Direct action can be turned into a real climate policy

by Tony Wood

Published by The Australian Financial Review, Tuesday 28 April

Last week the first auction for emissions reduction under the government’s Direct Action Plan took place. This week the period for submissions to the Prime Minister’s Task Force to review Australia’s post-2020 target for emissions reduction closes, with the government due to announce a new target by mid-year.

These events signal the beginning of a new world for climate change policy. Are we sailing to a future in which Australia makes a serious response to climate change, or dangerously adrift in a sea of denial?

The Department of the Environment’s most recent forecast indicates that Australia’s greenhouse gas emissions must be reduced by 236 million tonnes between now and 2020 to meet our target of five per cent reduction below 2000 levels. The government’s central mechanism is to purchase emissions reduction to meet this target through reverse auctions (so-called because the lowest bid wins).

In the first auction, the government secured contracts for 47 million tonnes at an average price of $13.95 a tonne. Sceptics of the government’s policy conclude that at this price the government will fall short. Environment Minister Greg Hunt described the outcome as a stunning success and rejected the negative assessments.

Further actions require higher prices

Critics say that further auctions will require higher prices, that many of the projects that won contracts were already established under the Labor government and that about a third of the contracted emissions reductions will not occur until after 2020. These charges are true, but may turn out to be flesh wounds.

The Minister’s claims of success rest on two assumptions: the price of emissions reductions will not escalate dramatically and the amount of reductions required to meet that target is likely to further reduce by 2020. He also points out that the auction process, with its $2.55 billion fund, is not the sole mechanism to meet the target.

These assumptions will be tested in future auction rounds. On balance, the first auction was probably middling positive for the government – hardly the stunning outcome claimed by Minister Hunt, but not a disaster either. The maths probably falls short but there are more auctions, the economy is slowing, and the government is within about 50 million tonnes of the 2020 goal. Yet the bigger game hasn’t even finished its first quarter.

The proposed post-2020 target that the government will submit to the international community will be higher than the current five per cent level. It should represent Australia’s fair share of global action to limit average temperature increases to no more than 2 degrees Celsius. The Climate Change Authority’s draft recommendation for a 30 per cent reduction for 2025 has already been strongly criticised by industry groups and Minister Hunt as unaffordable and beyond our fair share.

Whatever the target, maintaining Direct Action as the central policy instrument beyond 2020 creates two problems for the government. First, the need for major on-budget funding increases will only grow as the targets get harder. The current funding is in place only to meet the current five per cent target.

Second, there will be more unconstrained increases in emissions in areas of economic growth. The Direct Action Plan includes a safeguard mechanism to avoid this problem. Baseline levels of emissions will be set and organisations that exceed their baseline will be penalised.

Currently available details on the safeguard mechanism indicate that it is designed only to protect against rogue operators who cause emissions increases. By contrast, any new or expanding business will have considerable flexibility to set new baselines. This seems like a problem as more stringent post-2020 targets are imposed.

Direct Action not fit for purpose

It all suggests that Direct Action, as currently configured, is not fit for the purpose of meeting Australia’s post-2020 targets.

Yet there is a way forward. Direct Action could be used as a platform to build an effective and relatively efficient domestic policy to meet Australia’s post-2020 target(s). For that to happen, the government must replace the proposed penalty structure in the safeguard mechanism with a system of tradeable reductions credits, and progressively toughen up the baselines in the safeguard mechanism so that total emissions are consistent with Australia’s future targets.

This way it could build on existing mechanisms such as the Renewable Energy Target to produce a more comprehensive, market-based response. Achieving bipartisan support is desperately needed. Neither Direct Action nor the repealed emissions trading scheme can do that. This approach might.

The way forward has its political challenges. Direct Action has to become a trading scheme that isn’t cap-and-trade and Prime Minister Tony Abbott may need convincing that acquitting international credits that carry integrity is necessary and acceptable.

The government has pushed the climate change reset button; its first small steps have been positive but not compelling. There is a faint chance that a real opportunity awaits. But it requires a level of commitment and cooperation that has been absent so far. Time is running out.