The government’s $2bn climate fund: a rebadged rehash of old mistakes

Ian A. MacKenzie, The University of Queensland

Australia’s new flagship Climate Solutions Fund, announced this week by Prime Minister Scott Morrison, will spend more than A$2 billion on cutting greenhouse emissions by 2030.

While action on climate change is welcomed, this announcement seems to be a faithful reprise of the previous Emissions Reduction Fund, which was beset with problems.

The government has put a new name on an existing scheme, while steadfastly refusing to learn from mistakes made along the way. In cruder terms, it’s slapped a gleaming coat of lipstick onto a pig of a policy.

Add to that the A$1.38 billion pledged today for building the Snowy 2.0 scheme – another plan hatched by one of the government’s former incarnations – and there’s not a lot of imagination on display as Morrison’s government scrambles for some much-needed climate credibility ahead of this year’s election.

Read more:
Australia’s Emissions Reduction Fund is almost empty. It shouldn’t be refilled

Currently Australia’s main tool to try and reduce emissions is the Emissions Reduction Fund (ERF), a “reverse auction” that lets businesses voluntarily reduce pollution and be rewarded with taxpayer cash. Successful bidders for funding have to sign a contract to reduce their pollution over several years.

So far, 193 million tonnes of pollution reduction has been secured at an average cost of A$12 per tonne. In total, around A$2.5bn will have been used to help businesses reduce pollution under the ERF’s original incarnation.

The Climate Solutions Fund is basically a rebranding exercise. It will build on the existing ERF but now expands the scope of participants, including allowing farmers to drought-proof their farms and subsidising businesses to pursue energy-efficiency projects.

Experience tells us it’s a bad idea

The aim for any climate policy should be to reduce our emissions to the agreed 2030 levels at the lowest possible cost. Unfortunately this is unlikely to happen with the Climate Solutions Fund.

This fund will inherit many of the ERF’s existing problems.

One of the ERF’s main issues is with its so-called “safeguard mechanism”. This was set up to ensure that large polluters could not cancel out the progress achieved by the fund’s participants. But this has failed: many large polluters’ “benchmarks” (the amount of emissions they are allowed to release before being penalised) have increased over time and, consequently, much of the work done by the fund has indeed been undone. Because of this, the fund has not given good value for money, despite awarding funding to the lowest bidders.

There are deeper problems. The way the funding is awarded – with public funds going to project proponents who promise to do a good job – the participants inevitably know more about the details of the projects than the government does. This “informational asymmetry” may mean that businesses overquote, asking for more money than they would be prepared to accept.

The successful projects that have signed up may not even be genuinely “additional”, in that they may well have gone ahead regardless of whether or not they won government backing. In other words, we could be paying for something that would have happened anyway!

But we know what works

Economists have known for decades the best way to encourage pollution reduction. It involves putting a price on carbon.

Implementing a carbon tax or (more likely) a carbon trading market will give business the flexibility to choose their own pollution control measures, while also ensuring that overall emissions are reined in.

Read more:
One year on from the carbon price experiment, the rebound in emissions is clear

A carbon price will spur industry to invest in cleaner technologies (and increase the potential for jobs growth in these areas) and ensure we meet our climate goals.

Despite prophesies of economic doom, a carbon price can be used to decarbonise the economy, simulate growth in new industries, and redistribute the revenue to ensure equity. It’s using economic levers to help the environment.

Putting lipstick on a pig does not change the fact that it is still a pig.The Conversation

Ian A. MacKenzie, Senior Lecturer in Economics, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australia’s Emissions Reduction Fund is almost empty. It shouldn’t be refilled

Ian A. MacKenzie, The University of Queensland

Australia’s flagship climate policy, the Emissions Reduction Fund (ERF), has come in for fresh questions over whether the emissions allowances offered to big businesses will wipe out much of the progress made elsewhere.

This voluntary scheme – the central plank of Australia’s efforts to reduce greenhouse gas emissions by 26-28% below 2005 levels by 2030 – allows interested parties to reduce pollution in exchange for a proportion of the A$2.55 billion fund.

Read more:
The government is miscounting greenhouse emissions reductions

So far, through successive rounds of “reverse auctions”, the scheme has secured 191.7 million tonnes of emission reductions, at a price tag of A$2.28 billion.

As the budget for this scheme is nearly exhausted, it is important to ask whether it has been a success, or whether Australia’s carbon policy needs a radical rethink. Overall, the answer seems to be the latter.

