AIGN Analysis

Promoting sustainable industry development

International Negotiations

Background

The United Nations Framework Convention on Climate Change (UNFCCC) provides the foundation for international cooperation on climate change. The UNFCCCs Kyoto Protocol allocates emissions assigned amounts for developed countries over the period from 2008 to 2012.

Australia has been a significant contributor to the work of the UNFCCC since its formation in 1992, and AIGN acknowledges the importance of its Framework in providing a forum for the international community to formulate common actions to combat the effects of climate change.

It is of vital importance for appropriate long term investment in transitioning to a low carbon environment that there be a long term universal climate agreement based on common commitments across members.

Under the Cancun Agreements, 89 countries have made pledges to limit their greenhouse gas emissions. These countries, which include the United States, China, India, the European Union, Brazil and Australia, represent over 80% of global emissions. The pledged targets are in line with stabilising concentrations of greenhouse gasses between 550 ppm CO2-e and 450 ppm CO2-e by 2100.

Australia's commitment under the Cancun Agreements is to reduce net emissions by 5% below 2000 levels by 2020 irrespective of global action on climate change, with conditional net emissions reduction of up to 15% or 25% depending on the extent of global action.

Discussions had been underway within the UNFCCC on developing a new International Climate Agreement at the Paris Committee Of Parties (COP) meeting in December 2015. This Agreement was to replace the Kyoto Protocol and determine what will be the level of commitments by members to reduce their emissions post 2020. Debate over the nature of the agreement had been at the forefront of recent annual COP meetings.

The Paris COP 21 represented the culmination of a four-year negotiating round to the U.N. Framework Convention on Climate Change (UNFCCC) launched with the Durban Platform for Enhanced Action adopted at COP 17 in 2011. The Durban Platform called for protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties, to apply from 2020.

Paris Agreement

AIGN welcomes the signing of the Paris Agreement in December 2015 and the aim to keep the rise of global temperatures this century well below 2 degrees Celsius of preindustrial levels. Signed by 198 countries it is the first comprehensive global treaty to combat climate change. The Paris Agreement articulates two ambitious long-term emission goals: a peaking of emissions "as soon as possible" (with a recognition that it will take longer for developing countries) and for a balance to be reached between the rate of greenhouse gas emissions and the removal of these gases from the atmosphere (referred to as zero net emissions) by some time between 2050 and 2100.

A key to this outcome was that in contrast to the previous tops down approach the Paris Agreement reflects a "hybrid" approach blending bottom-up flexibility, to achieve broad participation, with top-down rules, to promote accountability and ambition.

Prior to COP 21, 160 parties submitted interim high-level policy plans setting out their approach to reducing emissions and contributing to the global goal of below 2 degrees covering 94% of global emissions. These Intended Nationally Determined Contributions (INDCs) provided a common framework for discussion at COP 21. They contained quantifiable information on the reference point for emissions reductions (including, as appropriate, a base year), time frames and/or periods for implementation, scope and coverage, planning processes, assumptions and methodological approaches and how the Party considers that its intended nationally determined contribution is fair and ambitious, in light of its national circumstances. However the levels of commitments and timeframes for implementation differ considerably with the total commitments representing a holding of global warming to a estimated 2.7 degrees celcius.

The new treaty ends the strict differentiation between developed and developing countries reflecting in part the growing share of global emissions from developing economies.

An important element of the Agreement was the Commitment placed on all countries to report regularly on their emissions and "progress made in implementing and achieving" their Nationally Determined Commitments (NDCs,) and to undergo international review. Parties are also expected to submit new NDCs every five years, with the clear expectation that they will "represent a progression" beyond previous ones.

The Paris Agreement is a treaty under international law, but only certain provisions are legally binding, partly to accommodate US concerns (where congress could disapprove a binding agreement). Therefore, if a country for instance, fails in its pledge to reduce emissions by its stated target, there will be no consequences under the Paris Agreement, provided it has shared its NDC, at 5 year intervals, and complied with the other procedural matters noted above.

Other important elements of the agreement included:

  • Reaffirm the binding obligations of developed countries under the UNFCCC to support the efforts of developing countries, while for the first time encouraging voluntary contributions by developing countries too;
  • Extend the current goal of mobilizing $100 billion a year in support by 2020 through 2025, with a new, higher goal to be set for the period after 2025;
  • Extend a mechanism to address "loss and damage" resulting from climate change, which explicitly will not "involve or provide a basis for any liability or compensation";
  • Parties may use "internationally transferred mitigation outcomes" to implement their NDCs. Require parties engaging in international emissions trading to avoid "double counting;" and
  • Call for a new mechanism, similar to the Clean Development Mechanism under the Kyoto Protocol, enabling emission reductions in one country to be counted toward another country's NDC. Rules for the new mechanism are to be adopted at the first meeting of parties after the agreement takes force.

