Energetics' paper - Gauging business’ understanding and response to Direct Action

Energetics' paper - Gauging business’ understanding and response to Direct Action
23 Aug 2013Archived News Publications

Energetics recently completed a series of briefings nationwide to outline and discuss the Direct Action plan and its implications for business should the Coalition win office. Representatives attended from a broad cross section of the economy including manufacturing, industrials, commercial, mining and government organisations. The feedback received provides insight into businesses’ readiness to manage the programs emerging from the Direct Action plan, and the questions that remain to be answered.

Key findings from the business briefings and webinar

Penalties should match the cost of abatement under Direct Action

Energetics conducted a poll in which 73% of participants indicated support for penalties that match the cost of reducing emissions being imposed on under-performing businesses.  Currently, the Emissions Reduction Fund (ERF) outlined in the Direct Action plan only intends to reward emissions reduction activities. 

The result suggests that business is prepared to accept appropriate penalties imposed for underperforming businesses, provided there is a level playing field.

Support for renewables to meet our international obligations

In this poll, 51% supported renewables, 20% were in favour of energy efficiency measures and 19% supported a move from coal to gas powered electricity generation.  Bearing in mind that gas prices are expected to escalate on the east coast from 2015, thereby reducing its use in the energy mix.9% were in favour of purchasing international carbon permits and 3% supported carbon sequestration in soil.  

Questions were also raised about the future of the Renewable Energy Target (RET).  Business wanted to know whether the RET will continue in its current form, whether it is Coalition policy to retain tradeable Renewable Energy Certificates, and whether support for solar from Small-scale Technology Certificates (STCs) would be abolished under Direct Action and if so, what mechanism would support small-scale generation.

These questions from business are particularly interesting in light of Energetics’ recent analysis which showed changes in the way Australians use energy.  One of the most significant trends we’re seeing is the rapid growth in renewables, particularly solar PV, which is reshaping Australia’s energy mix.  This, and a number of other factors, has reduced the national emissions forecast to 2020.  The abatement challenge that Direct Action must work to achieve has been calculated to be 275 million tonnes CO2-e reduction by 2020, down from the 2012 government forecast of 786 million tonnes.

Questions about the Direct Action plan:

  • Can Direct Action achieve emissions targets within the allocated funding arrangements, especially given ongoing Budgetary pressures?
  • Concerns remain about the operation of the Emissions Reduction Fund.  Questions span five major areas:
    • Businesses report emissions under the current National Greenhouse and Energy Reporting scheme as a single entity, so how will a Direct Action baseline, drawn from the National Greenhouse and Energy Reporting (NGER) Act, account for different business activities?
    • The relationship between production and emissions levels is not always obvious. How would a baseline account for variations?
    • Business is not clear about how a reverse auction would work under the Emissions Reduction Fund. Concern was also expressed that some energy efficiency activities might be regarded as ‘business as usual’ and therefore not eligible.
    • How does business growth and expansion effect the calculation of emissions reduction baselines?  How would a baseline be established for a new entrant? Will this be based on an industry average?
    • Will the Clean Energy Regulator be able to validate enough methodologies to allow the ERF to begin operation of 1 July 2014? What measures will be in place to assist business to reduce emissions and improve efficiency in the interim? 

This paper provides an overview of the questions raised by our audience and issues that will need to be addressed within the Direct Action framework should it be developed into a policy if the Coalition wins office in the upcoming federal election.

Figure 1. Business sectors represented in the Direct Action briefings (Brisbane, Perth, Melbourne, Sydney and webinar)

The Direct Action plan and its implications for business

Energetics in conjunction with the Energy Users Association of Australia (EUAA) hosted a series of briefings across the nation to explore the Coalition’s Direct Action policy. Briefings were held in Brisbane, Melbourne, Perth, Sydney and a webinar was also conducted. Representatives from 147 organisations across all sectors of Australia’s economy attended the briefings. A breakdown of the sectors represented is provided in Figure 1.

The briefings offered organisations an opportunity to learn about the Direct Action plan, raise questions and discuss its implications with business peers.

Topics covered included:

  • The Coalition’s broader policy position
  • The principles outlined in the Direct Action plan
  • Policy issues that enjoy bipartisan support.
  • The existing policy measures that the Coalition plans to repeal
  • The process for repealing the Clean Energy Future (CEF) legislation
  • The outstanding questions for business.

