Pearls and Irritations

Climate change policy has been a noticeable absentee from political debate in the current Australian federal election campaign. Recent news reports, however, suggest this silence masks secret bipartisanship on the need for an emissions trading scheme – or ETS – to help bring down Australian’s emissions of greenhouse gases. Labor’s commitment to introduce an ETS if elected in July is well-known: the party has in fact pledged to establish two such schemes – a specific ETS for the electricity sector and a wider economy ETS with emissions caps set in line with Australia’s international climate change commitments under the Kyoto Protocol and recent Paris Agreement. But the Coalition has steadfastly opposed any kind of ‘carbon price’. It repealed the Gillard government’s Clean Energy legislation for a carbon tax and ETS, and replaced it with the Direct Action policy which channels government funding to emissions-reducing projects. Environment Minister Hunt has also repeatedly rejected the idea that the Coalition government plans to introduce an ETS. So why are some in the media claiming that the Turnbull government is introducing an ETS by stealth?

Direct Action + Safeguards – an ETS by Stealth?

This claim turns on the so-called ‘safeguard mechanism’ that operates in conjunction with the Emissions Reduction Fund set up by the government to deliver on its Direct Action policy. The safeguard mechanism, which will come into effect a day before the election on 1 July 2016, will require facilities with more than 100,000 tonnes of greenhouse gas emissions annually (around 140 businesses) to keep their emissions within set ‘baseline’ levels. Initial baselines will reflect the highest level of the reported emissions for a facility over the historical period 2009–10 to 2013–14, as Figure 1 demonstrates (dbl click table to enlarge). The electricity sector will be subject to a sector-wide baseline but facilities can revert to individual baselines if the sector baseline is exceeded.

Figure 1: Setting of baselines under the safeguard mechanism: https://www.environment.gov.au/climate-change/emissions-reduction-fund/publications/factsheet-erf-safeguard-mechanism

These baselines are weak and likely to be easily met by covered businesses. The lax nature of the proposed baselines is not surprising as the safeguards mechanism was only inserted in the legislation for the Emissions Reduction Fund as part of a deal with Senator Nick Xenophon to secure its passage. However, with the Emissions Reduction Fund – including the safeguard mechanism – scheduled for review in 2017, the possibility remains that the baselines could be tightened to place real controls on emissions from covered businesses.

A safeguard mechanism with strong and progressively tighter emissions levels applying to businesses in the scheme could function in much the same way as an ETS. Covered businesses that reduced their emissions below their baselines could sell credits to businesses that exceeded them. Over time some of these heavily polluting industries might be forced out of business as the costs of complying with baselines became progressively higher. This kind of ‘baseline-and-credit ETS’ (see Figure 2, dbl click graph to enlarge) was previously used successfully in New South Wales to lower electricity sector emissions under the state’s Greenhouse Gas Abatement Scheme.

Figure 2: Operation of a baseline and credit ETS. Source: Climate Change Authority, http://www.climatechangeauthority.gov.au/reviews/carbon-farming-initiative-study/key-characteristics-baseline-and-credit-schemes. 

The ETS being proposed by Labor uses a different model known as ‘cap and trade’. In a cap-and-trade ETS, the overall level of carbon pollution is capped and the cap is progressively lowered over time to reduce levels of greenhouse gas emissions across the economy. Businesses covered by the cap are allocated or need to purchase permits to emit greenhouse gases, with the total number of permits available constrained by the cap. Businesses that can reduce emissions are able to sell any excess permits to those whose emissions exceed that allowed under their permits. Cap-and-trade is the predominant form of ETS used around the world (for example in California and the European Union). These schemes are generally preferred to baseline-and-credit ETS because they offer greater certainty as to the overall emissions reductions that will result from the scheme and are less administratively burdensome since it is not necessary to set baselines for individual businesses or sectors.

Is one kind of ETS better than another?

Essentially, a baseline-and-credit ETS does much the same job as a cap-and-trade ETS; they are both capable of driving down carbon pollution by putting a price on excess greenhouse gas emissions. Does that mean that the Coalition’s safeguard mechanism is likely to achieve much the same outcome as Labor’s proposals?

On current indications this is unlikely to be the case. In the first instance, the baselines established for the safeguard mechanism have been set at the highest historical level of emissions for covered businesses. This essentially endorses ‘business as usual’ and will not require those businesses to undertake any additional emissions reduction activities. In addition – and notwithstanding the review of the safeguard mechanism scheduled for 2017 – the Coalition government has given no sign that it intends to strengthen the baselines to impose real limits on emissions. Indeed, responding to claims that the government was seeking to introduce an ETS by stealth, Minister Hunt said reports that emissions baselines for individual firms would decline from 2017 were incorrect, as were claims that firms would automatically be able to sell emissions permits they did not use. In other words, while the Coalition’s safeguard mechanism has the potential to be converted into a baseline-and-credit ETS, it does not seem that this is the intention of the Turnbull government.

Professor Jacqueline Peel, Melbourne Law School

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