Direct Action not as motivating as carbon tax say some of Australia’s biggest emitters

Jayanthi Kumarasiri, Swinburne University of Technology; Christine Jubb, Swinburne University of Technology, and Keith Houghton, Swinburne University of Technology

Australia’s largest listed, carbon intensive companies say management lost focus on carbon matters, abandoned energy projects and didn’t have the commercial imperative to produce long-term strategic action on reducing emissions after the carbon tax was repealed, new research finds.

Our research looked at the comparative views of emitters before and after the repeal of the carbon tax legislation, in interviews with 18 senior managers from nine carbon-intensive listed companies.

Two years have passed since Australia’s carbon tax was repealed. It was introduced by the Labor government and came into effect in 2012.

The carbon pricing scheme asked big emitters to pay for each tonne of emissions above a threshold of 25,000 tonnes, in carbon units, and these were at a fixed charge of: $23 a tonne in 2012, $24.15 a tonne in 2013 and $25.40 a tonne in 2014.

The Swinburne research found the financial pressure exerted by the carbon tax forced companies to take action to manage emissions. As one senior executive observed at the time:

“…the threat is our operating costs will increase, and we won’t be able to pass that cost on through to our customers, and, therefore, our earnings suffer as a result”.

In July 2014, the coalition government repealed the carbon tax by replacing it with the “Direct Action” plan which works primarily by providing funding to companies to incentivise emission reduction activities. The government has spentA$1.7 billion on 143 million tonnes of emissions, at an average cost of A$12 a tonne.

Many of the companies interviewed for our research said Direct Action was not as effective as a carbon tax in driving companies to act urgently and manage emissions. The carbon tax gave companies incentives to act because it increased utilities prices, adding financial burden for some companies, in addition to these companies being liable under the tax.

One manager said:

“The scheme [carbon tax] now obviously having a cost associated with those emissions, it was a case of trying to understand where the costs were and essentially how we capture that information and how we track it.”

The existing National Greenhouse Energy Reporting Act 2007 (which requires high emitters to report emissions) does not provide the same incentives because it’s only a compliance measure with no direct financial burden.

Our research found the carbon tax created not only financial pressure but also a reputation threat for high emitting companies.

When the carbon tax was repealed, the focus on carbon emissions in these companies shifted. In some cases this showed up in the form of changes to staff hiring, away from environmental or technical specialists and towards legal staff. One manager explained it as:

“Even though we may not have the technical background in some respects, I think there’s a lot of interest in the legal profession into climate issues, you know, the social issues.”

This shift in focus was partly due to a lack of top management attention to the issue and partly because the financial justification for having dedicated personnel to tackle emissions decreased.

Some companies postponed or abandoned energy management projects after the repeal of the carbon tax. For example, one manager observed that his company had postponed A$1.5 billion worth of long term renewable investment projects due to the carbon tax repeal and the political uncertainty around the Renewable Energy Target.

Another factor is the lower use of techniques such as provision of incentives and setting targets for emissions management compared with the period of the carbon tax. One manager stated his company was no longer investing in target setting as there was no financial return for doing so.

Almost all interviewees in our research agreed that the carbon tax had been an effective mechanism when it was in place. Certain companies have a clear expectation a carbon price will re-emerge. They are proactively monitoring this issue. One manager described it as:

“We shadow in a carbon price across our portfolio of assets, determine what the potential impact is for [company name] and how we would manage that. We’ve continued to invest in carbon reduction…The business now looks at it as a cost-of-doing business opportunity.”

Overall, the research provided mixed evidence about achieving Australia’s commitment, made at the Paris climate change summit, to reduce emissions to 26-28% on 2005 levels by 2030. Some companies are acting as though the carbon tax never left us, while for others carbon emission management is no longer a strategic issue.

The financial pressure exerted from the carbon tax was a strong motivation for all sample companies to take urgent action on emissions management. So the challenge for the current government is whether Australia’s current policy incentives for corporate constraint of carbon are strong enough to deliver.

Jayanthi Kumarasiri, Lecturer in Accounting, Swinburne University of Technology; Christine Jubb, Professor of Accounting, Associate Director Centre for Transformative Innovation, Swinburne University of Technology, and Keith Houghton, Emeritus Professor Australian National University, and holds a part-time position at, Swinburne University of Technology

This article was originally published on The Conversation. Read the original article.

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Direct Action not giving us bang for our buck on climate change

Paul Burke, Australian National University

Direct Action is the centrepiece of Australia’s current greenhouse gas reduction efforts. To date, A$1.7 billion in subsidies has been committed from the government’s Emissions Reduction Fund to projects offering to reduce emissions.

