Ensuring Australia’s economic sustainability

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National goals: Provide longer term regulatory certainty in the pricing of carbon, incentivise business to reduce carbon emissions in the most economically efficient way, support the transition to a low carbon economy and meet Australia’s target of a 5% reduction in emissions by 2020.

Carbon issues

The Opposition has stated a full repeal of the Carbon Pricing Mechanism (CPM) is one of the first actions it will initiate if elected, while the Government has suggested it will accelerate the CPM to its flexible pricing scheme earlier than originally planned.

It's no surprise then that businesses find themselves in a ‘holding bay’, delaying strategic decisions or investments because they are uncertain about the future existence of a carbon price or the structure of any alternative carbon policy – particularly in the short-term.

While there is a live debate about the respective merits of the two policies, one point is clear: the ongoing debate means ongoing uncertainty about the future policy environment in which businesses will have to operate. This uncertainty is damaging, especially in the electricity sector, as businesses require a level of certainty to plan and invest for the future. Australia urgently needs to agree on a policy framework for responding to the challenge of climate change.

Appropriately designed, carbon pricing is the most effective way of achieving least-cost abatement, particularly in the long-term. It can drive the cheapest abatement options across the economy, and avoid many of the administrative burdens and inefficiencies found with more interventionist government policies.

As a matter or urgency, the incoming Government will need to clarify the new carbon rules for business under its respective policies. It will also need to consider how it will achieve Australia’s commitment to meet the agreed 2020 emissions reduction target.

In addition, both parties must commit to supporting companies that have already taken or are currently taking abatement activities.

It is also critical that any changes to policy leverage off the effort already invested by the business community in assisting the set up of the CPM (and in some circumstances the previously proposed Carbon Pollution Reduction Scheme).

Amending the CPM

An acceleration of the CPM to a fully flexible pricing stage, one year ahead of schedule, will see the carbon price subject to market mechanisms that will function more freely and allow companies to make investment decisions based on least cost.

Should the incoming Government initiate this acceleration, it will need to do so as quickly as possible to meet the start date of 1 July 2014. By doing so, businesses are more likely to participate in the advance auctions (currently scheduled to take place in the first half of 2014) or broader carbon market activities, such as domestic trading, trading of international units or entering into forward contracts and swaps - all of which will aid the ability to meet liability at least cost.

Repealing and replacing the CPM

Should the Opposition come into power and follow through with its commitment to repeal the CPM and implement the Direct Action Plan, it needs to leverage what businesses have already done as part of responding to existing legislation and any investments that will result in carbon abatement.

We strongly support the proposed process of releasing a white paper, providing greater detail on the Direct Action Plan and Emissions Reduction Fund, where business have the opportunity to provide input and give guidance on the policy’s development.

Due to the often competing outcomes of climate change policy for particular parties, we expect significant divergence in the views that will be expressed in response to a white paper. However, we recommend setting some overarching policy principles to underpin the key elements of the Direct Action Plan.

Specifically we recommend:

  • The time period for which baselines are set for businesses should be retrospective, to avoid penalising businesses that have recently undertaken abatement projects
  • That strict controls be put in place for calculating baselines and abatement reductions, so they are truly verifiable, yet don’t stifle innovation or penalise businesses that can deliver strong commercial outcomes
  • That flexibility be provided in the ways in which business can access funds under any scheme
  • That any funds previously approved for abatement projects be transitioned into new support structures wherever possible
  • That projects with low risk of delivering high abatement potential are prioritised.
  • That funds should be allocated to support research and development of new solutions to emissions reduction and energy efficiency.

What does it mean long-term for Australia?

Beyond the short-term uncertainty and above-mentioned issues surrounding the policies, both parties' have committed to a minimum target of a 5% reduction in emissions by 2020 from 2000 levels with Australia a signatory under the Kyoto 2 commitment period.

Financing mature carbon abatement and energy efficiency technologies and developing new energy efficiency and carbon abatement solutions remains challenging and complex, with large up-front costs and limited capital resources.

Innovative financing programs required

Innovative financing programs, including a combination of low-interest funding and up-front loans for renewable energy and energy efficiency projects, are required to support liable companies, impacted companies and investors.

If the CPM remains in place and converts to an international emissions trading scheme, it is likely Australia would reach the minimum 5% emission reduction by 2020. The Australian industry sector will be incentivised to reduce its carbon intensity, which will improve its efficiency and relative international competitiveness. However a large portion of the abatement associated with such a scheme is expected to predominately occur offshore, since the purchase of international credits is the lowest cost form of compliance.

Direct Action Plan not looking promising

General consensus by the scientific community is that if the Direct Action Plan is implemented, it will be difficult for Australia to meet our Kyoto commitment and difficult to achieve more aggressive longer-term reduction targets. This may leave Australia vulnerable to international demands from our trading partners to reduce our emission intensity or place restrictions in emission intensive exports.

It could also leave Australia with an uncompetitive and inefficient industry sector less prepared for the transition to a low carbon global economy. In this situation, businesses may need to invest, independent of the Direct Action Plan, to remain internationally competitive beyond 2020.

Under either scenario outlined above, the incoming Government cannot ignore the long-term requirement for businesses to remain competitive in an international carbon policy context.

Carbon conclusion

The Federal Government must act decisively to firm up a carbon policy that respects existing investment to avoid disruptions to business, while supporting efficient long-term investments that reduce carbon emissions and honour existing commitments. The central feature of carbon policy for the incoming Government should be a focus on achieving the carbon emissions reduction target in a least cost approach.