Achieving the long term objective to move to zero carbon emissions will require action from all parties in the initial absence of clauses penalizing non-action. The complexity of the follow-up steps required to translate the words of the agreement into action should not be under-estimated.

Negotiations

Australia's 2030 Emissions Target

The Prime Minister in conjunction with the Minister for Foreign Affairs and the Minister for the Environment announced on 11 August that Australia's post-2020 commitment is to reduce greenhouse gas emissions so they are 26-28% below 2005 levels by 2030. The PM said the decision was made in the context that "we have got to be environmentally responsible but we have got to be economically responsible too"1.

The PM further commented that Australia's "responsible and achievable target" is "comparable to the targets of other developed countries and allows our economy and jobs to grow strongly"2. He noted that Australia has an existing strong record on climate change and in framing the post-2020 target consideration was given to a number of challenges and issues include a growing population and economy, exports that are emission-intensive in nature and a reliance on coal to generate its electricity.

In setting the post-2020 target the PM commented that consideration was made to ensure that there was not a "forcing of any change in sectors in terms of sending emissions offshore and jobs offshore. We want to keep those jobs onshore and we will let the modelling present the individual sector analyses in coming days"2.

Australia's emissions per person are forecast to decline by at least 50 per cent between 2005 and 2030, while emissions per unit of GDP will fall by 64 per cent.
The Government has outlined a number of policy proposals for achieving the 2030 target including:

  • policies that build on the successful Direct Action Plan, in particular the Emissions Reduction Fund and its Safeguard Mechanism;
  • planting 20 million trees by 2020 plus 350 Green Army projects around the country;
  • as announced in the Energy White paper prioritises a National Energy Productivity Plan (working with State and Territory governments to improve energy productivity by up to 40 per cent by 2030). This will include components to address energy efficiency and vehicle efficiency plus a low emissions technology roadmap;
  • ozone and HFC measures;
  • developing a strategy to improve the utilization of solar power;
  • technology improvements and "other sources of abatement".

Australia's 2030 Emissions Target

The Government will review Australia's emissions reduction policies in detail in 2017-18 in close consultation with businesses and the community.
Australia's activities at the international level include committing $200 mn (over four years) to the Green Climate Fund and support for developing countries through mechanisms like the Asia Pacific Rainforest Recovery Plan. Australia will limit the negative effects of climate change through adaptation measures outlined in a National Climate Resilience and Adaptation Strategy.

Sources

1. Joint Press Conference, Parliament House Canberra 11 August 2015.

2. Australia's 2030 Emissions Reduction Target 11 August 2015.

Climate Change Policy

The Coalition Government’s climate change policies are contained in its Clean Air policy, within its broader plan for the environment that also includes Clean Land, Clean Water and Heritage Protection.

In framing this policy, the Government “…accepts the science of climate change… [and that Australia will have] to play its part in solving this global problem”. 1 The Government is committed to the unconditional reduction target to reduce emissions by five per cent below 2000 levels by 2020. 2 The Government has furthermore committed to reducing Australia’s emissions by 26 – 28 per cent below 2000 levels by 2030.3

The Government intends to reach its emissions reduction targets through efficiently and effectively sourcing low cost emissions reductions. The government has allocated $2.55 billion over the next four years for the purchase of lowest cost abatement via a reverse auction process.

The Government’s Clean Air policy is implemented through its Direct Action package of measures. This includes the Emissions Reduction Fund (ERF) and its accompanying safeguard mechanism.

Three design principles have guided the development of the ERF. These are lowest cost emissions reductions, genuine emissions reductions and streamlined administration.

The safeguard mechanism commenced on 1 July 2016. Its job is to “…ensure that emissions reductions purchased by the Government are not offset by significant increases in emissions above business-as-usual levels elsewhere in the economy.” 4 The safeguard mechanism covers around 140 large businesses comprising about half of Australia’s emissions. It includes facilities in power generation, mining, oil and gas, manufacturing, transport, heavy and civil engineering construction, and waste. 5

By contrast, the crediting element of the ERF is open to the whole economy. Emissions reduction projects are implemented by participants and must follow rules set out in the relevant emissions reduction method; the Regulator then issues Australian Carbon Credit Units (ACCUs) for the emissions reductions achieved. These can be kept to acquit potential liabilities under the safeguard mechanism, to trade on the (as yet small) secondary market, or offered to the Government for purchase. 6

