First auction, first success?

Last Thursday concluded the first auction of the government’s Emissions Reduction Fund (ERF), the centrepiece of their Direct Action climate policy. It awarded 144 projects from 43 participants to deliver 47 million tonnes of carbon-equivalent abatement over a ten-year period at an average price of $13.95 (Clean Energy Regulator). A “great start” and “stunning result for Australia”, as appraised by Federal Environment Minister Greg Hunt.

The design of the ERF has changed somewhat since I discussed it last, but its implementation has always been left open to interpretation. The lack of certainty and communication of the policy has been a significant barrier to its success, however at first glance the policy appears to have achieved significant abatement at a relatively low price.

But of course, looks can be deceiving.

The price

Compared to a carbon tax of $24, the $13.95 result from the ERF seems miserly. But not only is this an average price, indicating some costlier projects, we can now fully expect prices in future auctions to exceed this. With multiple auctions and a government mandate to meet a target, the advantage is clearly in the hands of bidders.

Moreover, as we are effectively consumers paying for emission reductions, what are our options? If we’re looking for value for money, the price of European Emission Allowances (EUAs) in the EU Emissions Trading System (EU-ETS) are less than $10, and Certified Emission Reduction offsets (CERs) from the Kyoto Clean Development Mechanism (CDM) are trading at 25 cents. Admittedly, CDM projects have contentious legitimacy concerns, although arguably no more so than projects within the ERF.

The participation

47 million tonnes of abatement is a significant amount. However, this comes at a cost of $660 million without any incentives for future abatement. This is also an upward cap, with no incentives for additional reductions, nor any penalties for falling short. The government has accepted significant contract and performance risk, and provided clear incentives for participants to overbid (and underperform) their expected emission reductions.

The number of projects and participants is also a concern. Our national environmental policy is at present targeting 264 entities that have registered in the ERF, of which only 43 have been incentivised to make future emission reductions.  With stagnation and uncertainty in the number of methodologies and approved activities, the majority of industries and polluters are currently excluded from participating.

Moreover, many projects appear to be land and agriculture based activities initiated under previous legislation, including the repealed Carbon Pricing Mechanism and the Carbon Farming Initiative. These low-hanging fruit options are not only questionable in terms of value, but once exhausted we can expect rising prices and bids by project participants.

An inherent feature of the ERF is the necessary barriers and bureaucracies that are required for participation. The need for firms to closely develop a project plan and ensure compliance with onerous guidelines and regulations is limiting participation, as is the uncertainty regarding auction outcomes and schedules.

A success?

So was the first auction a success? Well, yes. For a poorly designed and ill-constructed government policy, the auction was able to contract a significant amount of abatement at a relatively low-cost. So in other words, we’ve performed well at performing badly.

Although it is difficult to assess the extent we may be overpaying or how narrowly we target emissions reductions, it is very clear that we have chosen an inferior policy plan designed for inaction and a path of least resistance.

The extent to which the ERF can encourage broad and deep emission reductions must be exposed and seriously questioned. And as with the release of the Green paper before Christmas, the timing of the first auction before ANZAC day again comes as no surprise.

3 thoughts on “First auction, first success?”

  1. Excellent analysis and engaging read – sorting the rhetoric from fact on this important economic and moral issue.

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