Keeping track of the Permit Revenue and Complimentary Measures, Speech written by Anna Reynolds

01 May 2009Archived News Energetics in the News

With old programs gone but the new programs not yet here, what will be the driver for emissions action? In this paper, Energetics Principal Consultant Anna Reynolds speaks on the important role of both the CPRS permit revenue and complementary measures in driving reductions in our energy consumption and emissions. Specifically she comments on:

- The size and use of the CPRS Climate Change Action Fund (or C-CAF) and 

- The developments in the National Strategy on Energy Efficiency (NSEE)

As part of the sector that is helping corporate Australia make the transition to the new carbon economy, it is disappointing that the CPRS introduction has been delayed and that its start still remains in doubt.

An issue that the CPRS delay also raises is the possibility of new period of low national policy activity over the next few years to 2012, which is when we expect the CPRS to really gets going. This is possible because at the moment several old Howard Government programs have, or are in the process of being dismantled which has been done in anticipation of the CPRS starting in 2010. Policies on their way out include:

  • The requirements on recipients of large diesel fuel rebates to produce emission action plans under GH Challenge Plus and
  • A requirement that was due to come in on the generation sector, to investigate and report on the Energy Efficiency Opportunities program. The government’s current position is to extend the exemption for this sector to 2013.

So with old programs gone but the new programs not yet here, what will be the driver for emissions action? There may be a vacuum, and yet all the while we continue to have spiralling energy consumption rates, which are still growing at around 2% per year.

The CPRS policy challenges and changes we have all witnessed in the last few days illustrates perfectly what the Inter-governmental Panel on Climate Change (IPCC) said in their 2007 review of mitigation options - they said that:
“most analysis suggests that designing a trading scheme is prone to gaming of the rules by participants + that it is difficult to predict the outcome of the of the rules that are set for the trading scheme”.

In defence of tradable permit schemes though, the IPCC found that they also have many strengths as a policy tool…and one of those strengths is that the sale of permits generates revenue from pollution which can be re-directed to fund transition policies and programs.

That’s what I am speaking about today - the important role of both the CPRS permit revenue and complementary measures in driving reductions in our energy consumption and emissions. Specifically I would like to make some comments on:

  • The size and use of the CPRS Climate Change Action Fund (or C-CAF) and
  • The developments in the National Strategy on Energy Efficiency (NSEE)

It’s fair to say that these issues have been somewhat marginal to the main discussions about the CPRS design such as – sectoral coverage, free permit formulas and the rules of the carbon market. The dominant view in national policy circles has been that the carbon price will be the major driver of change in business behaviour and investment trends.

But times have changed, and how fast things change! There is now more political momentum around the need for new complementary measures, driven partly by a realisation that some complementary measures may be easier to implement than the CPRS scheme. The most recent announcements on complementary measures came out of the Council of Australian Governments (COAG) meeting last Thursday with finalisation of the new Renewable Energy Target and the draft of a National Strategy on Energy Efficiency announced.
The size and use of the CPRS auction revenue will be affected by the changes announced on Monday and will no doubt change again, but the core message remains unchanged - the strategic use of the CPRS auction revenue is as important as the carbon price signal that the CPRS sends.

Energetics has come to this conclusion based on our experience that energy demand and consumption is relatively inelastic to soft price signals. By way of example, for most Australian businesses, a quite large energy price rise of 30% will see energy as a percentage of total business costs move from 6%, which it is currently, to just 7% or 8%. That’s not enough of a signal to make a material impact to energy management practises.

So while a carbon price is an extremely important part of the policy mix, particularly for investment - a low carbon price on its own will not drive all the energy efficiency opportunities that are available but are not yet being implemented. However the strategic use of the CPRS permit auction revenue could help to drive implementation of more energy efficiency and carbon management initiatives, and could therefore be as important as the carbon price in driving emissions reductions.

