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“In the Coalition, we believe now, as we did back in 2007, that climate change is real, that humanity does make a contribution, and that you need a strong and effective policy to deal with it.”

Tony AbbottLeader of the Opposition

Coalition Climate Policyand the National Climate Interest

This presentation summarises The Climate Institute’s report, Coalition Climate Policy and the National Climate Interest, includes analysis of both the Government’s legislated policies and a range of approaches the Coalition could take to implement its policy platform.

Images: Michael Hall, Creative Fellow of The Climate Institute

August 2013

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Background Every Federal election The Climate Institute undertakes a thorough qualitative and quantitative assessment of the climate policies of various political parties and independent MPs.

This presentation concentrates primarily on the strengths and weaknesses of the Coalition’s proposed policy framework.

The Climate Institute has also published a separate overview and analysis of the current Government’s policy settings in partnership with the World Resources Institute and the international Open Climate Network.

We judge each policy against our assessment of what is required for Australia to contribute to effective global climate change solutions, and build a prosperous and resilient Australia. The full qualitative assessment of the political parties and independents is available online at:

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Key Findings

40% more domestic emission

reductions are achieved under the current legislation

$4 billion additional

expenditure needed to achieve 5% 2020 target

45% increase in emissions

by 2050 under Coalition scenarios

8-10% increase in emissions by 2020 under Coalition

scenarios

33% less carbon productivity

improvement under Coalition policy

$50 billion subsidy to

energy industry to 2020

$250 million more needed if

Renewable Energy Target is weakened

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• Supports agreed global goal of avoiding a 2 degree C increase in global temperature and a 5% - 25% reduction on 2000 levels by 2020

• Supports (in-principle) a second commitment period of the Kyoto Protocol• Will repeal legislated domestic emission cap and carbon price• Emission Reduction Fund (ERF), a grant-tendering scheme:

– Cheapest emission reduction options will receive Government funding through a reverse auction process.

– Funding will not be delivered until project implemented and abatement achieved.– Budget commitment of $2.55 billion over the forward estimates.

• To be determined financial penalty for companies that exceed a an emissions baseline based on ‘business as usual’

• Supports retention of Renewable Energy Target (RET) and goal of 41,000 GWh large scale target in legislation but will review in 2014

• Post-2020 policy will be reviewed and determined in 2015

Coalition Policy

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• Qualitative assessment including review of existing material and similar programs in Australia and oversees.

• Quantitative assessment including engaging SKM MMA and CoPS, Monash University to model a range of policy approaches.

– Marginal Abatement Cost Curve Model used to assess what options:• covers emissions abatement opportunities in energy, transport, industrial processes,

fugitive emissions, and waste• calculates the cost and potential emission abatement of all the eligible options • ranks the options from lowest to highest cost (in terms of $/t CO2-e)• least-cost combination of options in covered sectors will be selected• only options that are additional are considered • used DCCEE estimates for land use change and agriculture abatement (mid point

estimates)

– Outputs from the MACC curve analysis and other relevant external assumptions have been input into the MMRF–Green model of the Australian economy

– Involves iterative process as some interaction between results, e.g. impact of baselines and penalties on emissions.

Approach

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A number of independent reviews of the Coalition’s policy have been undertaken to date and they raise some core issues that need to be addressed.

Qualitative Review

Core issues raised by other policy and economic experts are:

• High levels of uncertainty on emission reductions with knock on effects to international posture

• Highly complex and high administrative costs• High levels of uncertainty for business investments• Greater reliance on other mechanism such as the RET needed

McLennan Magasanik Associates, 2009; Department of Climate Change and Energy Efficiency,2010; Ernst and Young, 2011; Treasury, 2011; The Australia Institute, 2011; Allens, 2013

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Domestic and international experiences indicate mechanisms of the nature proposed by the Coalition have not achieved absolute emissions reductions to date.

Experience Here and Overseas

Alberta, Canada: Specified Gas Emitters Regulation

• overall emissions continue to increase• Auditor General raised serious concerns around the validity of soil carbon

and other emission offsets

Greenhouse Gas Reduction Scheme • 0.7 Mt reductions in 2010• significant proportion of ‘abatement’ certificates were unlikely to correspond

to the actual emissions reductions

Greenhouse Gas Abatement Program

• National Audit Office have found emission reductions were ‘substantially less’ than projected, many projects did not proceed, only 40% of its original budget allocation was spent

Clean Technology Program • leveraged $850 million in private investment• expected to result in abatement of 11.37 Mt CO2-e in total

Abatement and technology funds, Norway

• 2001–2011 $1.9 billion spent• direct emissions reduction of 1.5 Mt CO2 in total• Norway’s carbon tax cut emissions by 5 Mt CO2 in 2010

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• Funding: Cap on funding set as per Direct Action policy. After 2020 funding increased by 5%/year

• Reverse Auction Process: Assumed to cover the cost of abatement that could not be covered by normal commercial transactions plus compliance costs

• Baselines: Baselines are set at the entity’s historical average emissions intensity for the three years. Intensity baselines was set using value add as the numerator. For new entrants, emission intensities was set at the top Australian rate for each sector

• Carbon penalty. MMRF–Green model used to determine whether the carbon penalty is paid. The penalty for emitting above baselines is set at $15/t in 2014/15 increasing to $20/t in 2020 (based on GGAS and Alberta SGER), escalating by 6.5 per cent per annum in nominal terms thereafter. Note: Penalties only come significantly into play in one scenario

• Admin and compliance costs: Administrative cost of this process assumed to be $2/t and $3/t abated in line with costs incurred under the Greenhouse Gas Abatement Program and NSW Energy Savings Scheme programs. Aggregation possible to reduce costs

• Have been deliberately conservative in assumptions.

