In follow-up to my last article discussing what the ALPs proposed emissions trading scheme means for Australian businesses and the global economy, I feel it is important to also explore Australia’s Emissions Reduction Fund (ERF) and its role in creating a level playing field for Australian businesses. So lets explore the realities of how this centrepiece of the Australian Governments emissions policy will affect businesses by: outlining what the ERF is exactly; defining how Australian businesses are eligible to participate; looking at the ERF in light of the international emissions reduction landscape; and presenting a comparative analysis in the context of Australian businesses maintaining and growing their international competitiveness.

In 2013 a green paper published by the Australian Coalition Government established its case for an emissions reduction fund by arguing it as a classic market mechanism designed to buy back lowest cost carbon abatement. In addition, the green paper stated that the previous Labor Government’s carbon tax had relied on increasing the cost of electricity and gas, and that in contrast an ERF would provide a direct and powerful incentive for Australian businesses to reduce their emissions. Legislation to implement this ERF came into effect on 13 December 2014.

Read the 2013 Coalition Governments ‘Emissions Reduction Fund’ green paper here

As the ERF has evolved since 2014, subsequent policy makers have defined how businesses must outline the emission reduction targets of their projects. A number of approved methods currently govern emission estimates for sectors including agriculture, energy, mining, oil and gas, transport, vegetation management, waste and water sectors. Businesses in these sectors must estimate their emissions reductions from a wide range of activities, including those relating to:

• Sequestering carbon in soils in grazing systems
• Commercial building energy efficiency
• Land and sea transport
• Avoided clearing of native regrowth vegetation

In order to be eligible to participate in the ERF, projects must be new; not required by law; and not receiving financial support under any other Government program. To participate in the ERF, businesses then need to register their project with the Clean Energy Regulator (CER). Businesses with registered projects can then sell their Australian Carbon Credit Units (ACCUs) to the CER, which acts on behalf of the Government. Auctions are run by the CER to select the lowest cost abatement.

The ERF has three parts:

Crediting – Businesses must use an approved sector-specific method to estimate the emissions reduction that will be achieved

Purchasing – The CER purchases the emissions reductions from a business under a contractual agreement

Safeguard mechanism – This mechanism, due to commence in July 2016, is designed to ensure that reductions paid for under the ERF are not displaced by a significant rise in emissions above a company’s business as usual case.

If a project is chosen, the business enters into a contract to deliver Australian Carbon Credit Units, being paid on the basis of the price they bid at the auction. As the project proceeds they must submit reports that verify the emissions that have been achieved, and the Government will regularly audit each project on this basis. Once a company submits a report to the Government, the report is assessed and the emissions reductions are verified. Once the reductions are verified, the CER will issue one ACCU for each tonne of emissions reductions achieved.

Australia has achieved 33.2% of its emissions target at a cost of approximately 66% of the initial $2.55 billion budget

Following the third ERF auction held in April this year, a Government report entitled ‘The Emissions Reduction Fund – what it means for you – How Australian businesses and the community can benefit from the Emissions Reduction Fund’ was published by the Department of the Environment. According to this report, more than 34 projects are currently contracted to deliver 143 million tonnes of emissions reduction at an average price of $12.10 per tonne – meaning a total cost of $1.7 billion. Based on the green paper emissions reduction target of 431 million tonnes between 2014/2020 and the Department of the Environment figures, Australia has achieved 33.2% of its emissions target at a cost of approximately 66% of the initial $2.55 billion budget. This return on investment is surely worthy of questioning, given that taxpayers are funding the ERF.

Read ‘The Emissions Reduction Fund – what it means for you – How Australian businesses and the community can benefit from the Emissions Reduction Fund’ report here

As a result of following each of the three ERF auctions closely, five points come to my mind regarding what the Australian Government and businesses will need to grapple with (and rather quickly find workable solutions for) in order to reduce their emissions as well as maintain, and over time increase, their international competitiveness.

1) Governments will need to implement innovative policies that empower businesses to identify and pursue low carbon opportunities.

By its very name, the ERF offers Australian businesses opportunities to implement lower emission projects. This assumes the following:

• They were successful in the bidding process
• They can afford to comply with all of the contractual compliance conditions including delivery timelines

However, the conditions that successful bidders are required to agree to are quite onerous and therefore businesses need to ensure that their project costings are very well managed in order for the project to remain financially viable.

2) There is a clear signal that future policies need to mandate or incentivise the procurement of a large percentage of businesses’ energy needs from renewable sources.

