The property industry isn’t too excited about Direct Action

31 July 2014 — Weeks after the carbon tax was axed, and an age since Direct Action was proposed as an alternative, the property industry remains unconvinced the Coalition’s answer to reducing greenhouse gas emissions can work.

The final details of the Federal Government’s Direct Action implementation through the Emissions Reduction Fund are not expected until October, but early indications are that projects by small organisations are unlikely to be successful bidders. There are also worrying financial risks for any firm who is successful, with a penalty applying if an activity fails to meet its projected emissions reductions targets. In short, it’s looking like a bit of a gamble, though one many local governments say they are willing to take.

According to Bruce Easton, chief executive of Ecovantage, emissions reduction activities for the industrial, commercial and residential property sectors are going to be included under an expanded version of the Carbon Farming Initiative.

There will be numerous methodologies or frameworks developed for the verification of activities to create carbon reduction certificates [Australian Carbon Credit Units], and these are being modelled on the New South Wales Government’s Energy Savings Scheme. All projects bidding for funds under Direct Action’s Emissions Reduction Fund will need to fit within one of those methodologies.

Smaller firms likely to be disadvantaged

Mr Easton said that unlike the ESS scheme, there will be no forward payments, and firms will need to carry their own project costs until the abatement commitment has been achieved and verified. This means smaller firms who cannot carry these kinds of overheads will only be able to participate if they are part of a larger business or organisation’s aggregated project.

The smaller firms will also be disadvantaged by the bid-and-penalty structure, as they are less likely to have the resources to prepare a bid they can stand by in terms of achievable abatement. This will be crucial, as any successful bidder who fails to achieve the promised number of tonnes of carbon reduction will be required to make good the shortfall, which means needing to buy carbon reduction certificates from another bidder who managed to over-deliver.

Lawyers Marcus Priest and Grant Parker from Sparke Helmore examined a draft standard form Emissions Reduction Fund contract. They commented in an article on the company website that banks may be reluctant to lend companies money on the basis of the security provided by the contract.

“The problem that emerges from the draft contract is that it places much of the risk upon companies bidding and very little upon the government,” they said.

“To qualify to bid in the ERF reverse auction, a company will need to meet ‘eligibility and credibility’ criteria. In relation to the ‘credibility’ criteria the government has indicated that a company’s previous record of delivering contracted emission reductions – or more particularly failure to deliver – will be considered, along with commercial readiness of the technology or practice and the capacity of the project proponent to carry out the project.

“Proponents need to understand the terms of the contract and its implications before bidding – once a bidder is successful in the reverse auction it will enter into a contract and it will not be able to further negotiate its terms. Details provided by the bidder before the auction – quantity of units to be delivered, price and delivery schedule – will automatically become terms of the contract.

“However, the substantive obligations of the contract – to deliver and purchase units – will only come into effect once certain conditions precedents have been met. These conditions precedents will include demonstrating evidence of the seller’s capacity and authority to enter into the contract and availability of sufficient funds to operate the project.”

Priest and Parker also pointed out that the seller’s obligation to deliver Australian Carbon Credit Units does not specify they must have been obtained from the actual project that formed the basis of the successful bid.

There are other concerns too, such as if a proponent is hit by a natural disaster that affects their project, they must purchase make-up credits, and they must do so before they make a claim under the contract’s force majeure provision. This in effect places a double penalty, in terms of reimbursable credits lost from being unable to complete a project wiped out by bushfire, flood or other disaster, and the need to buy make-up credits.

“It is going to be difficult,” Mr Easton said. “And it will be very hard at the smaller companies end, and certainty around reductions is part of the problem.

“But there are some people interested in trying to work out how to work within the scheme, but a fair degree of scepticism about it also.”

Martin Brennan, regional director of ICLEI – Local Governments for Sustainability Oceania, said the bid structure was already proving a stumbling block for the local government sector.

The Action on Council Emissions project ICLEI is proposing in conjunction with Ironbark Sustainability aims to aggregate the emissions of 100 councils on a regional basis and achieve an aggregated emissions reduction of over 600,000 tonnes. Proposed activities include the preparation and delivery of information, case studies and tools for low-cost emissions abatement, reporting and actions targeting public lighting retrofits and council facilities emissions reductions.

ICLEI has been in negotiations with Minister Greg Hunt around bidding for projects on the LGA level, and while the minister was supportive of this, Mr Brennan said there has been a refusal on the part of the federal government to provide any funding support for preparing the bid.

Support for preparing a bid for ACE under the ERF will now be sought from other organisations such as the Australian Local Government Association.

“If backbenchers want to be doing something about Direct Action, local councils would be a good place to start,” Mr Brennan said. “At this point it’s looking like direct action for a few.”

Big guns will get the money

This point was echoed by Mr Easton, who said he believed the majority of successful bids would come from the heavyweight firms such as Santos and BHP.

These firms, he said, have the advantage of being able to achieve abatement through activities such as decommissioning older boilers or upgrading chiller. They also have the engineering expertise in-house to accurately assess the carbon reduction involved, as well as the financial capacity to underwrite the whole exercise.

Mr Easton said he believed these bidders were likely to under-promise in terms of estimated emissions reductions from activities, and then over-deliver. This would then give them extra certificates to sell.

For ICLEI, the current difficulties are the most recent in a series of blows to local government climate change mitigation actions. The successful Cities Climate Protection program lost its funding under the Rudd Government, leaving 240 local councils without direct support for a series of actions that had delivered 80 million tonnes of abatement.

“As a local government association, we ride the bumps. And we try to save as much of the furniture as we can, and hope later to find that we saved the right furniture,” Mr Brennan said.

“At the local council level, we all have to deal with the impacts of climate change, and we all need to have the opportunity to take action, as we are drivers across our communities. We just need to keep on keeping on. If you drop the carbon ball on these issues, it sets back the business case, and it sets back the social case and the environmental case.

“I remain hopeful about the minister being able to persuade cabinet that it needs to be a whole of sectoral approach. We will continue to watch, and see if it becomes direct action, or indirect action, or nothing at all.”

According to Mr Easton, it is unlikely any activities will be approved to proceed under the ERF before next year. Given the urgent calls for emissions reduction from the UN and leading climate scientists, this is also a concern.

Mr Brennan said that at the recent Pacific Local Government forum he attended in Papua New Guinea, the Pacific Islands representatives were unequivocal in their position that climate change and carbon emissions need to be tackled now, as the islands are already seeing dramatic impacts.

“The Prime Minister of Tuvalu said, “If we save the Islands, we save the world.”