Safeguards not so safe

Much of the problem stems from the ERF’s safeguard mechanism, which puts limits on the greenhouse emissions from around 140 large polluting businesses. Under the mechanism, these firms are not allowed to pollute more than an agreed “baseline”, calculated on the basis of their existing operations.

The mechanism is described as a safeguard because it aims to stop big businesses wiping out the emissions reductions delivered by projects funded by the ERF. But it doesn’t appear to be working.

The government has already increased the emission baselines for many of these businesses, for arguably specious reasons. Some firms have been given extra leeway to pollute simply because their business has grown, or even just because they blew their original baseline.

Worryingly, on February 21, 2018 the federal government released a consultation document which favours “updating baselines to bring them in line with current circumstances” and suggests that “to help prevent baselines becoming out-of-date in the future, they could be updated for production more often, for example, each year”.

It doesn’t take a genius to realise that if baselines are continually increased over time, the fixed benefits of the ERF will inevitably be wiped out.

This underlines the importance of having a climate policy that operates throughout the economy, rather than only in certain parts of it. If heavily polluting businesses can so readily be allowed to undo the work of others, this is a recipe for disaster.

Contract problems

Even within the ERF process itself, many emissions reduction contracts have already been revoked. This is worrying but also avoidable if the contracts are written correctly.

It is important to note that these contracts run for around seven years, and thus it is possible that the planned carbon reductions never eventuate. Currently only about 16% of the announced 191.7 million tonnes of emissions reduction have actually been delivered.

For the ERF to work effectively, the government needs to know the “counterfactual” emissions – that is, firms’ emissions if they decided not to participate in the ERF. Yet this is completely unknown.

This means that projects that successfully bid for ERF funding (typically the cheapest ones) may not be “additional”. In other words, they may have established these emissions reduction projects anyway, with or without funding from the taxpayer.

Another problem with the ERF is that it is skewed towards projects from lower-polluting sectors of the economy, whereas heavily polluting industries are underrepresented. The largest proportion of signed contracts have involved planting trees or reducing emissions from savannah burning.

Meanwhile, the firms covered by the safeguard mechanism are largely absent from the ERF itself, despite these firms accounting for around 50% of Australia’s greenhouse emissions.

The bare fact is that Australia’s flagship climate policy doesn’t target the prominent polluters.

A different way

Australia’s climate policy has had a colourful past. Yet the economics of pollution mitigation remain the same.

If we want to reduce pollution in a cost-effective way that actually works, then we must (re-)establish a carbon price.

This would provide the much-needed certainty about the cost of genuine pollution reduction. This in turn would allow all major polluters to make strategic, long-term investments that will progressively reduce emissions.

Instead of spending A$2.55 billion to pay for modest emissions reductions that might be cancelled out elsewhere, creating a carbon price will allow for the generation of tax revenue that can be used for a host of purposes.

For example, distortionary tax rates (such as income and corporation tax) could be lowered, or the revenue could be used to fund better schools and hospitals.

A clear example of such a success can be taken from the northeastern states of the US. The Regional Greenhouse Gas Initiative is a cap-and-trade market that sells tradeable pollution permits to electricity companies. Estimates have shown that US$2.3 billion of lifetime energy bill savings will occur due to investments made in 2015.

To tax or cap?

If the ERF is to be replaced, what type of carbon price do we want? Do we want a carbon tax or a cap-and-trade market?

While advantages exist for both, most evidence shows that carbon taxes are more efficient at driving down emissions. Moreover, taxation avoids the potential problems of market power, which may exist with a small number of large polluters.

Read more:
Australia’s biggest emitters opt to ‘wait and see’ over Emissions Reduction Fund

A carbon price would also remove much of the political rent-seeking that is encouraged by Australia’s current policy settings. A simple, economy-wide carbon tax would be more transparent than the safeguard mechanism, under which individual firms can plead for leniency.

The ConversationWith the ERF fund almost empty, the federal government should ask itself a tough question. Should it spend another A$2.55 billion of taxpayers’ money while letting major polluters increase their emissions? Or should it embrace a new source of tax revenue that incentivises cleaner technologies in a transparent, cost-effective way?

