The white paper on direct action has provide little direction for industry.

30 April 2014 — The government’s emissions reduction fund white paper has added little clarity to whether or not the scheme will be beneficial to the property industry, with questions around contract length, safeguarding and aggregation still left unanswered.

The paper, released on ANZAC Day eve last week, has now had the opportunity to be digested by the business community, though changes made from the green paper have added little certainty to whether the scheme will work, and has thrown up additional questions.

Jonathan Jutsen, executive director, strategy at Energetics told The Fifth Estate he was expecting to see a white paper that was much more developed than what had been delivered by the government.

Curtin University’s Jemma Green, in a piece for The Conversation, said that the details in the white paper were yet to provide real assurance that Direct Action would not cost more than current climate policies while achieving less.

Shadow minister for environment, climate change and water Mark Butler also said the white paper had hardly elaborated on the green paper, had raised more questions than it answered, and would hand “billions of dollars to big polluters without making any substantial reductions in carbon pollution”.

“It’s more than four years since this policy was released and I think it’s extraordinary that four years on a White Paper poses more questions than it gives answers to the very significant flaws that experts – climate scientists, economists and many others – have identified in the Direct Action policy now for four years,” he said in a Sky News interview.

“Direct Action is a dressed-up slush fund which pays big polluters to keep polluting.”

Contract length

One problem with the ERF has been the five-year contract length proposed by the government. The white paper says there is a “preference” for this length, but after stakeholder feedback noting that a contract length this short made many projects infeasible, and a length of up to 15 years was needed, the government will now conduct a “market assessment over the coming months to work with business, to ensure that they are happy with the contracting arrangements proposed”, Environment minister Greg Hunt said.

“We’ve set out a preference; we will test it through the market testing process.”

Jonathan Jutsen told The Fifth Estate that for energy efficiency projects those in the built environment may bid for, contract length was still a major concern.

“The contract period is still a problem,” Mr Jutsen said. “I’d like to see at least seven years [rather than the current five], which would line up better with the contracts currently being offered for energy efficiency projects. Ten years would be better.”

Deeming

Mr Jutsen said he had been hoping to see some deemed upfront payments possible in the white paper, but that this suggestion had been knocked back by the government.

He said upfront deeming would have given more certainty for businesses, particularly those with cash flow strain, and would have given industry more confidence earlier in the program.

Aggregation

A key addition to the white paper that may have built environment applications is “removing barriers to aggregating emissions reductions by setting up standard arrangements for transferring rights from households and small businesses to a project aggregator”.

“We want to encourage the bringing together, to make it easy, of whether it’s farm projects or energy efficiency projects, so we will be removing barriers to aggregation,” Mr Hunt said in a press conference launching the paper.

“It is a great way to get low-cost emissions in a simple approach.”

Mr Hunt explained how aggregation might work in the built environment.

“Let’s say a power company and a building company get together. They might work with 100,000 households, they might work with 1000 commercial premises and 100 industrial premises. They could put forward a million tonnes of emissions reduction or abatement a year, and so they could bring that emissions reduction together, rather than an individual household trying to participate.

“You could have a Mirvac or an Energy Australia that brings together all of those savings and they say, we’ll provide a million tonnes a year. The contract price, which they might put forward, and this is just a hypothetical, could be at $8 per tonne of abatement over five years and then, they will be paid on delivery. And so this is where the use of the State energy efficiency methods becomes very, very valuable, because we’ve already got in place well understood methodologies, we don’t have to reinvent them.”

Mr Jutsen, however, doesn’t see that aggregation will be able to be cost-competitive.

He told The Fifth Estate he was dubious as to whether there would be a lot of small scale aggregation.

“If the [implicit] carbon price is low there won’t be a lot of scope for aggregation – it’s much harder to run than larger projects,” he said.

“It’s hard to see how anyone is going to be able to afford to do aggregation.”

Another industry source, who wanted to speak off the record, agreed that it would be difficult for aggregated projects to compete with large single-source emissions reduction projects.

He also told The Fifth Estate he couldn’t see how the ERF would overcome well-known barriers to financing energy efficiency projects in the property sector that similar white certificate schemes such as the NSW Energy Savings Scheme and the Victorian Energy Efficiency Target faced, which had led to poor uptake in the commercial building space.

He said the costs associated with creating baselines and measurement and verification were often such that they outweighed the benefits derived from funding.

He said the ERF had to be cautious that the methods and mechanisms for verification did not erode any additional benefits derived from funding.

Safeguarding

A safeguard mechanism would be brought in from 1 July 2015, which aims to ensure companies that emit more than 100,000 tonnes of CO2 a year –around 130 companies – do not exceed historic emissions baselines.

A letter from the Emissions Reduction Fund Expert Reference Group published with the white paper noted it was broadly agreed that “an effective safeguard mechanism” was needed to ensure the Emissions Reduction Fund made an effective contribution to reducing greenhouse gases in Australia.

However, there has been concern expressed that the safeguarding mechanism proposed by the government will not be adequate.

In a media conference, Mr Hunt said that business would not be burdened by exceeding emissions targets, with the government “not budgeting a dollar of revenue from the safeguarding mechanism”.

No penalites

If companies were to breach set baselines, then it would lead to “discussion or activity”, Mr Hunt said.

“We’re using the time between now and [1 July 2015] to establish and agree with business the parameters.”

The admission that there would be no revenue generated from the safeguard mechanism indicated there would be no financial penalties, Mr Jutsen said, which was “rather problematic”.

“I don’t know how it works if there’s no penalties for non-compliance,” he said.

The Climate Institute said the white paper failed to “set a credible guarantee against ever increasing emissions”.

“We welcome the release of greater details on the government’s proposed policy but remain very concerned that the policy does not at all ensure that emissions will fall in line with those of other nations, or that it can help avoid dangerous climate change,” said Erwin Jackson, deputy chief executive of The Climate Institute.

“Without a mechanism to ensure that major emitting companies do their bit in driving new clean technology investments, we risk our economy continuing to fall behind. The USA, China, the EU and other major economies are already implementing carbon pricing, regulations and renewable energy incentives and are in the process of developing plans for steep emission controls beyond 2020.

“While some positive improvements have been made, as it currently stands the Emissions Reduction Fund will not be an enduring climate policy. It simply can’t meet the long-term challenge of climate change.

“The Government has deferred key compliance decisions and is unclear on future spending commitments, while at the same time it intends to dismantle the current legislation.”

Timing

Auctions will start in the second half of 2014 and will be run quarterly.

Mr Jutsen said he was also concerned about timing. With the first auction set to be held in July, Mr Jutsen said he was sceptical, given the length of time the process has already taken, this could be achieved.

“It’s made some steps forward but there’s still a fair way to go.”

Additionality

There was an “absolute and obvious tension” around additionality too, Mr Jutsen said, the requirement that emissions reductions be additional to what a company would have done anyway.

“With a low carbon price, what’s implicit is [the ERF is] unlikely to be the main driver of a project going forward.

“I think from having a look at a few projects recently, and trying to factor in a $10-12 carbon price [which many commentators have said would be the likely figure given the amount of funding and the amount of carbon dioxide needed to be reduced to hit the five per cent reduction target], it would be a useful income stream but not a driver.

“So you do wonder how we’re going to prove the project is both additional and lowest cost. There is a carbon price at which [ERF funding] will be significant or not significant to the project.”

While there was a danger of funding projects that could have gone forward without taxpayer funding, Mr Jutsen said being too tight on additionality requirements would lead to the ERF being inaccessible.

“If you go too far to having to prove additionally, no one will be able to access fund. You need to have some balance.”