Australia’s Pollution Plan Starts to Look Like Trading

Australia’s newly elected leaders, claiming a mandate to dump the old government’s climate policies, would actually protect programs the defeated Labor party was using to prepare for emissions trading.

Environment Minister Greg Hunt is working to shield the agencies that monitor and regulate greenhouse gases from cuts proposed for other climate units, according to a policy paper he issued on Oct. 24. The outline reaffirms a pledge to pare Australia’s emissions by 2020 and calls for a “carbon buy-back fund” that might include penalties as well as credits based on industry targets, Hunt said in an e-mail last week.

“We will use architecture that is already in place and working well,” Hunt said in the paper drawn up for the Carbon Market Institute, an industry group based in Melbourne. “We agree on the science. We agree on the targets. We agree on market mechanisms. We disagree, absolutely, on what is the right market mechanism.”

The paper marks the most detailed account yet of how Prime Minister Tony Abbott plans to fulfill his promise to keep fighting global warming as he dismantles many of the programs the previous government had for pricing emissions. Abbott’s Liberal-National coalition trounced Labor in September by disparaging its “toxic tax” on fossil fuel emissions.

Abbott’s first legislation would repeal the levy imposed on about 300 of Australia’s biggest emitters, forgoing about A$10 billion ($9.1 billion) in tax revenue next year. At A$24.15 ($22) a ton, the Australian levy was the highest carbon price in the world, exceeding 4.40 euros ($5) in Europe and $13.95 in California.

Old Program

Under Australia’s old program, a fixed carbon price would pave the way for a cap-and-trade market in 2015. What policy replaces the tax isn’t certain. Hunt’s paper lauds some of the structures from the previous government, and those could be used to build an emissions market, said Peter Castellas, chief executive officer of the Carbon Market Institute.

“The coalition has been pretty consistent in saying their proposal is a market-based system,” Castellas said in an interview. If the coalition build its proposed $2.5 billion Emissions Reduction Fund around credits and penalties determined by baseline estimates, “you’re talking about an emissions-trading system,” he said.

The coalition’s fund should enable businesses to make long-term plans and support a secondary market to help them hedge risks, according to Westpac Banking Corp., Australia’s second-biggest lender. Tradeable carbon units should also be part of the program, said Emma Herd, the Sydney-based executive director for emissions at Westpac.

Carrots and Sticks

Australia’s actions are important because it along with Japan and Canada have indicated they’re lowering ambitions on reducing greenhouse gases. It’s the first year since the United Nations started annual climate talks in 1992 that rich countries scaled back targets on the environment.

Companies are monitoring how Abbott’s proposal, known as Direct Action, will provide both “the carrot” to reward pollution abatement as well as “the stick,” analysts said.

“We’ve already started conversations with the new government,” BHP CEO Andrew Mackenzie said at a shareholder meeting in Perth on Nov. 21. “We are working very keenly with them as to what we can do with their Direct Action measure that will protect the competitiveness of trade-exposed industries.”

‘Blank Sheet’

Abbott’s government would struggle to rein in greenhouse gases with incentives alone, said Hugh Bromley, a carbon analyst at Bloomberg New Energy Finance in Sydney.

“It’s hard to see how enough abatement will be generated if there are only subsidies,” Bromley said in an interview. Abbott, he said, needs to co-opt some of the previous policies because “otherwise, they are starting from a completely blank sheet of paper.”

Castellas’s non-profit institute has members including the utility AGL Energy Ltd., oil company BP Plc and food producer Bunge Ltd. It asked for Hunt’s views on how the policy would evolve and made recommendations. Castellas, leading a panel presentation today in Melbourne, said the new government has been open to its ideas.

Labor Party leader Bill Shorten has said he wants to move immediately to an emissions trading system, where the carbon price is set by the market rather than government.

Policy Flaws

Hunt and Abbott are moving ahead with legislation to repeal the system Labor put in place, saying the opposition hasn’t addressed flaws in the program.

“The idea that a punitive electricity tax is the right approach has been unequivocally rejected by the Australian people,” Hunt said in his paper.

Labor planned to allocate carbon allowances to industry based on a nationwide cap, aiming to reach a government goal for a 5 percent cut from 2000 levels by 2020. Emitters would be able to buy and sell permits. Australia’s market would take global price signals through a link to Europe’s Emissions Trading System.

Mark Butler, a member of parliament who speaks for Labor on the environment, last month said Abbott was trying “to slam Australia into reverse” on climate policy. Butler wasn’t available to comment last week, according to his spokeswoman.

The coalition says the Labor plan is a tax on electricity. It wants to scrap the Climate Change Authority, a government adviser, and the Clean Energy Finance Corp., a $10 billion fund. Instead, it would spend $3.2 billion over the next five years rewarding the most cost-effective approaches for cutting carbon. It envisions auctions where companies compete for funds to prevent pollution.

Coalition Plan

The Emissions Reduction Fund would award credits to parties that cut pollution faster than their peers, according to Hunt’s paper. It would use data compiled by Australia’s National Greenhouse Gas Inventory Report as well as the Clean Energy Regulator -- agencies that enforce the fixed carbon price in the current system. It would establish baselines for credits and penalties for non-compliance, the paper said.

Hunt said penalties have always been part of the coalition’s program, even though Abbott focused on incentives and Direct Action. The minister rejected the idea that the system will evolve into carbon trading.

“There should be no surprises,” Hunt said in an e-mail on Nov. 29. “We have said on multiple occasions what we would keep and what we would reject. We want to make the transition as simple as possible but remove the tax. We are not proposing to raise any revenue. We are not creating an Emissions Trading Scheme. We are using a carbon buy-back fund.”

‘Green Paper’

The government is consulting industry on how to structure the auctions. It plans to release a “green paper” this month with preliminary guidelines for the new fund.

The paper probably will propose including 300 emitters now bound by Australia’s fixed-price on carbon in a new system that rewards companies exceeding peer averages, said Mathew Nelson, the Melbourne-based head climate change service at Ernst & Young. “Aggressive” penalties for underperformers would only come later, he said.

Abbott’s coalition has been “clear as day” since 2010 about possible penalties for emitters, said Danny Price, founder of Frontier Economics Ltd., a Melbourne-based company advising the coalition. “Emitters already understand what their baselines are,” Price said. “A massive amount of work has been done.”

While the coalition’s Direct Action will use local auctions to provide better price signals, there are similarities between the new and old approach, he said

“There is more agreement than disagreement,” Price said.

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