Climate change policy: not the political battleground it once was

On an unusually mild winter’s day at least in Sydney, Australia attempted to elect the next Federal Government. We may not know the outcome of the election for several days if not weeks. All that can be said is that a hung parliament is highly likely.  The Coalition should form government with Malcolm Turnbull as Prime Minister, but he will not have the mandate he had hoped to direct the Coalition party room.  In addition, Senate results to date suggest that it will include the Greens as well as representatives from up to five minor parties. The major parties will therefore need agreement from the Greens and/or the cross-bench to deliver policy.

However, while there is uncertainty in the makeup of the new government, climate policy may not be the source of political angst it once was. Changes to the climate policy framework were not proposed as part of the Coalition’s campaign.  Indeed, except for the first couple of weeks of the long campaign, climate change policy did not play a defining role.
 

It’s also worth remembering that, well before the election, it was the Abbott Government which:

- proposed the 26 to 28% reduction target, and

- proposed or implemented a range of policy measures that have the potential to deliver the abatement necessary to meet the national target.

It is the second action that is critical, as it lays the foundation for long term bipartisan support for a suite of policies. The key feature of the current policies is the Safeguard Mechanism which acts to put a price on greenhouse gas emissions (GHG) from covered facilities that exceed the baseline for the facility. The Safeguard Mechanism could deepen the market for Australian Carbon Credit Units (ACCUs) beyond what is currently provided by the Emissions Reduction Fund (ERF).

Clarification is needed within existing policies

While there is no requirement to change the suite of policies to achieve deeper cuts in national emissions, it will be necessary to change the targets and the settings, although doing this may not be controversial.

There are two areas in which clarification is needed:

- The baselines for the Safeguard Mechanism and the thresholds for covered facilities are set by the Minister of the Environment.  They need to decline in order to drive the emissions reductions necessary for achieving the 2030 target.  Lowering the baselines does not need Parliamentary approval. Instead the only role the Parliament can play is to disallow these settings. 

- While not required immediately, increasing the RET in order to create deeper emissions reductions beyond what is needed for the 2030 target, will require a change to the enabling legislation. But in 2016 we see support for renewables growing exponentially with rapid technological innovation in storage, billions of dollars of investment funds being unlocked worldwide to support uptake, and more and more iconic, large emitting businesses and cities are committing to sourcing renewable energy.  In addition, any national RET will be well supported by the renewable energy targets and carbon neutrality moves from a number of state governments – Victoria has proposed a 40% renewable energy target by 2020 and is targeting carbon neutrality by 2050.  SA is also targeting carbon neutrality by 2050 and the ACT is pushing for carbon neutrality by 2020.

Bearing in mind too, the growing inefficiencies of Australia’s rapidly ageing generators and current trend of divesting from fossil fuel assets such as coal fired power stations, support the case for changing the energy mix.

The Abbott Government committed to a review of climate change polices in 2017.  This review will occur no matter who forms the next government, and we anticipate that, among other things, the timing of action required for the 2030 target will be a focus area. The fact that Australia is well on track to meet its 2020 cumulative abatement target does not lessen the challenge required for the 2030 target, and should in no way constrain early action – which is preferable given the greater costs incurred with delays.  Recent analysis  conducted by Energetics suggests that for every tonne of abatement achieved before 2020, three tonnes of abatement is not required post 20201.  

Developments to watch:

The Prime Minister’s challenge

Australia has committed to restricting global warming to less than 2 degrees but our current target, while broadly in line with targets for other developed nations, is consistent with 3.7 degrees of warming. Therefore, the five year reviews of climate policy agreed at the Paris COP21 will likely see Australia committing to deep cuts in emissions as nations push towards the 2 degree world.

Prime Minister Turnbull agreed not to vary climate policy in the period following Tony Abbott’s departure , however the evidence certainly suggests that he will support more action on climate change than his predecessor. However, a resurgent conservative right of the Coalition may be resistant.

The Xenophon party: supporting climate action
 

Senator Nick Xenophon is an advocate for climate action. The Coalition may find that they need the support of Rebekah Sharkie, the likely new member for Mayo, to pass legislation in the lower house, and support from the Nick Xenophon Team (NXT) representatives to pass legislation in the Senate. This may see Senator Xenophon calling for further changes to climate policy and in particular a move to his preferred 2009 ‘baseline and credit’ trading scheme (coincidently adopted by then opposition leader Malcolm Turnbull).

An opportunity for bipartisan support on climate action

While there are some differences between the Coalition’s and Labor’s climate polices, the similarities are significant. The major difference lies in the size of the targets: Labor called for a 45% reduction in emissions and a 50% RET; the Coalition proposed no change to the RET.

Energetics ’ modelling suggests that achieving a target deeper than the current 28% reduction will require decarbonisation of electricity2. Clearly the RET has a critical role here.  A deeper national target can be driven through an increase to the RET. Labor addresses this decarbonisation with a higher renewable energy target whilst the Coalition government is yet to disclose their plan, with an issues paper due for release later in the year.

Implications for Australian business

It is likely that the basic policy levers, the Safeguard Mechanism and the RET, will survive the 2016-2019 government. Even though the settings of these levers may change, there will be a period of policy certainty allowing businesses to prepare their contribution to the national 2030 target.  

Steps that business can take now include:

- Consider your carbon exposure - assess immediate and short-term exposure to the Safeguard Mechanism and to a potential extension of the RET, but also consider the medium-long term carbon exposure of your business through asset stress testing and scenario planning. 

- Understand the business value in adopting a strong climate change position – consider eligible projects you can implement to create ACCUs now to either sell into the market or to offset excess emissions, should they be liable under the Safeguard Mechanism. If there is any kind of emissions trading in the coming years, ACCUs will have value beyond that associated with ERF funding.

- Improve productivity - focus on lifting energy productivity to both lower the emissions profile and improve outputs. As the focus on achieving the 2030 emissions reduction target becomes more absolute, greater scrutiny – and likely liability – will be placed on inefficient Australian business.

- Take control of your energy - move to sourcing 100% renewable energy, which also provides a hedge against volatility in energy markets.

- Continue to manage risk - examine how the domestic and global energy and carbon markets are evolving, what your peers are doing, how capital is being redeployed and determine the impacts on your business.

Regardless of domestic policy action, the globe is decarbonising. Action taken before 2020 to reduce emissions will be both easier and less costly to achieve, than in the 2020-2030 period. 
 

 

 

1 & 2. Energetics' modelling to be released shortly

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