October 2013 New government policy: scrapping the carbon tax and implementing the Direct Action Plan – briefing paper Background Under the previous government, the climate change policy ‘A Clean Energy Future’ was introduced July 2011 with a carbon tax at its heart to drive GHG emissions reduction. It was implemented as a range of programs intended to promote investment in renewable energy, encourage energy efficiency and create opportunities in the agriculture sector. The Abbott government has committed to repealing the carbon tax (or more fully, the Clean Energy legislative package and associated measures) as a first order of business. They propose their Direct Action Plan as their climate action policy. Both sides of government support reducing Australia’s emissions by 5% below 2000 levels by 2020. They also both support the Carbon Farming Initiative concept. The policy Scrapping the carbon tax This process has commenced. The carbon tax repeal bills have now been released for public consultation, which closes 4 Nov. The task includes the removal of 17 pieces of legislation covering: • the carbon price mechanism including the fixed price and carbon trading from 1 July 2015 • the Clean Energy Finance Corporation • associated grant-­‐based programs funded through the tax including: o Clean Technology Investment Program (CTIP) o Clean Technology Innovation Program (CTInP) o Steel Transformation Package o Coal Sector Jobs Package o The Jobs and Assistance compensation package which incorporates assistance for energy intensive trade exposed companies. The above programs and remainder of the policy of the previous government (which totaled 33 programs or initiatives) was implemented by a total 8 agencies and 7 departments. This included the Climate Change Authority (which sets emissions caps), and the Climate Commission (conducted research and public communication on climate change) which are also to be abolished (or have been already in the case of the latter). Under the Abbot government, climate policies will be delivered under three bodies run by two departments: Australian Renewable Energy Agency (Resources and Energy) and the Clean Energy Regulator and Low Carbon Australia (Environment). The Climate Commission, which has been abolished by government, is now operating as a ‘community-­‐
supported’ body known as the Climate Council. COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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Aspects of the legislation relating to changes in taxation rates (for households) won’t be repealed. The Direct Action Plan “a climate change strategy based on direct action to reduce emissions and improve the environment” “We agree with the Government on the science of climate change. We agree on the targets to reduce emissions. We agree on using markets as the best mechanism” – Greg Hunt, speech to the Grattan Institute 16 Jul 2013 “The questions is not whether or not our climate is impacted by human activity – clearly there is a human impact on our climate” – Tony Abbott, Hansard, 28 May 2013 The Direct Action Plan (DAP) aims to deliver the 5% per cent reduction in Australia’s emissions by 2020 at a cost of $3.2 billion. This policy was originally developed for the 2010 election. At that time the expected contribution of soil carbon to emissions abatement was heavily focused on, though the message has now changed to convey the broad nature of the DAP and fact that the Emissions Reduction Fund will be ‘source neutral’. The intention is to commence the DAP 1 July 2014. The policy consists of: 1. Emissions Reduction Fund ($1.55b) 2. One Million Solar Roofs 3. Clean Energy Employment Hubs 4. Solar Towns and Solar Schools 5. Geothermal and Tidal Towns 6. Renewable Fuels 7. Greenhouse Friendly Programme; and 8. The Urban Forests and Green Corridors. Some key features are outlined immediately below. The Emissions Reduction Fund is the centerpiece. The capped government ERF will directly support emissions reduction or avoidance activities by businesses. It will be voluntary, incentive-­‐based. Government will purchase lowest cost abatement from projects through a reverse auction process (same mechanism used for water buy-­‐backs). Project activities can be: • Those approved under the existing (or an expanded) Carbon Farming Initiative mechanism, or • Those which create abatement by operating below ‘business as usual’ baseline. Lowest cost abatement could be a range of activities e.g.: • Projects to clean up waste coal mine gas, power stations or capture of landfill gas • Energy efficiency improvements in Australian households, commercial buildings, industrial facilities. • Reafforestation of marginal lands, revegetation activities of improvement of soil carbon The Clean Energy Regulator (established by the previous government) would be responsible for approving abatement methodologies. Successful bidders would secure long term contracts (7 years), and be paid on delivery of abatement. COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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Farm businesses would sit within the ‘voluntary participation’ category. Some large agricultural companies (fertiliser, food processing which were liable under the previous carbon tax) would sit under the ‘compulsory’ category. Similar to the CFI and principles of the Clean Development Mechanism used internationally, the ERF would seek projects that: 1. Reduce emissions (efficacy) 2. Deliver additional practical environmental benefits (co-­‐benefits) 3. Not result in price increases to consumers (cost neutral) 4. Protect Australian jobs (productivity) 5. Not otherwise proceed without Fund assistance (additionality) There is a focus on ensuring the Fund is simple, efficient and with transparent contract arrangements. The CFI will be addressed to ensure it approval process is more efficient (including through using existing rules for abatement projects e.g. as recognized under the UN Clean Development Mechanism). They also intend to give priority to the ‘rapid development of methodologies’, and offer shorter permanence requirements for sequestration projects of 25 years. A penalty & credit scheme is to operate, with businesses fined if they exceed ‘business as usual’ emissions baselines (e.g. their ave. emissions for previous five years). This is likely to be the ~350 ‘liable entities’ that came under the carbon tax – initially transitioning to a baseline and penalty scheme which may then move to an ‘emissions intensity’ measure. The existing NGERs (National Greenhouse and Energy Reporting Scheme) will be used to set the baseline and penalties. Companies that can reduce their emissions can then participate in the Fund. Others can ‘opt-­‐in’. It could be that some form of re-­‐packaged & re-­‐named market mechanism could emerge. A focus on reducing emissions in the electricity sector will support improvements in performance of existing generators, possibly fund shutdowns and have a focus on job protection (through developing ‘Clean Energy Employment Hubs’). COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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Boosting the renewable energy sector especially solar is a feature, through solar roofs, rebates for solar panels or solar hot water, Solar Towns and Solar Schools (competitive tenders for solar panels) and support for emerging technologies (geothermal, tidal energy). There will be support for emerging technologies through the RET (renewable energy target). There will be support for the National Climate Change Adaptation Research Facility (NCCARF) -­‐ funding ceased under the Rudd Labor Government. Policy implementation -­‐ timing The government has committed to repeal the tax and implement the DAP from 1 Jul 2014. They are adamant that 2013-­‐14 will be the last financial year that the carbon tax will apply and the carbon tax will not be extended beyond 2013-­‐14, even if the Parliament does not pass the repeal bills until after 1 July 2014. However, at this stage the whole process is looking likely to be more onerous, complex and time-­‐consuming that that. The proposed changes require successful passage of legislation in Parliament. To repeal the carbon tax in the current Senate, Abbott would require the support of the Labor Party which is not likely. Labour have been vocal in their opposition (though there is evidence of some division within the Party). When Parliament resumes in the current Senate the Coalition will face opposition from 31 Labor and nine Greens Senators. New Parliament will assemble 12 Nov, with a total of four sitting weeks in Nov-­‐Dec. With Labour and the Greens deadlocking the plan, the alternative is to wait until the new Senate sits from 1 July 2014, or call a double dissolution election – the latter is unlikely. Post 1 July 2014, the Abbott government will need the agreement of at least six of the eight minor parties in the new Senate to repeal the legislation and implement the Direct Action Plan. It appears there will be enough support from new and continuing senators to repeal both carbon and mining taxes after next July, but possible difficulties regarding their Direct Action Policy. • Minor parties against the carbon tax: Democratic Labor Party, PUP, Liberal Democrats, Family First, Nick Xenophon (uncertain – ‘open’ view) • Minor parties position on carbon tax unknown: Aust. Motoring Enthusiast Party, Aust. Sports Party • In regards to Direct Action Plan – Xenophon and DLP have concerns and reservations and LDP and Family First have ruled out their support. Therefore it is likely that from now to Jul 2014 the existing Clean Energy Act will continue. It is understood that whilst the legislation can be repealed at that time, the associated regulations (that influence what businesses do e.g. electricity companies incorporating the carbon tax into their pricing) can only cease to apply on the first June 30 after the repeal. Which may take us to after 1 July 2015. Immediate steps (first 100 days) The Direct Action Plan (DAP) currently exists as a fairly broad policy and set of intentions with details yet to be developed. The details of the Emissions Reduction Fund (ERF) – the centerpiece of the DAP -­‐ are being developed through a White Paper process over the