While we focus on the NEG, emissions reduction needs economy-wide policies

bradkerin Market Intelligence

by Peter Castellas, Chief Executive Officer of the Carbon Market Institute.

 

 The two big stories in Australia this week are linked by the need to address climate change. 

As crippling drought ravages much of Australia, State and Federal politicians meet this week to haggle over the technical design and emissions targets of the National Energy Guarantee.

In this typically fractious political pantomime, it’s easy to lose sight of the bigger picture; which is that climate change is an issue of economic, social and environmental significance and warrants more than just a focus on the electricity sector.

The drought highlights how one sector, agriculture, is already being hit hard by the impacts of climate change. Climate models project a continuing decline in rainfall over southern Australia over the next century, exacerbating drought conditions in parts of Australia, which will negatively affect both crop and livestock systems in most regions. The economic impact is stark. The human impact is considerable.

Regarding the NEG, a key policy decision needs to be made as to what proportion of the abatement task is to be undertaken by the electricity sector out to 2030 and beyond. The emissions reduction component of the NEG should be ambitious, as there are economically viable, low-emissions technologies such as wind and solar generation that are readily available. If the NEG doesn’t do the heavy lifting, the costs will be borne by other sectors where the low-carbon technology options are more limited and costs for emissions reductions are greater.

So, although it is critical that an enduring, effective, market-based framework is now agreed upon for the electricity sector, the Government, and the Opposition, need to put the same effort and political capital into confirming how emissions will be reduced across the economy. Simply, the NEG is not enough!

We still do not know how the Safeguard Mechanism – which covers a larger carbon footprint than the electricity sector – is going to evolve to drive emissions below business as usual. We were supposed to get clarity from the 2017 Climate Policy Review but as yet, there is little certainty about how baselines under the Safeguard will decline and provide the carbon-price signal necessary to manage risk and future carbon liability and inform strategy and investment decisions.

Australian Carbon Credit Units have been proposed to be used in the NEG and are a compliance unit under the Safeguard, however, there is little liquidity in the market and ACCUs are increasingly in short supply for Safeguard entities looking to trade in emissions to meet their baseline exceedance. As the ERF funds are dwindling, there is no clarity about what the future supply and price of ACCUs will be. So, as the demand side picks up – the Safeguard, NEG, voluntary market – significant Government attention to the supply side and a strong market signal is needed to stimulate new projects.

And as the Paris Rulebook discussions reach their pointy end and other economies in our region embark on extensive discussions to link their markets to reduce the costs of meeting commitments under the Paris Agreement, Australia must ramp up its international engagement and align trade, aid and diplomatic strategies to capitalise on the new global low-carbon market. 

The 26-28% target is a floor (not flaw!) and under Paris we are committed to ratcheting up ambition and more international pressure will come to do so. This increase in ambition should be hard coded in the NEG design – as should a longer-term net zero target. The Australian Government has committed to start developing in 2018 “a whole-of-economy emissions reduction strategy for 2050 to increase investor confidence”. Providing long-term indications, beyond the 2030 period, of how Australia’s main economic sectors will reach net zero emissions is central to allowing business to make long-term decisions and optimise their position in the transition to a low-carbon economy.

Addressing climate change to better future proof our economy requires government to connect the dots with impacts like severe drought and take immediate, concerted and bipartisan action to better integrate climate and energy across a broader suite of policies. There is a possibility the NEG does not get done. But if it doesn’t, there is plenty more that must be.