The Emissions Reduction Fund

Budget Review 2014–15 Index

Alex St John and Kai Swoboda

A core election commitment of the Coalition Government was to repeal the carbon pricing mechanism (CPM) and replace it with a multi-faceted Direct Action Plan (DAP).[1] The CPM imposed a liability on large emitters of greenhouse gases to pay for (or offset) their emissions; under the DAP the Government will pay for emissions reductions and offsets, through an Emissions Reduction Fund (ERF).

As part of Australia’s commitment to the second period of the Kyoto Protocol, Australia must reduce its greenhouse gas emissions by 5 per cent compared to 2000 levels, by the end of 2020.[2] According to the Government’s latest estimates, this means that the emission of 421 million tonnes of carbon dioxide-equivalent (t CO2-e) must be abated (avoided or offset) by the 31 December 2020.[3]

ERF design

To achieve this target, the Government will purchase Australian Carbon Credit Units (ACCUs), generated by emissions avoidance and offset projects, in a reverse-auction process or through alternative arrangements such as a tender. Project proponents will be able to submit confidential bids to the Clean Energy Regulator (CER), offering to supply a quantity of ACCUs, for a nominated price, with auction rounds to be held regularly. In each round, the regulator will accept the lowest 80 per cent of bids that are below a ‘benchmark price’, which will not be disclosed to participants.[4]

It is the Government’s intention that agricultural and forestry activities under the existing Carbon Farming Initiative will bid into the Fund, as well as new activities such as industrial and commercial energy efficiency and emissions avoidance projects. The ERF is not a grant scheme—that is, the Government will only pay project proponents once emissions reductions have been delivered, in the form of ACCUs (which are generated only after the emissions reduction has taken place and been measured).

Expenditure

The Coalition’s pre-election policy for the ERF was for a total allocation of $1.55 billion over the period to 2016–17, with $300 million for 2014–15, $500 million for 2015–16 and $750 million for 2016–17.[5]

This amount was increased to $2.55 billion in April 2014, with the Minister for the Environment noting in his media release accompanying the issue of the ERF white paper that ‘the forward estimates commitment to the ERF will be $2.55 billion, with further funding to be considered in future budgets’.[6] While the term ‘forward estimates’ noted by the Minister implies that the additional $1 billion would be allocated to 2017–18, in his foreword to the white paper the Minister noted that the $2.55 billion would be ‘allocated flexibly over time according to the profile of projects contracted under the [ERF]’.[7]

Funding to the ERF explicitly allocated in Budget Measures: Budget Paper No. 2: 2014–15 is for funding of $1.15 billion over the four years to 2017–18.[8] In a media release accompanying the 2014–15 Budget, the Minister for the Environment re-stated that the Australian Government ‘had today delivered on its pledge to provide $2.55 billion to establish the [ERF] from 1 July 2014’.[9]

So where is the difference between the amount of $1.15 billion and the committed $2.55 billion?

The Government has indicated that it will acquire ACCUs under the ERF with a preference for five-year contracts.[10] Given this decision, expenditure under the ERF as outlined in Budget Paper No. 2 represents the expected outlays in each year for contracted emissions reductions that relate to the particular year. The total allocation of $2.55 billion is referred to in the budget papers but the expenditure is now expected to occur over the ten years to 2023–24 given the timing of payments.[11] An indicative profile of expenditure beyond 2018–19 based on certain assumptions, including a committed $2.55 billion of expenditure, shows expenditure peaking in 2019–20 (Table 1).

Table 1: Indicative annual Emissions Reduction Fund expenditure, 2014–15 to 2023–24 ($ million)[12]

2014–15
2015–16
2016–17
2017–18
2018–19
2019–20
2020–21
2021–22
2022–23
2023–24
75.5
299.8
354.5
416.9
463.4
434.4
210.1
155.4
93
47

Note: italicised appropriations are estimates.

