Greenhouse Gas Mitigation in Australia: An Overview of the Current Policy Landscape

Summary

This report outlines Australia’s policy framework for greenhouse gas emissions reduction, identifies areas of potential change in the near term, and attempts to evaluate the impact of current policies on Australia’s emissions trajectory to 2020. It assesses Australia’s international commitments, and the major policies of federal and state institutions to reduce emissions. It also assesses the likely success of these policies in achieving Australia’s emissions reduction goals. Australia has bipartisan political support for its international commitment to reduce emissions by 5–25 percent from 2000 levels by 2020, but very little bipartisan agreement as to how to achieve these reductions. The Clean Energy Act 2011 (and associated legislation known together as the Clean Energy Future package) implemented by the current federal government comprises a three-year fixed carbon price followed by a cap-and-trade scheme linked to the European Union (EU) emissions trading scheme and some Kyoto mechanisms. The federal government plans to change the legislation to bring forward the start of the cap-and-trade scheme to July 2014. When the trading scheme starts, annual caps on Australian emissions will be set by the federal government following recommendations by the independent Climate Change Authority (CCA). At this point, Australian entities will be able to use European and to a lesser extent Kyoto permits to meet up to 50 percent of their emissions liabilities, with the balance required to be domestically sourced permits. Full bilateral trading with the EU is intended to start in 2018.

In addition to this carbon-pricing mechanism, central federal policies are the Large-Scale Renewable Energy Target (LRET) of 41,000 gigawatt hours (GWh) renewable energy generation by 2020, the Clean Energy Finance Corporation (CEFC), which has $A10 billion to assist deployment of low-emission technologies, and the Carbon Farming Initiative (CFI), which is expected to have relatively little impact in the short term but significant long-term potential. State-based policies include feed-in tariffs for solar photovoltaic (PV), energy efficiency obligations, and laws regulating land clearing.

The federal Opposition, two center-right parties in long-standing partnership known as the Coalition, has promised to rescind the carbon-pricing mechanism—both the fixed price and the emissions trading scheme (ETS)—and dismantle the CCA and the CEFC. The Coalition proposes to review the RET in 2014, despite a 2012 review by the CCA that warned further biennial reviews would increase investment uncertainty. The Coalition proposes to replace the carbon-pricing mechanism with a fund to purchase emissions abatement via reverse auctions, but has provided little information on how this would operate or achieve Australia’s target range. Legislative obstacles may prevent the removal of the current carbon-pricing framework.

Assuming the Clean Energy Future package remains in place, Australia is able to achieve its full target range, if it so chooses.

However, the degree to which this achievement relies on the purchase of international permits as opposed to emissions reduction within Australia depends on a range of factors, including the influence of European permit prices on Australia’s carbon price, the maintenance of the LRET, the winding back of state-based land-clearing laws and the implementation of policies under investigation such as light vehicle emission standards and a national energy saving obligation. Under current policies and prices, the Australian government projects that domestic emissions will increase, and the country would achieve its targets by purchasing international abatement. Recent changes to electricity consumption have not been factored into these projections.

The key risks to Australia’s achievement of its emission targets are:

• Ongoing policy uncertainty: Investment in low-emission technologies is likely to be deterred by policy uncertainty around the future of Australia’s carbon-pricing mechanism and the LRET. The repeal of the carbon-pricing mechanism by a Coalition government would exacerbate this problem unless the Coalition establishes a credible alternative carbon-price signal. In the absence of such a signal, investments that go ahead will attract higher risk premiums, increasing the cost of the low-carbon transition in Australia.

• Over-reliance on international markets: Currently low relative prices in the EU ETS and Clean Development Mechanism (CDM) would encourage Australian emitters to purchase international permits instead of reducing emissions within Australia. This practice could stymie domestic emission reductions, increasing Australia’s reliance on imported emission permits. This situation, in turn, increases the exposure of the Australian economy to volatility in international carbon prices and slows the transition needed to achieve longer-term domestic transformation. Maintaining limits on international imports and direct domestic policy interventions to reduce emissions and boost energy efficiency (for example, stronger vehicle emission standards, regulatory approaches to limit fugitive emission increases, energy efficiency obligations on large energy users) would reduce these risks.