The Clean Energy Regulator has announced the results of the first auction of carbon abatement contracts from the Emissions Reduction Fund (ERF), part of the Abbott Government’s Direct Action Plan climate change policy. The regulator announced that the Government has committed to buy emissions abatement totalling 47.1 million tonnes of carbon dioxide-equivalent (Mt CO2-e), at an average price of $13.95 per tonne, over the next three to ten years. This undoubtedly represents a successful first auction for the ERF, but what does it mean for the future?
The Direct Action policy is designed to reduce domestic emissions in Australia by providing incentives for various groups to take actions to reduce emissions. Originally, this policy included measures such as providing cash payments for installations of solar panels and solar water heaters, but has been reduced to rely on the policy’s centrepiece, the $2.55 billion ERF. Under the ERF, project proponents offer to reduce greenhouse gas emissions by a quantified amount, and the Government enters into contracts with proponents to pay an agreed price, once the emissions savings have been realised.
Prior to the first auction, there had been some uncertainty amongst commentators as to whether the Direct Action policy could procure enough abatement at a cost which was affordable under the financial constraints of the plan. However, the results of the first auction suggest that there are a number of participants able to deliver greenhouse gas emissions reductions at a price acceptable to the Government. But will it be enough?
Under the terms of the contracts awarded from the initial auction, the Government has agreed to pay $660 million for abatement purchased over the life of contracted projects, ranging from three to ten years. It’s important to note that only abatement delivered in the next 5.5 years (between now and the end of 2020) will count towards Australia’s Kyoto target, which means that some abatement contracted in this auction will not assist Australia to meet its commitment.
Previously, the Library’s analysis suggested that the average price paid by the Government would need to be around $5.35 per tonne of carbon dioxide equivalent – the results from the first auction substantially exceed that price. However, since our last analysis at the time of the 2014-15 Budget, the projected abatement task (the amount of emissions reductions that must be achieved to meet the Kyoto commitment) has been revised downward from 421 to 236 Mt CO2-e. This means that the emissions reduction task that must be achieved by the ERF has become substantially easier. This task also includes 129 Mt CO2-e that was ‘overachieved’ in the first period of the Kyoto Protocol, which will be used to make the abatement task for the second period easier.
However, if the price of $13.95 per tonne of carbon dioxide-equivalent is maintained in future auction rounds, the maximum amount of abatement that the Government could purchase for the committed $2.55 billion would be 182.8 Mt CO2-e, which is short of Australia’s Kyoto commitment by more than 53 Mt CO2-e. Therefore, if Australia is to meet its target, the price paid in future auction founds of the ERF would need to be significantly lower than $13.95.
It is not clear where a cheaper supply of emissions reductions could be sourced from that is still eligible for inclusion in the ERF. To be eligible, a project must be additional, which means it must not have happened anyway (that is, without the intervention of the ERF). The majority of projects funded in this round of the ERF (forest protection and destruction of methane from landfill and piggeries) are towards the lower end of the marginal abatement cost curve (amongst activities that still require investment to proceed), so it may be difficult in future to find activities that are still additional, but cheaper.
It should also be noted that these types of activities do not make structural changes to Australia’s emissions profile. In fact, Australia’s emissions are expected to grow to record levels by 2030, according to the Government’s emissions projections (see chart below). This is driven by increases in emissions from coal and gas production, and emissions from the electricity sector. Should the results of this auction be replicated in the future, Australia will meet its targets by using emissions offsets (such as sequestering carbon in vegetation), rather than by reducing emissions at their source (e.g. from power stations and transportation).
So although the ERF is off to a relatively successful start, it might be worth considering whether the funds used to purchase this abatement might be more effectively invested in reducing emissions at their source – for example by funding efficiency improvements to power stations or by investing in reducing demand for energy through efficiency and conservation activities, which have already had significant success in reducing electricity demand (and associated emissions).
Chart - Australia’s projected greenhouse gas emissions to 2030.Image source: Department of the Environment, Australia’s emissions projections 2014-15/CC BY 3.0