Cash to be provided to the CER by Appropriation Bill (No. 1) 2014–15 is for an allocation of $79.3 million for administered items.[13] This allocation essentially provides the resources for the CER to purchase emissions reductions in 2014–15. While the CER may be able to commit to multi-year contracts exceeding this amount in 2014–15, there is no appropriation available to the CER above this value or for future years. The payment of funds to the value of $2.55 billion will therefore require additional appropriations via annual appropriation bills or a standing appropriation.

Efficacy

For the Direct Action Plan to achieve the 5 per cent target, the Government must acquire 421 million ACCUs by the 2020–21 financial year (assuming emissions conform to projections, one ACCU equals one tonne of CO2-e avoided or offset). Our analysis suggests that the ERF will have spent $2.25 billion by 2020–21, which means that the average price the government can pay is $5.35 per ACCU. It is not clear if this price will be sufficient to purchase enough abatement to reach the target; currently similar certificates from other state-based energy savings schemes are trading in the range of $8-18 per tonne of avoided emissions.[14] Analyst firm RepuTex concluded that the most likely source of abatement at around $5 per tonne would be avoided emissions from landfill, although this would only be a limited supply.[15]

Should the government not be able to purchase enough abatement through the ERF to meet its target, it may be necessary to purchase cheaper abatement from overseas, although the Government has been a strong critic of this practice. Another risk to the efficacy of the DAP is that the associated emissions safeguard mechanism, to prevent companies emitting higher-than-usual amounts of greenhouse gases, is not set to start until July 2015, potentially leaving a year without either a carbon price or baseline system to constrain emissions.[16]



[1].           Liberal Party of Australia, Our plan: real solutions for all Australians, Coalition policy document, 2013, accessed 14 May 2014

[2].           Australian Government, Submission under the Kyoto Protocol: Quantified Emission Limitation or Reduction Objective, November 2012, accessed 14 May 2014.

[3].           Australian Government, Emissions Reduction Fund, White Paper, April 2014, accessed 14 May 2014; Department of the Environment, Exposure draft: Carbon Credits (Carbon Farming Initiative) Amendment Bill 2014, Explanatory Memorandum, Bill 2014, 9 May 2014, accessed 14 May 2014.

[4].           Ibid.

[5].           Liberal Party of Australia, Fiscal budget impact of Federal Coalition policies, Coalition policy document, 2013, accessed 14 May 2014.

[6].           G Hunt (Minister for the Environment), Emissions Reduction Fund White Paper released, media release, 24 April 2014, accessed 14 May 2014.

[7].           Department of the Environment, op. cit., p. I. The Minister also signalled that ‘further funding would be considered in future budgets’.

[8].           Australian Government, Budget measures: budget paper no. 2:2014–15, 2014 p. 103, accessed 14 May 2014.

[9].           G Hunt (Minister for the Environment), $2.55 billion confirmed for Emissions Reduction Fund, media release, 13 May 2014, accessed 14 May 2014.

[10].         Department of the Environment, op. cit., p. 11.

[11].         Australian Government, Budget strategy and outlook: budget paper no. 1: 2014–15, 2014, p. 3–24, accessed 15 May 2014.

[12].         Parliamentary Library estimates based on allocated expenses to 2018–19 are extrapolated to 2023–24 using a total funding envelope of $2.55 billion assuming uniform distribution of payments over five year contracts entered into for the years 2014–15 to 2018–19. Does not include additional amounts that may be provided by the Government in future years.

[13].         Appropriation Bill (No. 1) 2014-2015, Schedule 1 Services for which money is appropriated: Environment portfolio, accessed 14 May 2014.

[14].         Prices sourced from certificate brokers’ websites (Green Energy Markets, Green Energy Traders), on 14 May 2014.

[15].         RepuTex, Unlocking land sector abatement – Outlook for the Emissions Reduction Fund, January 2014, accessed 14 May 2014.

[16].         Emissions reduction fund white paper, op cit.

 

For copyright reasons some linked items are only available to Members of Parliament.


© Commonwealth of Australia

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.

Top