coming months: COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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Terms of Reference on the Fund White Paper are now out for comment, with submissions due 15 Nov. A Green Paper will then be released Dec 2013 for further consultation, and the White Paper and ERF legislation released early 2014. The ERF is then planned to commence from Jul 2014. The Hon Greg Hunt MP as Minister for the Environment is responsible for the carbon tax repeal and implementation of the DAP. Discussion Repeal of carbon tax and associated programs, organisations When it comes into effect, the repeal will reduce cost pressures (e.g. electricity, gas prices – a general ~14.5% cost increase according to Australian Industry Group). The majority of farm businesses experienced indirect impacts through increased electricity and input prices passed through to them. Early modeling undertaken by the Australian Farm Institute and ABARES showed that particularly in the short term, negative impacts on the agriculture sector from the carbon tax were quite significant, especially given the absence of similar policies for competitor agriculture exporting nations. For more on cotton carbon tax impacts, see our carbon tax Background Briefing. However, prior to the election the Labor government had implemented changes in their own policy which would’ve seen impacts softened e.g. switching from a fixed carbon priced to an emissions trading scheme earlier than the intended 2015 date (from $24 down to ~$5-­‐10/EU market value). However, at a similar time, the EU had decided to fix their carbon price after slumps which should result in a gradual increase in global price of carbon. In addition, many of Labor’s support and grant programs had been pared back in final budget rounds. This included remaining Land Sector Package funds (Filling the Research Gap, Action on the Ground, Extension and Outreach). The cotton industry secured RD&E funding from these and contracted projects will be honoured. The incoming government will need to make decisions on funding calls that were never assessed or announced. Prior the election, they indicated that anything other than signed contracts is a ‘Labor promise’ -­‐ remaining unannounced projects might not be honored. A repeal would most directly impact the ~350 liable entities who have to pay the carbon tax – initially in the time and resources invested in developing systems to achieve compliance as well as changes in contracts and pass through of carbon costs to suppliers and customers. There is also the destabilizing effect of policy change on carbon markets which will carry for some years. Scrapping the carbon tax will also mean renewable projects become less competitive as it allows conventional power to be provided more cheaply. The Climate Change Authority established under the Gillard government and to be scrapped under the Abbot government was currently reviewing Australia’s emissions caps and targets with a draft report due end of October. Disbanding the Authority needs to be done through a legislative process so we are likely to see the draft October report and recommended emissions target. COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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Abbot government policy effectiveness A quick comparison of government modeling on the outgoing and incoming climate policies: • Labor carbon tax -­‐ with carbon tax and CFI, Australia’s net emissions in 2020 were projected (by government modelling) to be limited to 537Mt CO2-­‐e, meeting our emissions reduction target of 5% below 2000 levels. With this target, Australia faces an abatement challenge of 155Mt CO2-­‐e in 2020. To meet this, 55Mt of abatement was projected to occur through the carbon tax and Carbon Farming Initiative, and another 100Mt from overseas credits. • New Direct Action Plan -­‐ Based on the 2010 policy document, the Plan will achieve 140Mt abatement in 2020, with 60% coming from ‘soil carbons’ and the remainder from a combination of electricity generators and industry, forestry, waste coal mine gas, transport, landfill/compost/recycling, and green buildings and energy efficiency. It is highly unlikely that the abatement created under the DAP will be interchangeable with international abatement schemes. Cost of abatement is not likely to follow international carbon price. There are a number of criticisms of the new policy, namely whether it will actually achieve emissions reduction targets for the stated cost, and the lack of sufficient incentive or target for industry to reduce total emissions. Comprehensive modeling has apparently not been undertaken which is concerning given the estimations were made in 2010, the carbon price is volatile and estimations assumed large gains (60% of abatement) to be made from soil carbon over other activities. Researchers continue to express caution regarding the contribution that soil carbon can make (i.e. far lower than touted, with much complexity associated with measurement and questions around long term storage). Generating the required sequestration through forestry would be