• In my previous articles I have highlighted examples of Governments increasing their investment in renewable energy and multinational corporations factoring this into their procurement decisions
• As a result of doing this, not only have cost savings been realised, corporate social responsibility profiles have been significantly transformed
• At present I don’t see how the ERF assists Australian businesses with this – the ERF is a competitive process and if you aren’t successful then where is the incentive?

3) It is clear that science-based emission reduction targets are gaining significant traction in both Government and business spheres.

• Targets like this clearly demonstrate corporations understand the challenges and opportunities that climate change presents
• Being market-based, those businesses that adopt these could see their competitive advantage grow
• The ERF is predominantly designed for individual projects rather than a series of projects one after the other-therefore I find it difficult to see how it encourages Australian businesses to set science-based emission reduction targets

4) There is a clear move towards pricing carbon internally. This is done to:

• Offset the costs and risks of greenhouse gas (GHG) emissions); and
• Fund the transition to secure low carbon energy sources
• This move establishes climate change as a bottom line item in business budget assumptions

5) Investing in renewable energies and low carbon assets is gaining momentum due to:

• The increasing importance that business owners and investors are placing on understanding and managing climate change related risks
• The rapid nature of the global divestment movement (moving money out of fossil fuel related investments)
• The falling cost of renewable energy technologies around the world

Given that there is no carbon pricing mechanism in Australia, once again it is difficult to see where the incentives are for Australian businesses to do this.

Under the current Government emissions policy settings I can’t see how Australian businesses are assisted to price carbon internally

Perhaps the best illustration of the worldwide hunger to invest in renewables is the divestment movement. The sheer scale of the divestment movement (started in the US and now virtually worldwide), and the range of sectors that are embracing divestment (initially foundations, universities, faith based organisations and NGOs and now the aforementioned plus large pension funds and private sector businesses) demonstrate how corporations have essentially charted their future course. At the risk of sounding like a broken record, under the current Government policy settings I can’t see how Australian businesses are assisted to price carbon internally or invest in renewable energies and low carbon assets (above ERF and ARENA comments not withstanding).

In its current form, the ERF is based on a contract between a business (supplying emissions reductions from a project) and the Government. These contracts cover a range of standard commercial, delivery and financial terms. As such, once a business enters into a contract to supply emissions reductions, it is unable to sell the emissions reductions from that project to anyone else within Australia or internationally. A number of countries and regions have introduced ETSs rather than the ERF currently in place in Australia, as they deem an ETS to be the most effective market-based approach to apply in their respective economies. As opposed to an ERF, an ETS can be linked from one region or country to another – thus providing additional environmental, economic and social opportunities/outcomes for any business looking to participate.

There is a whole new reality at play in the business world, which is investing heavily in emissions reductions as a means of decarbonisation

While both the Government and the ALP have approached emissions reductions from vastly opposing perspectives, one would think they would still both look at emissions reductions from a global business competitiveness perspective as well as a domestic one. As I have discussed in this and other articles, from an international competitiveness perspective there is a whole new reality at play in the business world, which is investing heavily in emissions reductions as a means of decarbonisation.

In terms of the ALP ETS proposal, the design and implementation of the emissions cap and the potentially significant increase in the compliance cost burden are such that I am not certain that the ALP ETS will deliver cost effective emissions reductions which are required to maintain (and grow) the international competitiveness of Australian businesses. Under the current Government’s ERF, it is difficult to see where the incentives are to reduce emissions if you don’t bid into or are not successful in an auction. If an Australian business is successful in the ERF as it stands, it is not clear that the business will be able to absorb the cost of complying with the contractual conditions placed on them by the CER. The current ERF is predominantly designed for individual projects and therefore it is difficult to see where the incentive is for successful businesses to reduce their emissions on an ongoing basis. These factors should be taken into account by the owners of Australian businesses when they are considering Australia’s ERF and the reality of creating a level playing field for Australian businesses.

From a domestic perspective, if an Australian business is successful in an auction and can deliver the emissions reductions to the Government it receives a return for those reductions. However the return is only for the project it enters into a contract with the Government for-not multiple or subsequent projects. If that business is not successful in an auction or does not participate, it is difficult to see where there is sufficient incentive for that business to reduce their emissions. Therefore I can not see a level playing field. From an international perspective, it is not clear to me how Australian business can use a successful bid in an ERF auction to remain internationally competitive, given that emissions reduction is only one part of the increasingly competitive drive to transform the way business is conducted in a world that is seeking rapid decarbonisation.