The purchasing element of the ERF is administered by the Regulator through competitive reverse auctions; the Regulator, acting on behalf of the Government, purchases emissions reductions at the lowest available cost (awarding successful bidders contracts guaranteeing payment in return for delivery of these emissions reductions). 7

Since the commencement of the ERF, auctions have been held each April and November in 2015 and 2016. Over the course of these four auctions, $2.1 billion of the $2.55 billion available to the Regulator has been spent purchasing 34.4 million tonnes of abatement, at an average price of $11.83 per tonne of CO2-e. At least 29.3 million tonnes of this abatement comes from sectors that are not covered by the safeguard mechanism. 8

In the context of announcing its post 2020 emissions reduction target, the Government has indicated that the policy framework for achieving the target will be considered in more detail in 2017/18 and be informed by lessons from the implementation of the ERF. However the Government also intends to consult on and develop the following initiatives in the meantime:

  • The National Energy Productivity Plan (developed with COAG Energy Ministers)
  • Improving vehicle efficiency
  • Phasing down hydrofluorocarbon use as a refrigerant
  • Developing a strategy to improve the utilisation of solar power
  • Developing a Low Emissions Technology Roadmap

The above measures will be accompanied by existing measures including the Renewable Energy Target, Minimum Energy Performance Standards for appliances and buildings, and the 20 Million Trees program. 9

The Government is undertaking a review of Australia’s emissions reduction policies in detail in 2017/18, in consultation with businesses and the community. 10

Climate Change Policy
Sources

1. Greg Hunt 2013. The Coalition Government’s Plan to Repeal the Carbon Tax and Tackle Climate Change Paper to the Carbon Expo Australia (3 December 2013).

2. ibid

3. Summary Australias 2030 emissions reduction target

4. Safeguard Mechanism

5. Factsheet Safeguard Mmechanism Coverage

6. Emission Reduction Fund

7. Emission Reduction Fund

8. Auctions Results November-2016

9. Summary Australias 2030 Emissions Reduction Target

10. Review Climate Change Policies

Energy Efficiency Policy

Energy efficiency and security is an important driver for AIGN members, which are (or represent) energy-intensive entities, produce energy commodities and services, or use energy products as feedstock.

There are many factors that have influenced the strength of the Australian economy in the last two decades. Undoubtedly, one of the most important has been the decision by successive governments to pursue competition policy reform, including in energy markets. This has resulted in an economy with an historically strong mining and manufacturing base; these sectors are responsible, directly and indirectly, for substantial revenue and employment.

The provision of “…adequate, reliable and affordable energy to… underpin strong economic growth” 1 is a key priority for the Coalition Government. The Government has commissioned its Chief Scientist, Dr Alan Finked AO, to conduct an independent review in to the future security of the National Electricity Market, 2 with the Preliminary report presented to the Council of Australian Governments (COAG) Leaders’ Meeting on 9 December 2016. 3

The Government is also implementing its National Energy Productivity Plan (NEPP), which “…provides a framework and an initial economy-wide work plan designed to accelerate action to deliver a 40 per cent improvement in Australia’s energy productivity by 2030. The NEPP 2016 Annual Report details that it is expected to contribute over one quarter of the savings required to meet Australia’s 2030 emissions reduction target (see Climate Change section). Under the NEPP, the Government has provided about $10 million in funding for various programs and initiatives, with COAG committing a further $8 million in its 2016/17 budget. 4

The Government has furthermore introduced a number of standards, programs and other tools to boost energy efficiency across Australia, including in households and commercial buildings.5 Energy efficiency for large energy users is a more complex issue; due to the large input costs associated with energy production and use, energy efficiency is one of a number of important factors that large energy users must take into account in all business decision-making.

Energy Efficiency

Energy Efficiency and Energy Intensive Industry

AIGN has prepared a paper examining the many elements business consider when making investments. This paper notes that focusing on energy efficiency whilst ignoring other important inputs will not necessarily result in the most efficient use of energy resources (usually due to highly individualised factors and considerations). Such an approach ignores the underpinning profitability of a business and is therefore unviable. Investment – and hence production – decisions are driven by the combined costs of all inputs and best reflect an individual entity’s perspective of the economic environment and their competitiveness within it. Large energy producers and users, including export and import competing companies, have complex decision-making processes and must consider a wide range of factors; energy efficiency outcomes are just one factor.

Government policies and programs that are implemented in the absence of market failure or that do not address the underlying market failure specifically, run the risk of encouraging irrational decision-making.