The Emissions Reduction Fund (ERF) as the centrepiece of the plan

The participants were most interested in the workings of the ERF as that has the greatest impact on business. Recall that the key features of the ERF are:

  • The Fund will be used to reduce emission reduction activities.
  • The Fund will use the National Greenhouse and Energy Reporting Act for the purpose of setting the baseline for the Fund and for any penalties.
  • Businesses that reduce their emissions will be able to offer this CO2 abatement for sale to the government, via a reverse auction.
  • The Clean Energy Regulator will be responsible for approving the methodologies defining genuine and verifiable emissions reductions.
  • Businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty.

 

The key questions raised by business

The questions, reflecting uncertainly or confusion in the business community fell into a few broad categories:

  • Will Direct Action achieve its goals?
  • Establishing robust baselines
  • Coverage and the relationship between Direct Action other federal and state schemes, particularly the Renewable Energy Target
  • The acceptance of penalties for under-performing as part of the Emissions Reduction Fund’s operation, in order to ensure a level playing field.

These areas are explored in more detail in the following sections.

How will Direct Action achieve its goals?

Several participants wanted a better understanding of the economic basis for the Direct Action plan, and whether the spending caps outlined in the Plan would be sufficient to achieve the national target of a 5% reduction in emissions on 2000 levels. 

There were also a number of questions around the certainty of the funding for Direct Action in the face of pressure on the federal budget.

A range of questions on the reverse auction came from the participants with many confused about its operation. Some participants wondered if businesses will be willing to invest in projects to reduce emissions.  The need to only claim reductions beyond business as usual (referred to as additionality) will make it hard to justify investments given the risk that the abatement achieved would not be purchased by the ERF.

Several participants in the seminars sought to understand whether emission reductions offered for sale to the ERF arise merely because an organisation’s emissions are below its baseline, or whether the reductions need to be linked to a specific project or activity. References to the need for additionality implies a linkage to specific projects in which case, a baseline for the organisation is not relevant to determining the reduction; only a baseline for the project is needed.

How will the Emissions Reduction Fund (ERF) work?  How will emissions reduction baselines be determined?

Businesses welcomed the use of the existing NGER scheme to provide the underlying information source as it removed the need to develop new systems which is a common complaint associated with the roll out of new legislation.

Businesses have invested in the establishment of emissions and energy reporting, integrated into businesses.  They also have audited information. There were however, concerns about the use of NGER data to establish the baselines which may be used for the imposition of penalties.

The proposed principle outlined in Direct Action is to adjust baselines to reflect changes in levels of production and use industry standards to define baselines for new entrants.  Across the briefings held, this principle was generally well received. However, some concerns remain:

  • Diversity of businesses.  Whole of businesses report under NGER, yet business activities are diverse. How will a Direct Action baseline account for business activities?
  • Relationship between production and emissions is not always linear, therefore how does the baseline account for variations?
  • How will the ERF account for growth and expansion in operations?
  • How would a baseline be established for a new entrant? Will this be based on an industry average?
  • Will the Clean Energy Regulator be able to validate enough methodologies to allow the ERF to begin operation of 1 July 2014?

Businesses are seeking to understand how the management of baselines in the Direct Action Plan will operate in practice, and how exactly baselines will capture changes in activity levels.

Several participants remarked that the existing systems of establishing the baselines for Emissions Intensive Trade Exposed (EITE) industries have been established and accepted, and this could be a good model for the system needed to implement Direct Action.

How does Direct Action work with complementary schemes such as RET, ESC, VEET, EEO?

The Direct Action principle that the ERF is source neutral led to a series of questions related to coverage. Businesses were keen to better understand the relationship between the Direct Action plan and the other federal and state schemes.

The Renewable Energy Target (RET)

The scheme that drew the most questions was the Renewable Energy Target (RET). Beyond questions about the future of the RET, participants wanted to understand how income from RECs will be treated. 

Further insight into the views of participants came from the results of a poll run during the webinar.   This sought participants’ views on the most effective source of emissions reduction for Australia. Results are shown in Figure 2. Just over 50% of participants saw renewable energy as the most effective route, which further reinforces the importance of clarifying the relationship between Direct Action and the RET. The limited support for sequestration in soil carbon may reflect the lack experience of the audience with carbon farming.

Figure 2

State-based schemes

The relationship between the ERF and the state based energy efficiency schemes emerged as an area where business is seeking further clarification. For instance, one participant wondered whether certain energy efficiency measures will be treated as business-as-usual and therefore ineligible for support through the ERF. The impact of the new policy settings under Direct Action on synthetic greenhouse gases (in particular HFC refrigerants) was raised by a couple of participants.  

