In the lead up to the Federal election, businesses should be aware of the difference between the Liberal and Labor positions on climate change. The financial implications of future compliance obligations could be significant, particularly if emissions reduction targets are further reduced.
Emissions reduction targets
Both Liberal and Labor have committed to a 5% reduction in Australia’s carbon emissions by 2020 based on 2000 levels. Beyond 2020, the Liberals have committed to a 26-28% reduction in emissions based on 2005 levels by 2030 whereas Labor have promised a reduction of 45% on 2005 levels by 2030. Labor have also committed to zero net carbon pollution by 2050.
The two major parties differ on the mechanisms to reach their respective targets, despite the fact the media has recently focussed on the similarities between their approaches.
How far away is bipartisan support for an emission trading scheme?
Alan Kohler recently wrote in the Australian:
“Quietly, surprisingly, Australia’s climate change policy has become a bipartisan emissions trading scheme, or ETS … well, almost”.
He based this statement largely on the fact that from 1 July this year, just one day before the Federal election, the “safeguard mechanism” will come into force. The safeguard mechanism is the final, key part of the Coalition Government’s Emissions Reduction Fund (ERF), which the Government describes as “the centrepiece of the Australian Government’s policy suite to reduce emissions”.
The Government’s approach – not an ETS
As explained in our recent eNews, there are three key aspects to the ERF. First, carbon credits known as Australian Carbon Credit Units (ACCUs) can be generated by carbon sequestration and carbon abatement projects registered under the revised Carbon Farming Initiative (CFI) legislation. Second, the Clean Energy Regulator runs competitive reverse auctions to purchase emissions reductions generated through CFI projects. The third part of the ERF is the safeguard mechanism.
The safeguard mechanism is designed to ensure that emissions reductions paid for through the ERF are not offset by significant increases in emissions elsewhere in the economy. It does this by applying a “baseline” to facilities which have direct (scope 1) emissions of 100,000 tCO2e per year or more. It is estimated that the safeguard mechanism will apply to about 140-150 companies, representing about 50% of Australia’s total carbon emissions. If these facilities emit more than their baseline, they will be required to surrender carbon credits in the form of ACCUs to match emissions in excess of their baseline, or face penalties.
However, the safeguard mechanism isn’t an emission trading scheme (ETS), as suggested by Kohler, because it lacks a couple of crucial elements. First, in a classic “baseline and credit” style ETS, if a facility emits less than its baseline the business generally receives credits that could be traded, for example to others whose emissions have exceeded their baseline. The Government’s safeguard mechanism does not include this crediting element, which provides an incentive to reduce emissions below the baseline. In addition, a feature of many ETSs is that the baseline (or the cap, in a “cap-and-trade” style ETS) decreases over time in order to drive down carbon emissions, usually in line with the government’s overall emissions reduction targets. Under the Government’s legislation and policy position, the safeguard mechanism baseline will not reduce in this manner. However, many commentators suggest that if re-elected, the Coalition is likely to lower baselines over time in order to meet Australia’s international emissions reductions targets and the Government has indicated that the safeguard mechanism will be reviewed in 2017. So this is a possibility.
Labor’s approach – a clear path to an ETS
In contrast, Labor has promised to introduce a general (non-electricity sector) ETS together with a separate scheme for the electricity sector.
A two-phase ETS for the general economy
Labor’s general (non-electricity sector) ETS will have two phases. The first phase, an “interim ETS” will apply for two years from 1 July 2018 to 30 June 2020 and cover facilities with emissions of more than 25,000 tCO2e (liable entities), as compared to the current safeguard mechanism threshold of 100,000 tCO2e. It is estimated that the Government’s safeguard mechanism will apply to about 140-150 companies when it starts on 1 July 2017, representing about 50% of Australia’s total carbon emissions, while Labor’s scheme would cover an additional 200 businesses.
Under Labor’s scheme, an economy-wide emissions cap will be set at a level to achieve a 5% reduction in emissions by 2020, and then individual caps applied to facilities meeting the threshold. These individual caps are likely to be lower than the “baselines” under the safeguard mechanism. Where a liable entity breaches its individual “cap” it will be required to surrender an equivalent number of “carbon offsets” for that year. The Labor policy indicates that these carbon offsets will be ACCUs generated from CFI projects, but it also signals that international offsets or credits may be used.
So far, Labor’s interim ETS is very similar to the Government’s safeguard mechanism. However, Labor’s policy signals that emissions intensive trade-exposed liable entities (EITEs) will be able to meet 100% of any interim ETS liability using international units, while the proportion able to be used by non-EITEs is yet to be determined but some, at least, may be used. The Government’s policy currently does not allow international units to be used to meet any safeguard mechanism obligations; only ACCUs can be used. But this issue has been flagged as coming within the 2017 review of the safeguard mechanism and many commentators tip that international offsets will be included under a future Liberal policy.
In the second phase of Labor’s general ETS, which will apply from 1 July 2020 (assuming Labor is re-elected in 2019), an ongoing ETS will be introduced. Labor has clearly signalled that the design will take a conventional approach with an economy-wide emissions cap, set in line with Australia’s international commitments and with the cap reducing over time. Ultimately, the cap will reduce to deliver a trajectory to Labor’s promise for net zero emissions by 2050. The policy flags that access to international markets will be canvassed including formal linkages with other ETSs and the operation of the domestic offsets market, a reference to the CFI. Labor has explicitly ruled out any fixed price.