From industry’s point of view the formula for a step change in energy efficiency is relatively straightforward:

  • A competitive industry = a profitable industry
  • A profitable industry = investment and replacement of capital stock
  • Investment = new energy efficient technology
  • New technology = step-change in energy efficiency

Governments can best support investment in industrial business energy efficiency by providing a stable, nationally integrated, energy and climate change policy environment in which policy risks are minimised.

Sources

1. Energy www.environment.gov.au/energy

2. National Electricity Market Review http://www.environment.gov.au/energy/national-electricity-market-review

3. Energy Market Preliminary Report www.environment.gov.au/energy/publications/energy-market-preliminary-report

4. NEPP 20 Annual Report 2016 www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/NEPP%20Annual%20Report%202016.pdf (p 4)

Renewable Energy Policy

In 2001 the Australian Government introduced a Mandatory Renewable Energy Target of 9,500 gigawatt-hours (GWh) of new renewable generation 2010, with the scheme running until at least 2020. The MRET legislated a requirement on electricity retailers to obtain two per cent of total electricity generation from renewable energy sources. 1

As part of the Rudd Government’s 2007 election platform, the MRET was significantly expanded and modified; in August 2009, the Government implemented the Renewable Energy Target (RET) scheme, to deliver its commitment to ensure that 20 per cent of Australia’s electricity supply comes from renewable sources by 2020, with the scheme ending in 2030. The Government set a fixed target of 45,000 GWh on the basis of official forward estimates of electricity demand in 2020. 2

The Commonwealth Parliament passed legislation in June 2010 to separate the RET into two parts, which commenced on 1 January 2011 — the Large-scale Renewable Energy Target (LRET), which legislated a 41,000GWh target, and the uncapped Small-scale Renewable Energy Scheme (SRES). The RET was reviewed by the Climate Change Authority (CCA) in 2012 according to its mandate; it recommended the RET continue and retain the existing target. 3

The Coalition Government initiated an independent review of the RET in 2014, chaired by Mr Dick Warburton. In addition, the CCA performed, as required, a further statutory review of the RET. 4 The Warburton Review recommended amending the LRET in light of lower than forecast electricity demand and the availability of lower cost abatement, and either abolishing or bringing forward the phase-out of the SRES. 5 The CCA Review favoured no changes to the LRET target or SRES rules, but did recommend a rescheduling of the target after 2017, so that the target would be reached about 3 years later than planned; together with an extension of the RET by at least 3 years to help investors recover costs. 6

After long and difficult negotiations between the Coalition Government and the Opposition, agreement was eventually reached to reduce the LRET target from 41,000 GWh to 33,000 GWh. Legislation encompassing this and other minor amendments passed Parliament in June 2015. 7

The RET is the primary policy vehicle for encouraging renewable energy growth in Australia. While it has been acknowledged to be an expensive approach to reducing emissions, 8 it has the relatively rare distinction among climate change policies of bipartisan support. In spite of regular changes (some of them significant) and an objective to increase renewable electricity generation (as opposed to reducing emissions), the RET is the most stable emissions reduction policy to date.

Additional initiatives to support renewable energy growth come from:

  • the Australian Renewable Energy Agency (ARENA) – streamlines and coordinates the administration of support from research, development, demonstration and commercialisation of renewable energy technologies; 9
  • the Solar Towns program – supports local renewables instalments, improving local environments and encouraging a sense of community ownership and self-reliance 10 ; and
  • the Solar Communities program – supports local responses to climate change and helping to lower electricity costs for community organisations. 11 The Centre for International Economics (CIE) prepared a report for AIGN on the cost and operations of the RET (see Related Files).
Renewable Energy

Governments can best support investment in industrial business energy efficiency by providing a stable, nationally integrated, energy and climate change policy environment in which policy risks are minimised.

Sources

1. www.environment.gov.au/climate-change/renewable-energy-target-scheme/updates

2. ibid

3. ibid

4. www.environment.gov.au/climate-change/renewable-energy-target-scheme

5. retreview.dpmc.gov.au/list-recommendations

6. climatechangeauthority.gov.au/reviews/2014-renewable-energy-target-review

7. www.cleanenergyregulator.gov.au/RET/About-the-Renewable-Energy-Target/History-of-the-scheme

8. “The Authority noted in its 2012 review that the RET was not a ‘first best’ approach to reducing emissions in the electricity sector.” Climate Change Authority, Renewable Energy Target Review Report, December 2014, p 3:

9. arena.gov.au

10. environment.gov.au/climate-change/renewable-energy/solar-towns

11. www.environment.gov.au/climate-change/renewable-energy/solar-communities