more effective but require substantially more wood production on far more land than currently occurs. Critics claim that the DAP would cost double that of Labor’s to achieve emissions targets. In a report widely cited by critics following the election (by SKM-­‐MMA and Monash University’s Centre of Policy Studies) it was suggested that the new climate policy would: • Reduce domestic carbon pollution by 200Mt by 2020 compared to 290Mt under Labor’s policy. • Australia’s emissions increase by 8-­‐10% rather than decrease. By comparison, under Labor, domestic pollution increases by 5%, but international offsets enable achievement of the bipartisan target range of 5-­‐25% below 2000 levels by 2020. Where does agriculture sit in all of this? The Direct Action plan is currently a set of intentions and principles; there is much detail to be established through the White Paper process – this will be an immediate focus. Given the DAP focuses heavily on land based abatement, it will be important for agriculture to convey its preferences clearly to government. With the right design, project opportunities that reduce emissions and benefit businesses could emerge. Otherwise there won’t be a compelling enough incentive to participate. The move to a least cost direct action approach will minimize the cost of the policy on industry. Though for agriculture to then consider participating in the Fund (or carbon markets in general) the price paid for abatement needs to be high given that activities in agriculture are likely to be more costly to undertake compared to non-­‐agriculture sectors. ‘Lowest cost abatement’ will mean initially at least that ‘low hanging COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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fruit’ abatement will be developed by major emitters, and effective carbon price will remain low until all of these opportunities have been exhausted. Agriculture could find it hard to compete. Whilst there are many known benefits that come with carbon farming (soil health, productivity improvements, reduced input costs), the dilemma is when costs of participating in the market outweigh benefits. The current carbon price indicated by government ($6-­‐$12/t under the Fund) is considered by many sectors (not just agriculture) to be too low for new abatement projects. $20-­‐50/t is more likely to be needed; agriculture projects requiring the higher end. Modelling has suggested that the gross income from any single CFI option is commonly less than 1% of gross farm income. At best, investment in lower emissions activities would be seen as complementary to agricultural production. The carbon price at least drove a high price which made the CFI more financially viable. So far under the CFI the majority of projects approved to date are landfill gas, gas flaring or piggery waste projects – other methodologies are not being used and those applicable to broadacre cropping are not yet available. They are in development though: work on soil carbon and fertilizer management methodologies continues including one applicable to irrigated cotton and management of nitrous oxide emissions. Progression of the latter is a government priority. Cotton Australia and CRDC remain engaged with Departmental staff on these developments. It is a goal of government policy and the CFI to increase participation in carbon abatement in the agricultural sector, to see benefits accrued. To deliver on this and address some of the above challenges, it will be important to shape the design. Some potential solutions might include: • The Government may need to promote aggregation opportunities, and work with co-­‐operatives or large-­‐scale agriculture operators • Partition the fund with activity banding dedicated to purchase of agriculture carbon units • Consider offering industry contracts (with industry to determine how to meet the emissions reduction) • Support using an ‘emissions intensity’ measure which will help recognise productivity as part of emissions reduction • Ensuring adequate contract term to support projects with longer term outcomes. Cotton Australia along with the NFF have been broadly supportive of the CFI concept. We will be working with NFF to effectively convey the above challenges and solutions in the White Paper process. Already the NFF Carbon Taskforce (in which CA participates) has provided advice to the Coalition on what agriculture would want to see in the Direct Action policy. We will build on this in a response to the White Paper process. Minister Hunt is well versed on carbon issues, and was Shadow Minister for Climate Action, Environment and Heritage. Cotton Australia has met with Greg Hunt in the last year, as well as his Chief of Staff (plus had follow-­‐
up interactions) regarding our viewpoint and the Carbon Farming Initiative and the work that has been done in cotton R&D and also more recently with bureaucrats in the design of a methodology for irrigated cotton to recognise reduced nitrous oxide emissions through improved fertilizer management. COTTON AUSTRALIA LIMITED – A.B.N 24 054 122 879
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