Australia: Simplicity and incentive? What the Direct Action plan means for business

Last Updated: 30 September 2013
Article by Graeme Dennis, Brendan Bateman, Nick Thomas, Robyn Farmer and Trisha Cashmere

Most Read Contributor in Australia, November 2017

Key Points:

Baseline methodologies are at the crux of the Direct Action plan, but more detail is needed.

The "Coalition's Direct Action Plan is based on two clear principles: simplicity and incentive" (Greg Hunt MP, the new Minister for Environment in the Abbott Government, in his speech to the Australian National University's Crawford School of Public Policy on 18 April 2013).

The question is will the balance tip in favour of simplicity, and not incentive?

So, what is it?

The new Federal Government's Direct Action plan is its alternative to the former Federal Government's Carbon Pricing Mechanism (CPM) and several other Former Federal Government climate change policies.

The Direct Action plan seeks to reduce CO2 emissions to 95% of 1990 levels by 2020, by quasi-voluntary means. The Government estimates that Direct Action will cost $2.9 billion over four years (this was previously $3.4 billion but was revised just before this month's Federal election).

As Greg Hunt described it in April 2013, it is "using a market mechanism to deliver the lowest cost methods of reducing emissions in Australia, ... you could call it a carbon buy-back" and "in economic terms, we simply hold a reverse auction and buy up the cost curve, ... we only pay on delivery of actual abatement".

When will we have it?

In his speech at the ANU, Greg Hunt MP set out the Coalition's plan to:

  • call for submissions on the framework of its Direct Action policy within 30 days of being elected (7 October 2013);
  • consult between days 60 and 100 (6 November – 16 December 2013);
  • release the White Paper and draft legislation by day 100;
  • receive further feedback and release final legislation by day 150 (4 February 2014); and
  • implement Direct Action on 1 July 2014.

However, the new Government has also committed to waiting to implement its Direct Action Plan until after it has repealed the carbon price. Consequently, when the Government can axe the tax will dictate when we will see its alternative policy implemented.

What is known about it?

While there has been substantial press coverage on the Coalition's position on the Clean Energy Act's Carbon Pricing Mechanism (which is to be repealed), there has been little extra flesh added to the bone of the Coalition's alternative since it was first published in 2010.

The Direct Action plan sets out the following key policies:

  • creation of an Emissions Reduction Fund with a capped budget of $750 million in 2013-14 and $1 billion by 2014-15, which will fund projects that reduce emissions in Australia and do not result in price increases to customers. An independent organisation (there are indications this will be Low Carbon Australia) will oversee the funding process which might involve reverse auctions or allocation of grant funding;
  • provision of incentives for coal-fired power stations to reduce emissions;
  • provision of an extra $500 rebate for either solar panels or solar hot water systems until 2020 (capped at 100,000 rebates per year). This was originally $1000, but the Coalition halved this amount, citing the reduction in price of the technology and its intention to target low income earners);
  • $100 million over six years through competitive tenders to implement mid-scale solar projects in 100 schools (grants of $500,000 maximum) and 25 communities (grants of $2 million maximum), including $2 million to study the application of high voltage direct current cables to support more remote large scale renewable energy projects and the use of underground high voltage cables;
  • $50 million over four years through competitive tenders to promote 25 geothermal or tidal power 'micro' projects (grants of $2 million maximum), although this will now come from the industry budget and not the Direct Action plan budget itself;
  • plantation of 20 million trees in public spaces, and support to 85 million tonnes of CO2 abatement per year through soil carbon sequestration;
  • $5 million to undertake a study into biofuels, subject to matched funding from the algal energy and biofuels sector;
  • creation of a new category in the Renewable Energy Target for larger renewable energy projects (over 50 megawatts) or for emerging technologies over 10 megawatts; and
  • $2 million per annum to keep the Greenhouse Friendly programme for five years.

The Direct Action Plan also identifies the need to reduce emissions created by waste coal mine gas and landfill, to encourage energy efficiency in buildings, composting and recycling, and to introduce alternative transport fuels. However, it does little more than identify these as areas for opportunity.

In his speech at the ANU Greg Hunt also signalled the expansion of the Carbon Farming Initiative.

Plans for $60 million investment in Clean Energy Hubs in the Latrobe, Hunter and Central Queensland regions, to facilitate clean energy research and development, have been axed from the plan, and replaced with $12 million funding to the National Climate Change Adaptation Research Facility at Griffith University in Queensland.

It appears that the key differences between the Direct Action plan and international voluntary carbon offset and clean development mechanisms are that Direct Action pays in cash, not offset credits, and approved Direct Action projects do not require additionality.

