Australia’s Emissions Reduction Fund (ERF) is skewed towards paying for low-quality carbon cuts that would have taken place anyway, and is less efficient than a broad emissions trading scheme or a CO2 tax, according to a report by the Australian National University.

The fund is the cornerstone of the Coalition government’s so-called Direct Action climate policy, and so far the government has paid A$1.7 billion ($1.25 billion) for 143 million tonnes of CO2e cuts from projects to take place over the next decade.

But the credibility of this approach is undermined by the difficulty of determining whether projects would have gone ahead even without ERF funding, which means baseline emission levels are often set too high, according to a report by the ANU’s Crawford School of Public Policy.

“Projects with overgenerous baselines will be able to submit relatively low auction bids because the abatement they offer is largely non-additional, and thus cheap. These bids are well placed to secure funding,” the report said.

The government’s policy is that it will buy the cheapest emission cuts on offer without any regards to quality as long as projects meet three basic requirements – they must be new, not mandatory, and unlikely to be implemented under a different government programme.

The ERF does not apply financial additionality tests, like the UN’s Clean Development Mechanism does.

The ANU report listed a number of project types that could receive ERF funding even though they might have gone ahead away, such as capturing gas to generate electricity when doing so may generate a profit, and committing to not clear land when there was no intention to clear.

At the ERF’s first auction, held in Apr. 2015, more than 60% of the emission cuts bought by the government was from avoided deforestation projects in New South Wales.

“The payments rest on the assumption that clearing would have happened without the subsidy. Given the size of the payments, it seems likely that some vegetation has indeed been preserved, albeit at a high price. Some of the spending has questionable additionality, however, given that the incentive to clear was anyway rather low … and that there is an incentive to identify the most marginal land to offer up to the scheme,” the report’s author Paul J. Burke wrote.

“In my discussions with local stakeholders, Direct Action revenue was referred to as ‘cream’ and ‘too good to be true’.”

Meanwhile, Direct Action provides little incentive to cut emissions from electricity generation, Australia’s biggest-emitting sector, and its project-based approach means any abatement achieved at one facility could easily be offset by an emission increase at another plant.

“Electricity-sector emissions declined by 9% over the two years of the carbon price (2012-2014) and have increased since its removal. While there are many factors affecting electricity-sector emissions in any single year, it is fair to conclude that the carbon price provided an incentive for emissions reductions in the electricity sector that Direct Action is not providing,” it said.

BROADER MARKET OR TAX

Many observers in Australia expect the Direct Action policy to eventually evolve into a baseline-and-crediting scheme.

“A baseline-and-credit scheme would be an improvement over the current subsidy approach, although it should be kept in mind that a share of permits traded will be anyway in nature, generated by firms that happen to be below their government-determined baseline,” the ANU report said.

“A baseline-and-credit scheme is also likely to have higher administrative and lobbying costs than a standard ETS, provide less certainty over the achievement of an emissions target, and miss out on revenue that could be used to reduce Australia’s budget deficit or for other purposes. A standard ETS would hence be preferable.”

It added that a carbon tax might be more desirable than an ETS, but was unlikely to be implemented because it would be politically unviable.

STANDING FIRM

ANU joins a long line of researchers and analysts that have concluded that the government’s current climate policy is unfit to bring about deep emission cuts in Australia.

In late April the opposition Labor party said it would abolish the policy and instead implement two emissions trading schemes if it wins the upcoming July 2 election.

But the government has dismissed criticism of its climate policy and maintains that a broad carbon market would push up electricity prices and hurt the economy.

On Wednesday Environment Minister Greg Hunt said that if the election brings a hung parliament, Australia is likely to end up with a Labor-Greens coalition.

“We thought Labor’s plan for a carbon tax was bad – imagine how painful it will be once the Greens get involved,” Hunt said.

By Stian Reklev – stian@carbon-pulse.com

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