Auction revenue will only make an impact though if there is a sufficient pool of funds available, and if these funds are used wisely, focused on the actions that can have the biggest impact on energy consumption. This is not a CPRS specific issue – wherever ETS schemes are being established, ensuring that revenue funds are wisely spent needs as much policy attention to detail as the market design components do.

Governments in Europe and the US are currently thinking about the strategic use of their emissions trading system auction revenue.

Europe which has been a slow mover on the auctioning of permits will be doing so from 1 January 2013 - auctioning 100% of power station permits and 15 % of other sectoral allowances. In early April, the Council of the European Union adopted the climate-energy legislative package and agreed that while each EU state will determine the use of its revenues
“at least half of the proceeds should be used to fight climate change in the EU and abroad and also to alleviate the social consequences of moving towards a low-carbon economy”.

In the US, the February 2009 budget has factored in the revenue impact of an emissions trading system starting in 2012. They expect that it will raise $645 billion between 2012 – 2020 from the full auctioning of permits. While the whole system is in the very early days of design, the budget figures suggest that $150 billion of the $650 will be used to fund investments in a clean energy future –that’s around 20% of total auction revenue targeted to transition programs.

The existing US emissions trading scheme, the Regional Greenhouse Gas Initiative (RGGI) has seen the 10 participating governments spend most of the auction revenue on energy efficiency programs. And most have doubled their spending on EE programs through the use of these funds

So how did the Australian Government’s plans (up until Monday) compare with these international examples…in terms of scale of funds and focus of programs? In terms of the size of the funds - a much smaller percentage of our auction revenue is proposed to be spent on targeted climate change action programs. The White Paper’s proposals for the use of the auction revenue have a stronger focus on smoothing the transition to the CPRS than on emissions mitigation or energy efficiency goals.

The vast majority of the auction revenue funds are to be spent on - assistance for emissions-intensive trade exposed industries, the fuel tax adjustment, assistance to low and middle income households and assistance to strongly affected industries. What is left over is earmarked for the Climate Change Action Fund (C-CAF) – and it is the only funding component with a specific goal of assisting in the reduction of emissions.

The total amount committed to the C-CAF in the White Paper was proposed to be $2.45 billion over 5 years. Under the original likely auction price of around $23 a tonne – this spending would have been less than 5% of the total auction revenue (estimated to be around $60 billion for the first 5 years of the scheme).

In our presentation to the Senate Economics committee on the CPRS we argued that less than 5% earmarked for the C-CAF is too low. We argued that 20% of the CPRS auction revenue should be spent on targeted business sector programs and incentives to drive energy efficiency. 20% is more in line with the ambitions of the other international emissions trading schemes. We also argued for a bigger business sector focus because this is where 75% of Australian energy is used, not in households. Spending the money to improve the energy efficiency of business will mean the revenue is being invested in savings where the vast bulk of national energy is actually consumed.

As far as the focus of the C-CAF – the planned program is divided into 5 components at this stage with the final form still to be finalised. The focus of the programs is on:

  • information for business
  • energy efficiency loans for small business and community organisations
  • funds for innovation
  • structural adjustment funds for workers and communities
  • coal sector adjustment programs

In our evidence to the Senate Economics Committee Energetics argued that the auction revenue needs to be spent in the most strategically useful way. While the proposed programs are worthy of funds, unless there is an expansion of the C-CAF these programs alone may not drive much in the way of emission reductions. We have made a few suggestions to the use of the fund – which I won’t go into in detail here but I will share a couple of observation we have made:

There is currently a strong focus on small businesses, which may be based on worthy goals but may be a difficult way to spend limited funds in a way that makes an impact. We would suggest that a larger share of the C-CAF is used to support transition for businesses that do not have to buy permits, but are currently large electricity users and therefore exposed to increasing carbon prices.

Targets could be the businesses captured under the National Greenhouse and Energy Reporting Scheme (NGERS) which would see the funds targeted at the nation’s larger energy users, and therefore ensure the funds have an impact on our national emissions profile.