The scheme replaced Australia’s two-year-old carbon price in 2014 and is a key part of the government’s plan to reduce emissions by 5% below 2000 levels by 2020, and 26–28% below 2005 levels by 2030.

Environment Minister Greg Hunt has called Direct Action a “stunning success” and “one of the most effective systems in the world for significantly reducing emissions”.

In a new article in Economic Papers, I look into the economics of Direct Action and how it is working. I conclude that the scheme is exposed to funding projects that would have happened without government funding.

This issue has long been known as a threat to schemes of this type, and means that the scheme is likely to be less useful in reducing emissions than the government is claiming.

Commonwealth Procurement Rules require value for money in government purchases. It is not clear we are getting that with Direct Action.

Information problems

The key challenge for schemes like Direct Action is information. What exactly is the scheme buying, and would that have happened without it?

Direct Action works by inviting voluntary project proposals and then allocating funds to the lowest bidders in reverse auctions.

Unfortunately, projects that would have gone ahead even without a subsidy – call them “anyway projects” – have a cost advantage that makes them well placed to win the auctions. It is often difficult for the government to identify such projects. When projects of this type receive funding, taxpayers’ money is being used ineffectively.

Economists call this adverse selection, or the “lemons problem”.

All about that baseline

The government has developed a set of methods for defining projects and measuring the emission reductions provided by each project against estimated baselines. It is an economy-wide scheme, and there are methods covering everything from energy efficiency to aviation.

As is, the methods leave opportunities for anyway projects to qualify. The Emission Reduction Fund White Paper states that a “flexible approach” is being pursued so as to encourage participation.

One rule is that projects be new. But across the Australian economy, new projects are launched every year. Some happen to reduce emissions. These projects are being attracted into the Direct Action auctions.

Carry-overs from the former Carbon Farming Initiative have also been allowed to side-step the newness requirement.

The experience so far

Three Direct Action auctions have been held to date, with the most recent in late April 2016.

Some of the funded projects are likely to be providing genuine reductions in emissions. Unfortunately, however, some project categories are rather questionable.

Landfill operators have been awarded Direct Action subsidies in each of the auctions. Their projects are often already generating revenues from electricity sales and renewable energy certificates.

Other projects to win subsidies include upgrades to lighting in supermarkets and to the fuel efficiency of vehicles. These are activities that are supposed to happen anyway.

The biggest winner to date has been vegetation projects. Among these are projects to reduce tree clearing, including of invasive native species near Cobar and Bourke in New South Wales. The large payments for these projects are likely to have preserved some vegetation. But some farmers appear to have not actually been planning to clear. If so, funding is going to anyway projects.

This vegetation could be protected under the avoided deforestation category of Direct Action. But was it going to be cleared, and is a taxpayer-funded subsidy the best way to save it?
Paul Burke, Author provided

Projects potentially in line for the next auction include boiler upgrades and modifications to aircraft. If Direct Action were to continue for years to come, the bill could become very big.

Journalists such as Lenore Taylor and Tristan Edis are among those who have raised concerns about the quality of Direct Action projects. The government has yet to properly engage with this issue.

This problem could be avoided

There are far better policy approaches than Direct Action subsidies.

A key advantage of either an emissions tax or an emissions trading scheme is that the government does not need to evaluate individual projects from covered enterprises.

These schemes instead introduce a price per unit of emissions and leave the private sector to decide which projects to implement. Large emitters are already required to report their emissions, so implementation is comparatively straightforward. Any revenue raised could be used to reduce other taxes or Australia’s budget deficit.

Regulations could also be put to more use. Strengthened restrictions on vegetation clearing and on the release of coal mine gas are examples.

Eligibility to generate offset credits should be tightened to cover only credibly genuine emission reductions that are difficult to achieve using other policies. Some carbon farming activities can meet this criterion, and could generate revenue from private-sector buyers. Public expenditure on new offset projects could be ended.

Better off going back to what was working

There are many other downsides to Direct Action. These include its administrative complexity, the issue of emissions reappearing elsewhere in the economy, and the subsidy culture it inculcates.

The scheme is yet to induce emissions reductions in key sectors of the economy. Emissions from electricity generation are rising again.

Australia has a big challenge ahead in decarbonising our economy. There are many opportunities, but we need to get our policy settings right. It would be better to move on from Direct Action subsidies. An approach centred on pricing emissions makes more sense.

An open-access version of Paul’s paper can be downloaded here.

Paul Burke, Fellow, Crawford School, Australian National University

This article was originally published on The Conversation. Read the original article.

