The Australian Senate

7 May 2014 — The government can use existing legislation to push through the centrepiece of Direct Action – the Emissions Reduction Fund – and bypass a hostile Senate, research from energy and environmental market analysts RepuTex indicates.

The analysis, released today [Wednesday], indicates the government may use existing Carbon Farming Initiative legislation to implement its ERF by developing new regulations, with funds allocated in the forthcoming budget.

According to RepuTex, however, any “regulated scheme” that bypasses the Senate would need to be streamlined, with legal limitations that could limit the Clean Energy Regulator’s ability to enter into contracts with successful bidders or implement baselines or penalties.

“While new legislation can be drafted to the government’s choosing, new regulations must be consistent with the legislation under which they are created,” RepuTex executive director Hugh Grossman said. “New mechanisms such as baselines or penalties may not fit with the original objective of the CFI Act, which is to increase abatement.

“Likewise, the Clean Energy Regulator’s ability to run auctions or enter into contracts would be outside the scope of the CFI Act, meaning that the design of the ERF would need to change.

However, RepuTex said the Department of Environment could run auctions and enter into contracts with winning bids.

“However, the ERF would be operated under a patchwork structure, with different market rules and lower transparency,” Mr Grossman said.

Land use sector to stay away from ERF in first year

Businesses in the land use sector were also likely to steer clear of the government’s Emissions Reduction Fund in its first year if the auction price was under $22, the research found.

The analysis said that emissions reduction credits were likely to be scarce, as government had to develop methods, and pre-approve and register projects.

The scarcity of new projects when the ERF opens in July will be compounded by competition between the ERF and the Carbon Price Mechanism “true-up” in February 2015 – where companies liable to pay carbon tax pay their final liability for 2014, or source offsets from the Carbon Farming Initiative.

As a result, CFI participants may bypass the ERF in year one and instead seek to capitalise on offset prices of $22 under the CPM until February 2015.

“Given the continued operation of the CPM true up through to February 2015, very few businesses from the land use sector are likely to bid into the ERF under $22, with these firms likely to bid high or bypass the ERF early auction rounds,” Mr Grossman said.

“Effectively, this means the ERF would need to match the current CPM offset price in order to be assured of enticing sellers of abatement from the land use sector.”

This low participation from the land sector meant that high emitting industries would be able to access significant amounts of ERF capital.

“The low number of bidders from the land use sector in the first year of the ERF may provide a significant opportunity for early movers outside of the CFI, such as high emitting industries, to secure higher priced contracts in place of CFI participants,” Mr Grossman said.

“In such an instance there is likely to be a large amount of capital available through the ERF for large emitters. We currently forecast that ERF funding is unlikely to be exhausted in the first year, leaving a large amount of capital available for even the largest projects.”