Modelling Assumptions

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1) Minimum carbon laws (Kyoto target). The current legislated policy environment. Net emission with trade and domestic emissions shown.

2) Coalition (Base case). Carbon price scheme and associated revenue transfers repealed and replaced by an Emission Reduction Fund implemented

3) Coalition (Lower RET). Base + LRET is ‘real 20%’ level by 2020 and 25% by 2025

4) Coalition (High RET). Base + LRET 30% by 2020 and 50% by 2030

5) Coalition (Absolute baselines). Base + baselines are set in absolute terms

6) Coalition (Decline and trade). Base + baselines decline. Liable entities can purchase international and domestic units to avoid penalty and/or purchase units from liable parties who have emissions below their baselines

Modelled Scenarios

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Impact on Emissions

Emission change in 2020 and 2030 – on 2000 levels

The Climate Institute analysis based on SKM–MMA, 2013

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Emissions Reduction Sources

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Emissions Gap

The Climate Institute analysis based on SKM–MMA, 2013

Shortfall in total emissions to achieve targets - million tonnes CO2e

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The Fiscal GapAdditional expenditure to achieve targets in 2020 - Real 2012 $billion

The Climate Institute analysis based on SKM–MMA, 2013. International unit imports are based in access to Kyoto carbon markets. Relying solely on these markets to meet a given emission target would not be credible domestically or internationally.

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The 2°C GapTotal emissions to 2050 – Policies and 2 degree carbon budgets

The Climate Institute analysis based on SKM–MMA, 2013. The carbon laws 25-80 per cent scenario assumes the Climate Change Authority recommends a 25 per cent reduction by 2020 and this is accepted by the Government. It also assumes the 80 per cent reduction by 2050 is the minimum long-term reduction.

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The 2°C Gap

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Overstated Emission ReductionsIndicative comparison of $/tonne for ERF and other low emission programs

The Climate Institute analysis based on SKM–MMA, 2013; Coalition, 2009; The Australia Institute, 2011; Grattan Institute, 2011 and Productivity Commission, 2011

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Boosting Carbon ProductivityAverage annual rate of change in carbon productivity by decade

The Climate Institute analysis based on SKM–MMA, 2013 and Treasury, 2011.

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Driving Energy Productivity

The Climate Institute analysis based on SKM–MMA, 2013; International Energy Agency, 2012; US Department of Agriculture, 2012; US Energy Information Agency, 2012 and Department of Resources, Energy and Tourism, 2013

Average annual rate of change in energy productivity by decade

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Australia’s Energy Mix

Electricity Generation in 2020

The Climate Institute analysis based on SKM–MMA, 2013.

A reduced Renewable Energy Target has no discernible macroeconomic impacts but costs $250 million to cover emission shortfall. Other studies show reducing the RET increases costs to consumers.

(AGL, 2012; BNEF, 2013)

Removal of the carbon price reduces renewable energy generation to 22% by 2020. That’s the same result as setting the RET at 20% by 2020 and 25% by 2025. Renewable energy would reach 24% under the current legislation. Its expansion is also constrained by depression of electricity prices.

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The ultimate test is whether policies help or hinder achieving national climate interest – 2°C goal.

Discussion

The core challenges confronting the Coalition are:• Scalability in the short and long-term: Australia’s emissions will continue to increase to 2020

and beyond. This is broadly consistent with other analyses. Beyond the practicality of implementing the proposed policy framework, the core issue remains that the policy constrains budget expenditure but doesn’t constrain emissions. The money available, based on all independent analysis to date, is insufficient to reduce Australia’s emissions in line with the bipartisan supported target range.

• Questions around deliverability of broad-scale domestic emission reductions and subsidy to emitting behaviours: This implicitly subsidises emissions below set baseline emissions, lacks of a broad-based investment incentive and has limited impact on the competitiveness of coal and other emission intensive activities.

• Risks undermining Australia’s positive influence internationally and undermining global action: A policy that can meet stated international targets is central to Australia’s diplomatic posture, the strengthening of the emerging architecture, building global ambition, and avoiding negative responses from other major economies.

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The Coalition has not had the benefit of Government resources to strengthen the process of independent review in possible implementation.

Recommendations

Make a firm commitment to maintain the current legislation until detailed policy development and further independent analysis is completed: • Full Regulation Impact State as per Coalition’s productivity policy• Treasury examine the emission reductions as part of the White Paper process:

– Include examining expanding scope and scale of the ERF to include the Government purchase of credible international emission units to ensure Australia international obligations are achieved

• Respect the currently legislated review by the Climate Change Authority of Australia’s carbon emission caps, budgets and targets

– This review aligns with international processes in 2014 and should be a key input into the ERF White Paper process and Australia submissions on pre 2020 ambition under the Kyoto Protocol

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If committed to remove the current legislated framework the Coalition should examine additional regulatory approaches to drive structural change in the economy.

Recommendations

• Commit to remove the legislated 2014 review of the Renewable Energy Target and focus the 2016 review on post-2020 policy settings.

• Give active consideration to legislating a fixed GWh to ensure around 50 per cent of generation is renewable energy by 2030.

• ERF process should explicitly consider setting declining emission baselines and carbon penalties for covered firms that is consistent with driving sustained decarbonisation of major emitting sectors.

• Regulate a declining emission performance standard for existing power generation. • Implement are more consistent, ambitious and stable policy framework to drive a step

change in energy efficiency across the economy.

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More information

Visit www.2013pollute-o-meter.org.au

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More information

Visit www.climateinstitute.org.au/articles/publications/coalition-climate-policy-and-the-national-

climate-interest.html

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