With the release of the Australian Government’s carbon pricing scheme on Sunday, Clean Energy Future, this antipodean nation with one of the highest per capita carbon emissions, has finally set a framework for serious action on climate change. What has surprised most commentators is that the “Clean Energy Future” policy released on Sunday is more than merely a carbon pricing scheme. Instead it is a broad package of policy measures designed to help Australia make the transition to a low carbon economy over coming decades. An outcome of a multi-party committee process which included the Greens and regional Independent MPs, the Labor government has devised a package that could be an economically and environmentally effective framework for reducing Australia’s emissions. If the initial response from much of the investment community, certain elements of business (including some energy and heavy manufacturing), environment groups (such as my own) and clean energy businesses is anything to go by, then this is what the government has delivered.
However, the media debate continues to be dominated by the ‘no tax’ campaign of the opposition Liberal party and an angry mining industry claiming excessive cost imposition.
An Independent Climate Change Authority
Critical elements of the package have been based closely on international examples, in particular UK models. An independent Climate Change Authority (CCA) will be established by law to oversee the scheme. The Authority will recommend national caps and long term emissions targets. Importantly, the package also includes a revised long term target of 80% emissions reductions by 2050 against 2000 levels (strengthened from Australia’s previous 60% target). Against this long term target it is likely the CCA will need to establish carbon budgets or equivalent, as the UK has.
Pricing, targets and industry impacts
The scheme will commence on 1 July next year with a fixed price of $AU23 (EUR 17) per tonne, rising at 2.5% p.a. (plus CPI) for three years. It is expected to raise around $AU 10 billion (EUR 7.5 billion) annually. A cap and trade emissions trading scheme will commence in July 2015 and include a price floor ($15/tonne) and ceiling ($20/tonne above international price). Under this hybrid arrangement, the delicate question of a 2020 target has been removed from negotiations and will be addressed eventually by the CCA. At present, government policy is a 5% target for 2020, with flexibility to be scaled up to a maximum 25%, depending on global commitments.
The scheme is set to cover about 60% of Australia’s emissions, applying to around 500 companies. Along with some sensitive exclusions from the scheme (such as the politically sensitive household petrol consumption), the package includes substantial assistance for the most emissions intensive and trade exposed industries, including steel, coal mining, electricity generation and liquefied natural gas with $9.2 billion (EUR 7 billion) in free permits, $1.3 billion (EUR 1 billion) to coal miners and $5.5 billion (EUR 4 billion) to coal fired electricity generators, with a further commitment for auction for closure of 2000 megawatts of the dirtiest brown coal generators, among other measures. More than 50% of the scheme revenue will compensate households for rising costs, with an emphasis on low and middle income earners, largely through amendments to income tax thresholds, even though the estimated impact on average weekly household costs is under $10 (EUR 7.50).
Clean Energy Finance Corporation
But what makes this more than just a carbon price are the additional measures to accelerate clean energy investment, increase the take up of energy efficiency opportunities and protect Australia’s increasingly threatened biodiversity against climate impacts. The package includes $AU14 billion (EUR 10.6 billion) in support for clean energy and the establishment of a Clean Energy Finance Corporation (CEFC), seeded with $10 billion (EUR 7.5 billion) over five years. Influenced by the UK Green Investment Bank and US initiatives such as the Department of Energy Loan Guarantees, the CEFC will be set up as an independent authority and staffed with experts in finance, investment banking and renewable energy to leverage private sector investment in clean energy.
Using loan guarantees, concessional loans and equity investments, the CEFC will help emerging technologies cross the valley of death that has so often resulted in great Australian clean energy research being commercialised overseas. Half the funding is guaranteed for renewable energy, with the other earmarked for energy efficiency, retooling manufacturing for clean energy production and additional renewable energy. The full investment mandate and guidelines will be set up after a review in coming months, with the appointment of an independent chair and board. The establishment of the CEFC was a key recommendation of our 2010 report Funding the Transition to a Low Carbon Economy and has been supported by the Investor Group on Climate Change, the Clean Energy Council and other super fund associations.
This is a body that has the potential to finally offer investable low carbon assets for institutional investors wanting to see their money in Australian-based projects, following the trend of European and US pension funds taking a leading stake in low carbon investments. Despite Australia’s strong renewable energy potential, to date investors wanting exposure to clean energy have tended to take their money to Europe, Asia and South America. With an active geothermal profile in Australia, along with solar thermal, ocean and wind resources a plenty, there is no shortage of projects needing limited public fiscal support to be commercially bankable. The CEFC could become a significant enabling institution to drive the levels of emissions reductions needed to reach future decades targets. It could drive between $AU50 billion and $AU100 billion (EUR 38 – 76 billion) of investment in clean energy.
Australian Renewable Energy Agency (ARENA)
Complementing the CEFC’s focus on the early commercialisation of clean energy technologies, $AU3.2 billion (EUR 2.4 billion) of existing funding has been rolled into a new Australian Renewable Energy Agency (ARENA) to administer early stage R&D grant programs.
An effective climate change mitigation strategy
The carbon price, along with ARENA and CEFC, show the government has achieved what the International Energy Agency has described as the most effective climate mitigation strategy with “an optimal portfolio of policies achieving emissions reductions at a significantly lower cost than a single policy”. In the months between now and when legislation is put to Parliament (expected in September) we are likely to witness the continuation of a loud and dirty campaign against the climate package, sponsored by certain big polluting industries and the opposition Liberal Party. But if we can squint through the smog of distorted messages in the tabloids, the future looks clearer. The government has the numbers required to get this package through parliament by year’s end. The package of measures it has put forward can finally lead Australia from being one of the world’s worst polluters to being a player in the rapidly emerging global clean energy economy
This article was original published in Responsible Investor on 12 July 2011.
Simon O’Connor is the Australian Conservation Foundation’s economic adviser and is also a director of Economists at Large.
More info at: http://www.cleanenergyfuture.gov.au/