However, this is not to say that, ultimately, the auction or funding criteria for Direct Action will not align with this international precedent. So, it may be the case that projects that would have happened anyway can reap the benefits of Direct Action. This has the potential to stymie other projects that are reliant on the funding to be viable.

What will it mean for business?

So far businesses can expect the following.

The existing National Greenhouse and Energy Reporting Scheme (NGERS) will be maintained, with an amendment to permit opt-ins.

We expect that the additional reporting requirements within the NGERs scheme that are imposed on liable entities under the Carbon Price Mechanism will be unravelled as part of any repeal of the Carbon Price Mechanism. In the meantime, affected businesses should continue to take steps to comply with the reporting deadline of 31 October 2013 for the financial year 2012-13, based on current reporting obligations and perhaps beyond.

The electricity sector will be consulted on the design of the assistance scheme for the industry. It is clear that criteria such as job, energy security and electricity price guarantees will feature. The latter in particular may be a deterrent for more expensive investment in clean energy projects, which are unlikely to reap the benefits of the cost-curve auction, unless the form of assistance, or other elements of the Government's scheme, helps to defray the financial costs of those projects.

Finally, there will be an opportunity for aggregation of tender bids to achieve cost efficiencies for the projects.

Baseline approach

Baseline methodologies are at the crux of the Direct Action plan:

  • The carrot: an organisation will be able to sell its CO2 abatement to the Government's Emissions Reduction Fund, where the organisation reduces its emissions below its historic baseline. The Government will call for submissions on the design of the fund in early October.
  • The stick: an organisation whose emissions exceed their historic baseline will incur financial penalties (on a sliding scale - reflective of the size of the business and extent of the emissions excess), except in circumstances warranting exemption.

However, there is much detail to be added here, particularly on how changes to the businesses themselves will be accounted for in assessing changes to emissions from those businesses, and how the baseline for new businesses will be set.

The baseline is intended to provide a "business as usual" benchmark for each business. The criteria for "business as usual" will need to be flexible and comprehensible, but also capable of fair application, so that they do not inhibit growth of dynamic businesses within the Australian economy. Whether the means to achieve this can be kept simple is arguable – for example, existing voluntary offset mechanisms typically integrate complex strata of guidance, methodology and other material to ensure the maintenance of recognised standards.

Another potential issue is how to review projects with a negative abatement cost. Emissions from certain sectors (especially manufacturing) have been declining in recent years. The Energy Efficiency Opportunities Program (EEO) (which commenced in 2006 and is mandatory for organisations using over 0.5 petajoules of energy annually, but also has an opt-in application) demonstrates that in abating carbon, organisations also benefited from reduced energy costs, resulting in a negative abatement cost. The April 2013 review of the first full cycle of the EEO found that it was a very effective complementary policy in reducing industrial emissions as well as energy consumption, with an estimated emissions abatement cost of negative $95 per tonne of carbon abated. Irrespective of whether the Carbon Price Mechanism stays or goes, the EEO is likely to play a significant role in achieving the Australia's 2020 emissions reduction target.

Enough incentive?

The Emissions Reduction Fund has a specific financial commitment, and Tony Abbott suggested to the National Press Club before the election that this commitment is an absolute funding limit, so there will only be a finite number of projects that receive financing from the Emissions Reduction Fund (and such funding will be retrospective).

It may therefore be unviable for some businesses to take action to mitigate their emissions without upfront funding or confirmation that there will be some pay-back (as is the case with energy efficiency schemes which save costs over the longer term). So, it is reasonable to expect that, in the absence of any significant sticks, the carrots must be juicy enough to commit investors to reducing emissions.

In adding weight to Direct Action, the Government could learn from the key international alternative to cap-and-trade systems (like the Carbon Price Mechanism), being the baseline-and-credit system (like the Kyoto Clean Development Mechanism and Joint Implementation system). This system provides that implemented projects generate offset credits that can be sold for value.

This relies on there being a regulatory reason for purchasing such credits. The Direct Action baseline penalty system is indicative of such a reason, where credits could be used to offset any penalties incurred for emitting over the business's baseline. This gives both buyers and sellers an interest in maximising the credits generated by an emissions reduction project.

This is a proven means by which voluntary emissions reductions schemes have incentivised participation. Such a market structure embeds the principle of additionality, ensuring that carbon mitigation measures go beyond those projects that would have happened anyway. Even without additionality, such a secondary market mechanism may encourage greater investment in emissions reduction.

What next?

We will provide updates on the Government's legislative steps to take Direct Action and repeal the Carbon Price Mechanism.

We would be very happy to assist in the preparation of submissions to the Government in response to public consultation, or to provide advice on the impact of the intended changes on your business.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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