We also really need a re-think the way program funds are deployed, as many government programs using traditional models are simply not having any impact on the implementation of energy efficiency. Many government programs simply fail to get money out the door. In our submissions we proposed, among other ideas a 100% tax concession program to encourage the rapid deployment of a range of specially identified and approved energy efficiency products. C-CAF funding can be used to help implement much needed reform in the National Electricity Market where much more could be done with demand management obligations.

So what about Monday’s announcements and the implications for the auction revenue? The Minister outlined the changes earlier today so I won’t repeat the detail. The key challenge with the change is that there will not be a CPRS nor any auction revenue in 2010 – 2011, and there will be limited auction revenue between 2011 – 2012 because there will be more free permits made available and the price of carbon has been capped at $10 a tonne. So the big change is that the auction revenue funds available to government will be limited.

The Government’s recent announcements suggest that the C-CAF will be preserved at its original level and even increased by $300 million to a total of $2.75 billion – but it is not clear if this spending commitment is still over the same 5 year period or a longer period.
The other recent development that I wanted to touch on is the draft National Strategy on Energy Efficiency – hot off the press from last Thursday’s COAG meeting. This process has always been flagged as the government’s 3rd plank of action, with the CPRS and the Renewable Energy Target as the other 2, but it has been the poor cousin up until now in terms of the policy maker’s attention.

But given the proposed delay and slow start to the CPRS there now needs to be a greater focus on getting this strategy finished and implemented so that new energy efficiency measures can help to slow Australia’s spiralling energy consumption and emissions.

The draft strategy covers some important ground but more work will need to be done to finalise the strategy by July. And probably this strategy needs to be a live and continuously updating process rather than one document – in the United States great advances have been made in energy efficiency policy through the establishment of a broad and inclusive policy process that has continued over a number of years, always advancing innovation in policies.

But it is clear that new action on energy efficiency is essential - it was essential before Monday’s CPRS announcements and now its even more important given the delayed CPRS start and the $10 price cap. Given the delay we need to accept that the CPRS price signal is not likely to trigger greater interest in improving energy efficiency for several years.

And what better time than now to challenge and help Australian businesses to reduce their energy costs – we estimate that a 20% reduction in energy consumption by 2020 would save Australian business more than $8 billion a year.

So what are the elements of the Draft Strategy on Energy Efficiency, and what’s missing? The current NSEE is divided into 4 action areas:

  • assisting households and business to transition – a focus on information and EE assessment programs that are nationally streamlined, skills and training advice and education;
  • reducing impediments to the uptake of EE – via changes in electricity market rules, new minimum energy performance standards;
  • making buildings more efficient – through tightening Building Code of Australia and bringing in mandatory disclosure of the efficiency of commercial buildings and tenancies from 2010;
  • Government action on the energy efficiency of its own operations

The refinement of this strategy will proceed over the coming months and its essential that some of the gaps are filled.

A major part where the strategy needs further work is in industrial energy efficiency – that is all the energy use that is not in houses and not in building. This happens to be the largest part of energy use in Australia, but the least well understood and least focused upon by policy makers currently.

Most of our top 200 energy using companies fall into this category of industrial energy use – and this fairly small group consumes about 57% of Australia’s total energy use. So any efforts that these companies take to improve their energy efficiency will have a material impact on national energy consumption and emissions.

The expectation is of course that this is the target group for the CPRS - but what strategies and incentives will drive energy efficiency improvement in these large energy users prior to the start of the CPRS? And will all the opportunities for energy efficiency be implemented in the early years of the CPRS if many companies are receiving free permits and the carbon price is low?
Clearly our new National Strategy itself be an efficient policy – it needs to focus effort where the greatest gains can be made, and therefore in the next few months greater thought needs to be put into industrial energy efficiency policy ideas.

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