Australian ‘soft start’ ETS would seek links to international carbon market, but demand seen limited

Published 05:11 on April 27, 2016  /  Last updated at 16:05 on April 27, 2016  /  Asia Pacific, Australia, International, Kyoto Mechanisms  /  No Comments

Australia’s main opposition party on Wednesday revealed plans for an emissions trading scheme with access to international offsets and potential future links to other cap-and-trade systems, although analysts said initial CER demand would likely be limited due to a ‘soft start’ approach.

Australia’s main opposition party on Wednesday revealed plans for an emissions trading scheme with access to international offsets and potential future links to other cap-and-trade systems, although analysts said initial CER demand would likely be limited due to a ‘soft start’ approach.

The Labor party’s climate change action plan included lifting Australia’s climate target to a 45% cut in emissions by 2030 from 2005 levels, and a framework for a market-driven shutdown of the nation’s coal-fired power plants.

Should the party take office after this year’s election, likely to be held on July 2, it would also introduce an ETS for industry from July 1, 2018, the plan said.

Companies emitting more than 25,000 tonnes of CO2 per year would initially be given caps consistent with Australia’s target to cut GHG emissions 5% below 2000 levels by 2020, but Labor stressed that this would not mean implementing a carbon price.

Only facilities emitting more than their cap allowed would have to buy carbon units.

Industries facing international competition would be allowed to use UN-issued CERs – currently trading in the EU market at A$0.59 – to meet their full obligation.

Other sectors would have restrictions on CER use, and would have to find the rest of the offsets in the more expensive domestic market.

“Roughly speaking, the CER demand would be limited, although potentially higher than under the current safeguard mechanism,” Bret Harper with market analysts Reputex told Carbon Pulse, while stressing it was difficult to make a precise estimate until all the policy settings were available.

“Judging by our current emission forecast and the coverage proposed by Labor’s plan in the first phase, I’d estimate the CER demand to be less than that from South Korea,” he said.

The Korean government is currently considering allowing CERs in its national carbon market, and Reputex has estimated its potential annual offset demand at around 20 million.

2020

After an initial two-year ‘slow start’ period, Labor said it would introduce a tighter ETS in 2020 with caps set in line with the 45% carbon reduction target by 2030.

Rules and regulations for the post-2020 period would be hammered out over the next three years, including the possibility of formal linking to other schemes, the plan said.

Under former Prime Minister Julia Gillard, Australia negotiated a link with the EU ETS that would have come into force in July 2015. However, that deal was abandoned when the Liberal-National Coalition won the 2013 election and subsequently scrapped the carbon pricing mechanism.

The markets in the EU, New Zealand, South Korea, California, and even China would be the potential top candidates for linking to an Australian ETS.

However, the use of CERs after 2020 remains a question. The Kyoto Protocol expires in 2020 and the market-based text in the Paris Agreement does not make any references to the CDM.

One or several new types of international units are expected to emerge by then, but a lot of work remains to be done in UN negotiations before there is clarity on what the international market would look like post-2020.

“Notably, the curbing of the use of CERs after 2020 may lead to the re-focusing of the market on domestic abatement objectives. This suggests that ACCUs will become the primary offset in Phase II of the ETS, directing long-term investments into Australian projects rather than foreign markets,” Reputex said in an analyst update Wednesday.

ELECTRICITY GENERATORS

In parallel with the industry ETS, Labor would establish a separate carbon market for electricity generators, based on a model proposed by the Australian Energy Market Commission.

The regulator would develop an industry-wide emissions baseline. Generators would earn carbon credits for each unit of electricity they produced below that baseline, but would have to buy credits if their electricity created emissions above the benchmark.

Power companies would not have access to international offsets.

“The different access of market segments to international permits will lead to the creation of multiple carbon markets, including different prices for Australian Electricity Sector Credits (AESCs), CERs, and ACCUs with the possibility of price differentiation by category,” wrote Reputex.

“The paring of a ‘slow start’ ETS with more immediate regulation to trigger emissions reductions from the electricity sector is likely to be both an effective and politically feasible policy solution, providing long-term architecture to guide the market towards a 2030 emissions reduction target, while at the same time, enabling the National Electricity Market to begin its transition away from carbon-intensive generation (and removing excess capacity) while avoiding pricing shocks.”

REACTIONS

The government’s initial response on Wednesday was that Labor’s plan would drive up energy costs.

“What they’re proposing is to double the burden on Australia, relative to other countries … When a similar target was modelled on the basis of Labor’s previous scheme, it would have required a very substantial increase in electricity prices,” Prime Minister Malcolm Turnbull told ABC radio.

“This is yet another economic handbrake that Labor is putting on our economy, another restraint on jobs to add to all the other job-destroying measures they’re proposing.”

But others were more positive.

“The energy industry has backed an efficient, national and market-based approach to emissions reduction for the past decade, and today’s plan is a step towards that objective,” said Matthew Warren, chief executive of the Australian Energy Council.

“Importantly, Labor’s climate plan recognises the need for all sectors of the economy to reduce emissions while recognising the specific sectoral needs of transforming the electricity system. There is still a lot of detail that needs to be worked through, and a number of specific proposals that require further clarification,” he said.

Jennifer Westacott, chief executive of the Business Council of Australia, also welcomed Labor’s proposal.

“The federal opposition’s climate change action plan … could provide a platform for bipartisanship to deliver the energy and climate change policy durability needed to support this critical transformation,” she said in a statement.

“The last thing Australia needs is to start from scratch on carbon policy. With the support of business and the community in developing specific measures, the opposition’s plan could build a bridge from the existing regulatory frameworks to the first phase of their proposed emissions trading scheme.”

Meanwhile, the Climate Institute’s John Connor “welcomed the ALP’s recognition that carbon pricing is a necessary but not sufficient part of the policy toolbox.”

“We need a policy package that replaces high-polluting coal power with clean energy, and supports communities and workers through this transition. The ALP’s policy takes an important step in this direction,” he said.

By Stian Reklev – stian@carbon-pulse.com

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