How to end Australia’s climate war

Since the accession of the Abbott “axe the tax” government, both sides of politics have ruled out any form of economy-wide carbon pricing. Rather, they’ve turned to an approach that applies policies to individual sectors of the economy.

The Coalition government claimed credit for Australia’s emissions reduction from 624 million tonnes in 2005 to 512 million tonnes in 2020, for which the actual drivers were changes in land use and a mix of federal and state renewable electricity policies.

Both sides of politics have now committed to net-zero emissions by 2050 and the Labor government has, as promised, legislated a carbon budget to 2030. This is a big step forward.

Australia could support import-competing activities by introducing a Carbon Border Adjustment Mechanism

Labor inherited a grim position: the only sector projected to reduce emissions is electricity, and the industrial sector will soon overtake electricity as the biggest emitting sector. The only emissions-reduction policy of substance that Labor had announced was to reform the Coalition’s Safeguard Mechanism and to use it to reduce industrial emissions via a form of carbon trading as envisaged by the Coalition in 2014 when the policy was implemented. Major business groups and Grattan Institute had called for this reform in 2021.

A proportional share of the carbon budget for the Safeguard Mechanism facilities would reduce their emissions from 138 million tonnes in 2022-23 to 99 million tonnes in 2030. If the sector spends any more than its total budget over that period of 811 million tonnes, another sector will have to do with less.

The safeguard should be implemented by setting baseline levels of emissions for each facility emitting more than 100,000 tonnes per annum and reducing those baselines in line with the sector decline. The decline rate will deliver emissions in line with the budget. A facility will be able to create or acquit tradable safeguard credits or Australian carbon credit units if its emissions are below or above its baseline, thereby lowering the overall cost.

The government is consulting on a range of design issues, three of which are critical to its success but which are likely to be controversial.

High level of certainty

First, each facility should have a fixed baseline, an absolute annual quantity that declines over time. Fixed baselines create a high level of certainty that the budget will not be exceeded. If the government instead chooses to continue setting baselines based on emissions intensity, it risks blowing the budget. To avoid that, the decline rates would need to be periodically adjusted – a more complex and less transparent approach. Either way, to support investment confidence, all facilities should have a rolling five-year baseline trajectory.

Second, baselines for newly built facilities should be based on industry best practice, and their emissions should be included within the budget. Their inclusion could be accommodated by creating an initial reserve within the budget, followed by annual adjustments to decline rates.

Finally, no facility should be exempt from the costs imposed by the reformed safeguard. Emissions-intensive and trade-exposed industries should be assisted only where the cost will cause the activity to move offshore and lead to an increase in global emissions. Any assistance should be external to the safeguard.

As intended by European countries and possibly the US, Australia could support import-competing activities by introducing a carbon border adjustment mechanism. However, Australia’s economy is more reliant on exports of emissions-intensive commodities. Exporting activities could be supported to decarbonise through the Powering the Regions Fund or the National Reconstruction Fund and/or a reserve of government-funded, low-cost Australian carbon credit units.

This will not be an easy ride. Although industry supports reforming the Safeguard Mechanism, there will be special pleading of the sort that fatally wounded previous Labor attempts to implement effective climate change policy. The difference is that we now have a legislated carbon budget: there can be no exemptions or concessions this time around.

For this government, success will mean that, by the end of its current term, industrial emissions are falling in line with the carbon budget, due to effective actions by companies across the sector. This would be a significant political achievement. More important, it is no exaggeration to suggest there would then be a genuine possibility of bipartisan commitment to policies to drive towards net zero by 2050 and an end to Australia’s climate war.