“Grey” emission reductions could flood the ERF if it is not designed properly.

5 December 2013 — Most of the government’s $2.25 billion Emissions Reduction Fund could be spent purchasing abatements that would occur anyway, according to carbon market consultancy RepuTex.

Research released by the firm today [Thursday] indicated that the creation of industry emission baselines may lead to the fund being flooded with more than 75 per cent “grey” abatement credits – ones created by companies despite them not achieving emissions reductions additional to business as usual.

“As a result, nearly $2 billion of the government’s total $2.55 billion ERF could be spent acquiring ‘grey’ emissions reductions,” said RepuTex head of research Bret Harper.

If emissions intensity baselines are set based on historic levels, then most Australia companies would come in below their five-year historic emissions due to natural improvements in emissions intensity.

Mr Harper said most companies could receive free abatement credits without actually reducing emissions, with the credits then able to be bid into the government’s Emissions Reduction Fund, potentially leading to a windfall gain for industry.

“Over the past five years, emissions intensity has been steadily decreasing for most companies in Australia, meaning that should baselines be set at an average across that period, most companies would already be operating below their historical baseline, without investing in any new emissions reductions,” Mr Harper said.

He said that large polluters would be the winners under such an approach, while projects actually reducing emissions through mechanisms such as the Carbon Farming Initiative would stand to lose.

“A company would be likely to receive credits based on their current emission intensity multiplied by the size of their operations, which is the methodology applied in other emissions intensity schemes globally. The larger the polluter, the more credits they could receive,” Mr Harper said.

According to RepuTex, the potential influx of grey credits could be mitigated if the government looked into alternative emissions intensity baseline methodologies in its upcoming Green Paper.

“A tighter baseline would curb supply of grey credits from industry, and as a result would mean that the ERF could financially support much greater abatement from industry and land-use,” Mr Harper said.