricity under such a scheme would increase by 8% on average to 2050, disposable income is projected to grow by 40% during the same period.

In both reports, the Authority considers the prospect of additional policies for the electricity sector which would encourage the entry of low-emissions generation and exit of high-emissions generation. It concludes that the risks would outweigh the benefits as additional policies may increase the costs and complexity of the regulatory environment and create uncertainty for investors. It recommends that existing schemes under the Renewable Energy Target should proceed as planned.

The Authority notes that, in its current form, the Safeguard Mechanism may prevent emissions from rising in  facilities to which it applies, but is unlikely to reduce emissions. It therefore recommends an ‘enhanced’ Safeguard Mechanism for the direct combustion, industrial processes, and fugitive emissions sectors, changes including:

1. reducing the threshold for facilities from 100,000 to 25,000 tonnes carbon dioxide per annum (the latter being the threshold for the National Greenhouse and Energy Reporting system);
2. introducing declining baselines for all facilities at a uniform linear rate, consistent with Australia’s Intended Nationally Determined Contributions (to reduce emissions by 26-28% below 2005 levels by 2030); and
3. removing flexibility mechanisms which allow facilities to reset their baselines.

The Safeguard Mechanism presently allows a facility to surrender credits generated under the Emissions Reduction Fund to comply with its obligations when its baseline is exceeded. The Policy Report recommends allowing facilities to also surrender international credits and permits, with a quantitative limit being imposed on facilities (though it notes that facilities in emission-intensive, trade-exposed industries should be exempt from the quantitative limit).

The Authority supports the continuation of the Emissions Reduction Fund and recommends that the Government continue to hold auctions until the ‘enhanced’ Safeguard Mechanism provides a source of demand for credits generated under the Emissions Reduction Fund.

> It highlights the significant role that the land sector has played thus far in the Emissions Reduction Fund (and former Carbon Farming Initiative) and recommends that the land sector continue to be covered.

The Policy Reports notes that energy efficiency is one of the fastest and most cost-effective ways to achieve emissions reductions. It recommends that existing state and territory white certificate schemes be  harmonised and that the resulting credits  be used by liable facilities to meet their obligations under the recommended emissions-intensity scheme for the electricity sector.

The Policy Report recommends prioritising investment in low-emissions innovation through targeted public funding for research, development and demonstration.

In the Authority’s view, most emissions reduction technology is likely to be developed overseas and it recommends that Australian public funding be  directed to areas in which Australia has particular challenges, strengths or opportunities and which are less likely to be prioritised by the private sector or other countries. It identifies carbon, capture and storage and agricultural innovation as two such possible areas.

The Policy Report recommends that in the short-term, Australia should introduce a mandatory carbon dioxide emission standard for light vehicles, the Emissions Reduction Fund continuing to apply to the transport sector until the standard is in place.

The Authority recommends further research in other areas, including a cost-benefit analysis to determine if a carbon dioxide emission standard for heavy vehicles should be adopted, and research into the roles that public and private providers should take in delivering electric vehicle recharging infrastructure.

The Authority considers that the most effective means for reducing emissions from landfill is direct regulation. It states that the Government should commence work to harmonise state-based regulation of emissions from landfills and link such regulation to Australia’s emissions reduction targets.

Taking the same approach as it does with the Transport sector, the Authority recommends that the Emissions Reduction Fund apply to the landfill sector until these regulations are in place.

The Policy Report notes that the costs of emissions reduction policies may disproportionately impact certain industries, regions, and households. It recommends, in general terms, that these impacts should be assessed and that additional support should be provided where adverse economic impacts can be demonstrated.

Two dissenting board members of the Authority who participated in the Special Review process have published a ‘Minority Report’ which criticises certain aspects of the majority reports.

The key point of disagreement is the failure of the majority to develop policy recommendations linked to a national ‘carbon budget’ which is consistent with the long term commitments set out in the Paris Agreement.

The minority recommends adopting a cap and trade scheme in the electricity sector and states that the emissions-intensity scheme proposed by the majority would result in lower demand compared with a cap and trade scheme.

It is critical of the majority’s emphasis on policy stability, stating that this approach does not provide a balanced assessment of the strengths and weaknesses of existing policies with other market mechanisms, and that considering the political feasibility of policies in developing recommendations reflects a lack of political independence.

The minority criticises the recommended continuation of Direct Action policies. The Minority Report states that the Emissions Reduction Fund in its present form is a ‘fiscal drain’ and that the ‘enhanced’ Safeguard Mechanism is unlikely to drive a transition to a low carbon economy because firms will purchase offsets instead of reducing  emissions.

The Minority Report also supports a regulated closure of coal-fired power stations.