Bipartisan support for an emission trading scheme is a way off
As already discussed, the Government’s safeguard mechanism is not an ETS and current Liberal policy does not flag a move to an ETS. As a matter of design, it would be relatively straight forward to introduce a crediting element into the safeguard mechanism and reduce baselines over time, matters which could be canvassed in the 2017 review if the Coalition is returned for a second term. And so it is possible that the policies of the major parties could converge over time, which supports Kohler’s claim of a “bipartisan” ETS.
But businesses should be aware that the current policy positions of the two major parties are a long way from that today. Having said this, it is clear that both parties support the continuation of carbon offsets or credits, through the CFI, and the ALP has stated that it will “reinvigorate” the CFI.
Labor’s proposal for the electricity sector
Labor proposes a separate ETS for the electricity sector which will apply from 1 July 2018.
A sector-wide cap that reflects the electricity sector’s share of total emissions will be set and then individual caps based on emission intensity levels will be imposed on generators. Generators with emissions intensity levels under their cap will receive credits which they can sell to generators exceeding their cap, thereby creating an “internal market”.
Labor’s policy is based on the Australian Energy Market Commission’s proposal for the sector and which the Commission thinks will minimise the impact on wholesale electricity prices and impacts on customers. Accordingly to the Commission:
This is because low emissions generators are rewarded with an additional source of revenue every time they generate, which will be reflected in lower offer prices due to an incentive to ensure that they are dispatched in order to create credits. Importantly, however, high emissions generators are only penalised to the extent their emissions intensity is above the baseline.
As already mentioned, the Coalition Government’s approach to the electricity sector is that a sector-wide baseline applies, like the ALP policy. But under the Government’s policy, individual generators do not have to meet an individual baseline unless the sector as a whole fails to meet the baseline. In addition, there are no “credits” under the current scheme. In contrast, under the ALP approach any time a generator does not meet its individual baseline it will need to obtain “credits” from other generators that are below their baseline.
Some other Labor climate change-related promises that may impact your business
Labor intends to impose mandatory light vehicle emissions standards from 2020, which are to apply to all road vehicles under 3.5 tonnes gross vehicle mass. Transport currently accounts for 16% of Australia’s carbon emissions, with 10% from light vehicles. Australia is currently one of the very few OECD nations without mandatory vehicle emission standards and Labor has signalled that the standards will likely be in line with those in the US, but will not be as stringent as those currently applying in Europe.
Labor has also signalled that it will introduce a “climate change trigger” in the Environment Protection and Biodiversity Act 1999 (Cth) (EPBC Act) to allow the Commonwealth to regulate broad-scale land clearing. Regulation of vegetation clearance is generally the responsibility of the states rather than the Commonwealth. However, Labor claims that some states are failing to regulate this activity adequately and that this will impact on Australia’s ability to meet its international climate change targets, as well as have adverse impacts on the Great Barrier Reef, in particular, due to increased run off. At this stage, Labor have not made it clear what will constitute “broad-scale land clearing” and the threshold which will trigger Commonwealth intervention.
So what next? What will it mean for business?
If the Coalition is re-elected:
- The ERF will continue and the question will be whether the ERF delivers the kind of carbon emission reductions Australia needs to meet its international commitments; and
- There may be changes following the 2017 review of the safeguard mechanism, such as a reduction in baselines and the ability to use international carbon credits.
If Labor is elected:
- It seems likely that the safeguard mechanism will continue as it is currently configured until 1 July 2018 when it will transition into Labor’s “interim ETS” which will operate in a very similar manner for most liable entities. The current 100,000 tCO2e safeguard mechanism threshold will drop to 25,000 tCO2e with effect from 1 July 2018. Individual “baselines” will be reset and will likely reduce. This is an area that those businesses subject to the safeguard mechanism, and those additional businesses likely to be caught by the interim ETS (with emissions above 25,000 tCO2e), will need to monitor carefully;
- EITEs will be able to meet 100% of their commitments with international units and other liable entities will be able to use at least some international units. However, it is likely that Labor will only allow non-EITEs to use international units to meet a relatively small proportion of any liability under its scheme so as to maintain the market for ACCUs;
- Those in the business of generating ACCUs can be confident that there will be a market for them, despite the ending of the ERF, even in the short term. Further, in the longer term ACCUs are likely to be a crucial part of the ongoing ETS that Labor proposes;
- Further auctions under the ERF are unlikely. Having said that, a Labor Government is expected to honour any ERF contracts already in place;
- The electricity sector-wide baseline set under the safeguard mechanism will most likely continue to apply through to 1 July 2018. Labor’s electricity-sector scheme would then apply with a revised, very likely lower, sector-wide “cap” set to reflect the electricity sector’s proportionate share of overall emissions; and
- Labor will introduce legislation to amend the EPBC Act to include a “climate change trigger” to cover broad-scale land clearance and develop a proposal to introduce light vehicle emissions standards in 2020.
This article was written by Meredith Gibbs, Partner.