Ian A. MacKenzie, Senior Lecturer in Economics, The University of Queensland

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

Australia’s biggest emitters opt to ‘wait and see’ over Emissions Reduction Fund

Jayanthi Kumarasiri, Swinburne University of Technology and Nava Subramaniam, RMIT University

Many of Australia’s most carbon-intensive companies are either not participating in the federal government’s flagship Emissions Reduction Fund (ERF), or are adopting a wait-and-see approach, according to our survey of senior executives. The Conversation

The ERF, introduced in 2014 after the repeal of the carbon tax, is the central component in the government’s policy to reduce greenhouse emissions. Companies can bid for money from an overall fund of A$2.55 billion, to invest in low-carbon technologies and initiatives. Participation is voluntary.

Five ERF auctions have been held, awarding A$2.23 billion so far. However, participation by high-emitting companies has been persistently low.

Some of the funded projects are likely to deliver useful emissions cuts in areas such as forestry, landfill and waste management. But the scheme is yet to reduce emissions reductions in key sectors of the economy such as industry and electricity generation. Our survey underlines concerns that the scheme is not attracting the biggest emitters.

Asking the questions

Our research, titled the Australian Emission Reduction Fund Survey and produced in collaboration with the Carbon Market Institute, was conducted in two rounds.

First, in 2015, we surveyed executives from high-emitting companies in sectors including mining, manufacturing, energy and transport. Then, in 2016, we surveyed executives from firms that had successfully registered carbon-reduction projects under the ERF. Survey respondents represented a broad range of positions, including managing directors, general managers, senior carbon advisers, heads of environmental markets and strategy, and chief executives.

The first-round survey, which was conducted before the first ERF auction and featured 68 participants, showed that 58% of companies planned to “wait and see” before engaging with the ERF. Another 34% said they did not intend to participate in the scheme at all.

One of the main reasons given for non-participation was the fact that the scheme is run as a reverse auction with no guarantee that bids will be successful. This makes it difficult to invest with certainty in the staffing and administration costs of running carbon-reduction projects. One participant told us:

…administrative costs do not make the ERF cost-effective for the scale of abatement opportunities available.

Respondents also told us that there was a lack of guidance on how to understand and participate in the ERF, and uncertainty over the rules of the safeguard mechanism that is meant to help drive demand for carbon credits.

Another issue that most participants highlighted is the inability to make a business case internally and to secure a relatively high price for emissions reductions. One manager emphasised:

Clearly a high price would assist in driving participation, but at the moment the package is not commercially attractive.

Furthermore, some respondents expressed concern over the perceived lack of a wide range of approved methods for cutting carbon. And almost all participants were concerned by policy uncertainty, with one saying:

…there is currently a lack of business certainty regarding carbon policy in the mid to long term.

ERF participants

The results of our second-round survey in 2016, featuring 33 participants from companies that have registered ERF projects, suggested that the financial risk for investors in ERF projects has reduced, having been awarded secure government contracts for delivering carbon reductions. Nevertheless, respondents highlighted a range of concerns about the scheme’s effectiveness.

All respondents highlighted the uncertainty of further funding after the initial A$2.55 billion allocation is exhausted. One participant suggested that the government’s forthcoming climate policy review, to be released this year, should specify exactly how much money the ERF will make available in the future.

Moreover, many respondents expressed doubts that contracts awarded in the ERF’s first four auctions will be completed. This has arisen partly because of a perceived lack of adequate measures to resolve potential disputes between project proponents and land holders. As one respondent told us:

The extent to which landholders understand the legal risks associated with projects is unclear.

Participants also presume that the policy’s safeguard mechanism lacks tight enough “baselines” – the emissions limits beyond which high emitters are required to buy carbon credits. Tough baselines would generate the necessary certainty of a future market, as one respondent explained:

The extent of uncertainty will also be affected by whether the safeguard mechanism is strengthened by reducing baselines, and therefore increasing the need to purchase offsets.

At the Paris climate summit in 2015, Australia pledged to cut carbon emissions by 26-28% below 2005 levels by 2030. But if the government’s flagship emissions-reductions policy is failing to involve the highest-emitting companies, that target begins to look very onerous indeed.

With the government’s major climate change policy review now underway, it is time for the government, other political parties and high-emitting companies to work together to design a climate policy that is economically efficient and environmentally effective. There is no time to “wait and see” when it comes to combating carbon emissions.

Jayanthi Kumarasiri, Lecturer in Accounting, Swinburne University of Technology and Nava Subramaniam, Professor of Accounting, RMIT University

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