The ERF will be expanded. Direct Action indicates that activities currently covered by existing schemes could be included in the Fund. State based energy efficiency schemes (so called “white certificate” schemes) such as NSW’s Energy Savings Scheme (ESS), Victoria’s Energy Efficiency Target (VEET), ACT’s Energy Efficiency Improvement Scheme (EEIS), South Australia’s Residential Energy Efficiency Scheme (REES). These white certificate schemes encourage the take up of energy efficiency measures. Will these schemes survive?

Furthermore, businesses have broader questions around the complementarity of energy saving schemes including the Energy Efficiency Opportunities (EEO) program. The recently completed EEO first cycle review highlighted the successes of the EEO program being:

  • effective in addressing information barriers and improving the identification and evaluation of energy efficiency opportunities by participating corporations. The review found that significant improvements had been made in organisational capability and the uptake of good energy management practices by EEO program corporations between 2005 and 2012 particularly in the areas of data analysis, opportunity identification and decision making
  • appropriate, as it targets an information failure not adequately addressed by a carbon price, and has delivered significant additional benefit to participating corporations. The analysis conservatively estimated that the EEO Program had been responsible for approximately 40 percent of the energy savings reported by corporations
  • efficient, as savings to participants have far exceeded program compliance and administration costs, and the program has enabled energy savings and emissions abatement at a very low cost to government .

Yet in Queensland we have seen the closure of the Smart Energy Savings Program and the now redundant Queensland Gas Scheme. This follows the early closure of Victoria’s EREP scheme announced in February of this year .

Business would like to see Direct Action build on existing schemes and add value. The streamlining of government programs is welcomed by business and aligns with the Wilkins review .  The challenge for Direct Action is to:

  • build on existing schemes, which it has committed to do through the use of NGER
  • provide minimal disruption to businesses as they transition from the Clean Energy legislative package
  • minimise duplication with state based schemes.

Penalties and business support for penalties that match cost of emissions reduction

The Direct Action plan speaks of penalties for corporations whose emissions exceed their baseline. Currently limited information is available on the type, form and extent of penalties. This raised concerns in the minds of our audience, in particular on the exact basis and level of penalties.

However, when polled during the webinar, businesses overwhelmingly (73%) indicated that penalties should be set at a level the matches the cost of action to reduce emissions. Only 15% of respondents wanted a penalty lower than the cost to achieve emissions reductions and 12% wanted no penalties.  

This indicates that businesses are prepared for a meaningful scheme that targets emissions reduction.

Figure 3


If the Coalition wins office, how soon could we see Direct Action come into effect?

Clearly determined by the outcome of the upcoming election on 7 September, should the Coalition win office an implementation pathway for Direct Action has been outlined:

  • Repealing the Clean Energy Future package of legislation will be the first order of business for a new Coalition government.
  • A White Paper consultative process will be held after the election.  It will:
    • provide an opportunity for industry to make submissions on issues such as the timing of the auction process and the setting of baselines
    • start within 30 days of the Coalition being elected, with consultation held between Days 60 and 100.
  • The White Paper will be released on Day 100 along with draft legislation.
  • The Coalition’s plan is to commence Direct Action and the operation of the Emissions Reduction Fund on 1 July 2014.

Energetics’ advice to business

There are a number of issues that need to be considered and strategies developed:

  • Scheme requirements and timing. Prior to repealing the carbon price, the Coalition will need to consider the entirety of the legislative package, and whether there are other pieces of legislation that need to be repealed. Also, they need to assess the impact of repealing the carbon price in isolation.  The Coalition intends to initiate a White Paper process within 30 days of the election, with consultation between Days 60 and 100, and drafting of legislation to start by Day 100. Businesses should monitor policy developments, evaluate as details emerge, quantify business impacts and develop a position.
  • Repealing the Clean Energy legislation (consisting of 17 pieces) will be complex and time consuming.  As part of your risk management strategy, prepare for the possibility of the carbon price remaining and budget for this scenario accordingly.
  • Uncertainty exists over the definition of baselines under Emissions Reduction Fund.  Baselines may be set at industry level, operations level or activity level.  Business should form a position on Direct Action and be ready to participate in the White Paper consultative process as described above.
  • There will be financial penalties for emissions that increase beyond a business-as-usual scenario.  However, the actual incentives and penalties for emissions reduction activities are unknown. The size of the penalties will be on a sliding scale commensurate with the size of the business and the extent to which they exceed their ‘business as usual’ levels.  More details should become available during the White Paper consultation period. If cost effective, a business should consider direct investment at site and facility level to reduce emissions from the ‘business as usual’ baseline.
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