The carbon tax wasn't a 'slug' to the economy and Direct Action may be a waste of money

Michael Harris, University of Sydney

Federal Environment Minister Greg Hunt, writing in the Fairfax opinion pages, has said that the now abolished carbon tax was a far more expensive way to reduce Australia’s carbon emissions than the Direct Action policy that replaced it.

He writes:

The carbon tax was a A$15.4 billion slug on the Australian economy – that works out at a cost of just over $1,300 a tonne for the emissions reduced.

It appears the Minister has taken the A$15.4 billion in revenue collected by the carbon tax and divided it by the “less than 12 million tonnes” of emissions reduction, to get just over $1,300 a tonne for the emissions reduced.

But tax revenues collected on emissions have no business being included in a calculation of the costs of reducing emissions. Measuring the cost of a tax on overall economic activity is not the same as measuring how much revenue was collected — not least because the revenue raised could be used elsewhere in the economy to provide infrastructure or mitigate against climate change.

Costs of emitting versus reducing carbon dioxide

Let’s consider what we’re measuring and why.

The social cost of carbon measures the expected cost to society of emitting “one more unit” of carbon into the atmosphere. Flipped around, it tells us the benefit of not emitting that tonne of carbon.

Estimates of the social cost of carbon depend both on our knowledge of the future impacts of warming, and the assumptions built into models to quantify these impacts on society. Unsurprisingly, they are controversial and subject to debate.

Hunt’s assertions relate to the cost of reducing carbon emissions per tonne; in principle we can compare this to the social cost of carbon, which tells us the benefit of emissions reductions.

His claim is that the cost of reducing emissions has been vastly decreased by using a subsidy approach (as in Direct Action) rather than a tax.

However, the first thing to understand is that the amount of tax collected under the carbon pricing scheme reflects taxes paid on actual emissions, not reductions in emissions.

There is also a difference between costs to the economy, and transfers within it. The amount of revenue raised through any tax is not a cost; it is simply a transfer from one “pocket” to “another”. The money has not been destroyed, and it remains available to be spent on something. It has distributional consequences, obviously, as the “pocket” where that money sits has changed, but total spending power within the economy remains undiminished. (Moreover, Australians received compensation via the tax system after the carbon tax was introduced.)

By contrast, the cost of a tax is what the economy – not an individual person or business enterprise – has lost as a result of the existence of the tax. Lower labour supply, fewer goods and services produced – these are the things we would typically count when assessing the burden imposed on an economy from any tax instrument. Hunt hasn’t provided credible estimates of these kinds of impacts.

Is there any simple way to quantify the costs of emissions reductions? In terms of the cost to individual businesses, the carbon tax was initially priced at A$23 a tonne. That means that for every tonne of greenhouse gases a liable business did not emit, they would save A$23. We would expect businesses to reduce any emissions they could where the cost to them was less than A$23 per tonne.

In other words, the amount of emissions reduction comes at a cost to that business of A$23 a tonne or less – not $1,300 a tonne.

Is Direct Action superior anyway?

If we assess the unit cost of emissions reduction under the previous carbon price as being (in the order of) A$23 per tonne, compared to $13.95 per tonne under the Direct Action policy, does this make the current scheme a winner anyway?

Not necessarily. First, ongoing revenue from the carbon tax can be used to fund, for example, public infrastructure investments, or to allow cuts to other more economically harmful taxes.

The cost of payments under Direct Action, by contrast, have to be funded by taxes elsewhere, or borrowed funds.

Second, the Direct Action scheme only involves commitments to reduce emissions, which have yet to occur, and may not be successfully achieved.

Third, emissions reductions contracted under the scheme may be offset by emissions increases elsewhere. Experts are concerned that the safeguard mechanism designed to prevent this has been weakened so much as to render it ineffective. This means there’s no guarantee that emissions reductions purchased under the scheme will translate to national emissions reductions, even though that’s what they are meant to represent.

The implication of all this is that Direct Action’s cost-effectiveness is unknown, and as things stand, possibly unknowable.

Michael Harris is Senior Fellow in the School of Economics at University of Sydney.

This article was originally published on The Conversation.
Read the original article.

Australia: Clive Palmer Will Not Back Coalition Government’s Direct Action Plant to Combat Climate Change

One of Australia’s most ‘laughed at’ politicians is refusing to back what he sees as a waste of money – a project to combat climate change that will achieve nothing.

For more visit:
http://www.reuters.com/article/2014/04/21/us-australia-climatechange-idUSBREA3K08V20140421