Emissions Reduction Fund faces challenges, says pitt&sherry

Carbon and energy specialist pitt&sherry has submitted its comments on the proposed Emissions Reduction Fund (ERF). The consultancy claims the fund faces significant design challenges, and to fail these would risk budget outcomes, national emission targets and Australia’s standing in international climate change negotiations.

The ERF sits at the centre of the federal government’s Direct Action Plan for delivering major greenhouse gas emission savings between 2014 and 2020 and represents a $1.55 billion commitment to ‘purchase’ new and additional abatement from emitters. However, pitt&sherry highlights that the plan must overcome several hurdles, including its reliance on:

• participants coming forward to enter legally binding contracts to deliver emission reductions,
• being able to reliably (and cheaply) estimate expected future emission trajectories,
• the need to source emissions reductions at the quantity and quality required,
• the risk that emissions in other parts of the economy will rise as government focuses on the abatement of individual companies or projects, with ambiguous outcomes overall.

These problems can add to program costs, affect the reliability of the ERF in supporting targeted national emission reduction outcomes and make it difficult for government to demonstrate value for money from the major public expenditures involved.

Brett Janissen, Principal Consultant - Economics at pitt&sherry, said: “Lessons from Australia’s recent past, as well as from other jurisdictions, highlight the challenges and complexities of utilising a competitive bidding process to buy future emission reductions.”

pitt&sherry highlights the United Kingdom’s experience with a reverse auction arrangement for purchasing emission reductions. Under this measure, major corporates were invited to compete for a share of a £215 million funding pool by offering commitments to achieve lower emission outcomes in the future.

“Not only did the total amount paid for abatement by the UK government far exceed the likely cost of generating that abatement (due to the uniform clearing price mechanism used), examination of the subsequent emissions trading market revealed that the price paid by government for abatement was far above the price the participants began charging each other shortly afterward,” said Janissen.

In its submission to the federal government’s ERF Green Paper, pitt&sherry has provided several suggestions for its designers to consider around the design framework and sources of emissions reduction, auction preparation and safeguards. The submission highlights that many existing energy-efficiency and fuel-switching programs represent major drivers of low (and no) cost abatement within the economy, and strengthening mechanisms in this area can deliver even greater savings while government takes the time needed to work through and refine its ERF concept.

pitt&sherry notes that significant low-cost emission savings from the residential and commercial sectors have been demonstrated in a range of settings, including through energy-efficiency schemes currently operating in NSW, Victoria, South Australia and the ACT, but that the ‘transactions’ costs of bidding this potential into the ERF will be prohibitive.

“There are highly cost-effective opportunities in these areas, but they require cost-effective and efficient regulatory measures, such as minimum energy performance standards, to unlock them. These measures have proven their ability to deliver very large greenhouse savings at negative cost,” Janissen said.

In addition, pitt&sherry recommends that ongoing policy support and incentives are required to overcome inherent owner disincentives to invest in energy-efficiency improvement in rented properties and to support efficient choices, while suggesting government focus on the commercial and transport sectors for significant low-cost abatement potential spread across myriad activities and available on a national scale.

pitt&sherry’s submission on the ERF Green Paper can be downloaded here.