How does the new emissions reduction target impact manufacturers?

Em_Targets

The Federal Government aims to cut Australia’s greenhouse gas emissions – mostly carbon dioxide from burning fossil fuels – by 26-28% below 2005 levels by 2030.  Given the most recent official projection that emissions will otherwise rise to nearly 18% above 2005 levels over the same period, this target is a big turnaround.

It’s a cut of around nearly 40% below the business-as-usual projection, an absolute reduction in 2030 reaching more than 250 million tonnes (mt) of carbon dioxide equivalent, or more than 2 billion tonnes cumulatively from 2021 to 2030.

 

Source: Ai Group, based on Department of the Environment, Australia’s emissions projections 2014-15, March 2015

Source: Ai Group, based on Department of the Environment, Australia’s emissions projections 2014-15, March 2015

All that sounds very big. But what does it mean for industry?

Alas, the answer is a combination of “we don’t know yet” and “definitely something”. The impact of the target depends entirely on the policies used to achieve it. The Government’s current policies are:

  • to purchase abatement with Budget funds through the Emissions Reduction Fund. This has no direct cost to industry, other than the opportunity cost of funds that could have been spent on other beneficial purposes, or not raised from business and other taxpayers in the first place. It may benefit businesses that are in a position to sell abatement.
  • to impose emissions baselines on large emitters who would be penalised if these are exceeded. This would impose costs on the liable businesses (about 150 nationwide) if their baselines are breached, but the current policy is not to penalise business-as-usual activity; we would not expect this ‘safeguard’ mechanism to impose costs in the next several years.
  • to encourage renewable energy through the RET. This has some direct costs to energy users, though emissions-intensive trade-exposed industries are now fully exempted from these; the RET also offsets these costs to energy users by suppressing wholesale electricity prices.
  • to maintain energy efficiency standards for many products. This involves some compliance cost for businesses directly involved in the manufacture or supply of these products.

In their current form, these policies don’t have much cost for most manufacturers. But these policies will not be enough to reach the target.

Reductions from the RET and efficiency standards are already baked into the projected growth in overall emissions. The safeguard mechanism is not currently envisaged as a driver of emissions reductions. And the Emissions Reduction Fund has only a limited pool of funding to achieve the existing 2020 target.

While the Government has now committed $200 million per year to the ERF after 2020, that may not buy much of the abatement sought – just 14 mt per year at the low prices achieved in the initial round of ERF purchasing, and 2 to 5 mt per year at the much higher marginal abatement costs that will apply as Australia digs deeper for emissions reduction opportunities. If Budget funds were unlimited, buying the full whack at these prices would cost somewhere between $100 billion and $250 billion from 2021 to 2030 in nominal terms, or $60 billion to $140 billion if we discount that spending to a Net Present Value in 2015.

That level of spending is clearly not going to happen. So what will come next to bridge the gap and meet the targets?

The gap may well shrink even without policy. The current projections are almost certainly too high, with weaker prospects for growth in coal and gas exports and their associated emissions once existing projects are up and running. New, lower projections are likely to be released in late 2015. But the remaining gap will still be big. Covering it is going to need significant new policies of some sort.

So far the Government has listed a few areas for further investigation, mostly for decision in 2017-18, after the next election:

  • Design of the ERF and Safeguard Mechanism; using the Safeguard to drive abatement would come at a cost to industry; however the Government will also re-examine whether to make use of lower-cost international abatement opportunities, which would reduce costs to industry.
  • A National Energy Productivity Plan being developed with the States; this is still embryonic, but regulatory standards or expanding efficiency trading schemes would have costs, as well as some offsetting benefits.
  • Improving the efficiency of vehicles; this would likely be through mandating fuel efficiency standards for passenger vehicles. Given the looming end of the local car assembly industry this would be unlikely to have a negative effect on manufacturers.
  • Phasing down HFC refrigerants. This will have transition costs for suppliers and users of refrigeration and air conditioning, though alternative refrigerants are increasingly available.
  • Developing a strategy to improve the utilisation of solar power; the content of this is unclear.
  • Developing a low-emissions technology roadmap; this may involve encouragement for battery energy storage, though it is also vague.

Estimating the direct and indirect costs of any of this won’t be possible until there is much more detail.

On the other side of politics, it is not yet clear whether the ALP Opposition will accept the same 26-28% target or commit to a deeper one. Whatever the target, their broad approach would be:

  • to reintroduce a carbon price, this time through a fully-fledged emissions trading scheme linked to international carbon markets; and
  • to boost renewable energy to 50%, though the mechanism for doing this is yet to be developed.

The ALP might well adopt similar regulatory ideas to the Government on cars and refrigerants. If their target is similar to the Government’s, the minimum cost of achieving the abatement is going to be similar: $100-250 billion worth of abatement in nominal terms to 2030 based on current projections. Power prices would go up again if a carbon price was incorporated, though they are also eventually going to have to rise by even more to attract new investment and replace existing capacity. Measures would be essential to maintain the competitiveness of trade-exposed industries faced with highly uneven international climate policies.

Either party could reduce costs with good design, like international linkage; inefficient policy design could also increase costs further.

So what is industry facing?  Total confusion until after the next election. The costs could be significant – though they also need to be put in context. Even $250 billion would be just around 1.5% of cumulative nominal GDP over the same period.

The overall economic costs of these targets – and the deeper ones that are likely to follow – can be manageable. The challenge for policymakers is to ensure that they are minimised and spread fairly – and with a close eye on the competitiveness of industry.

As a manufacturer, what hopes and fears does the future of Australian climate policy hold for you? Share your concerns and ideas below.

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Tennant Reed
Tennant is Principal National Adviser – Public Policy at Ai Group. He has worked heavily on climate and energy issues, advising Ai Group’s Leaders’ Group on Energy and Climate Policy and developing reports on natural gas supply, energy prices and energy efficiency. He also works on a range of issues related to manufacturing and innovation. Previously he was an adviser in the Department of Prime Minister and Cabinet, working on fiscal policy, stimulus and infrastructure.

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