Following the call for industry submissions on the Emissions Reduction Fund (ERF) terms of reference late last year, on 20 December the Department of Environment released the “Emissions Reduction Fund Green Paper”. The Green Paper provides additional context on how the ERF is likely to run and more of the ERF design architecture was revealed.
Key points are summarised below:
Coverage thresholds are likely to be based on existing NGER data with the proposal that they are set at a facility level. Two coverage options are proposed within the Green Paper. Full coverage could include all facilities producing more than 25,000 tonnes CO2e or be limited to facilities that pass the 100,000 tonnes CO2e threshold.
The ERF will buy lowest cost abatement through a reverse auction process. Higher cost abatement measures that have co-benefits will not be given priority.
Two possible approaches are available for bidding into the reverse auction process – activity methods and facility methods.
The stated maximum duration period for contracts is five years, however contract provisions may be made for projects with a longer pay-back period where payment is made for future abatement within the five year contractual period.
Absolute emissions baselines will be set using historical NGER data. The baselines will be used in conjunction with “the safeguard mechanism” to provide incentives for facility emissions to remain below the baseline.
The “safeguard” mechanism” may apply to companies exceeding their business as usual emissions. Little information is currently available about what the impact of this safeguard mechanism may be on liable facilities.
What does this mean for business?
Lowest cost abatement
Based on the Green Paper, the major determining factor for selection in the reverse auction process will be whether the abatement is deemed to be “lowest cost”.
To achieve the level of stated abatement through the ERF with the funding reserves available, purchased abatement is likely to be less than $20 per tonne CO2e. The focus on lowest cost abatement will automatically rule out a number of higher cost technologies with potential for large scale abatement.
While there are clear benefits to putting forward methods for higher cost higher impact abatement measures, in respect of meeting Australia’s emission reduction targets, participating entities need to be aware that they run the risk of being non-competitive in the auction environment.
The Green Paper limits the contractual period to five years. There is provision for participating entities that successfully bid with abatement activities that have a longer than five year period, however, forward payment for future, extended abatement is likely to be fraught with difficulty.
The reverse auction process
The Green Paper discusses the approach the Government might take to identify lowest cost, genuine abatement. A straight-forward tender process is proposed where the Clean Energy Regulator will rank submitted methods and select the “best-value bids”.
The Government also has the discretion to apply a confidential “benchmark price” which will rule out any tenders with an abatement cost beyond the benchmark. Interested tenders should note the strong repeated focus throughout the Green Paper on “lowest cost” which is not always compatible with “best value”.
Activity vs facility methods
Activity based methods provide a relatively straightforward approach for methodology development. All abatement needs to be clearly defined, and independently verified with clear guidance on project monitoring and reporting.
The second option for methods within the ERF auction process is the facility method. The stated aim of the facility methods is to:
“allow facility owners to be credited for emissions reductions relative to past practices, off the back of emissions and energy use data that they report under the National Greenhouse and Energy Reporting Scheme” and to “quickly facilitate large-scale emissions reduction projects across a broad range of sectors.”
The facility method allows participating entities to amalgamate a number of activities that, acting in conjunction, reduce the total emissions of the participating entity when compared with a designated “starting point”. There is little detail around how facility methods will be verified and operate in effect. This opens them up to a risk of Government revision at a later date if they are not proven to be successful.
Companies that choose to adopt a facility method as opposed to the activity method run the risk of not meeting the additionality requirement if more stringent assessments of individual activities are retrospectively applied.
In addition, where a number of activities are amalgamated into the one package, companies run the risk of putting forward an abatement method that is not cost competitive.
Without clearly defined and verified abatement on an individual activity level, it won’t be possible to extract lowest cost activities from the amalgamation.
In the absence of clear guidance, the activity method currently provides a far more robust and proven approach for abatement projects and should be favoured over the facility approach. Further development and information of the activity method is required.
Additionality – beyond common practice
For the purpose of the ERF, additionality is considered as ‘beyond common practice’ and actions need to go beyond regulated levels (called ‘regulatory additionality’). There is no requirement for companies to demonstrate financial additionality.
Without any requirement to demonstrate financial additionality, there is potential for participating entities to put forward activities already considered economically viable from a business perspective.
There are risks associated with this approach. Companies that have existing and publicly disclosed targets will need to demonstrate abatement above this disclosed target. Where additional abatement beyond the stated target has not been achieved, participating entities are likely to come under public scrutiny for misuse of Government funds that could have been better spent on alternative, effective abatement.
Establishing a baseline and the “Safeguard” mechanism
Establishing baselines on an absolute emissions basis, as opposed to an emissions intensity basis will pose an issue for a number of companies. However, the Green Paper outlines a number of additional mechanisms that soften the impact of any baseline. Participating entities will most likely be able to negotiate baselines that best reflect their current business.
This does not necessarily mean that baselines will remain the same for the duration of the operation of ERF. The Coalition Government is committed to meeting Australia’s domestic emissions reduction target of 5% below 2000 levels. To achieve this, baselines may need to be lowered at some future stage.
The “Safeguard Mechanism” may apply to companies exceeding their “Business as Usual” emissions. Liable entities need to be aware of the existence of this “safeguard” mechanism and factor in the associated risks of penalty for emissions above established baselines.
What are the likely impacts?
Without bipartisan support for the final legislated climate change policy implemented in Australia, companies will need to continue to factor in uncertainty risks into every decision in respect of climate change policy.
There will be an administrative burden associated with determining and maintaining, an appropriate facility baseline. Although the process will be streamlined as much as possible, developing appropriate, representative baselines will not be burden-free.
Liable entities should be well aware of the risks associated with using facility methods
To minimise the stated impacts, it’s important for entities captured under the ERF to know what they stand to gain through the policy and key risks. The following steps can be taken to inform a robust White Paper.
Understanding your risk profile – what are the potential impacts on your business?
Make a submission – Energetics is working with clients across many sectors to articulate their position.
Include “best value” abatement opportunities within your submission where the information is readily available. The Green Paper asks for examples of potential abatement. Highlighting that “best value” abatement is not necessarily consistent with “lowest cost” abatement will be important for informing the White Paper.