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The Emissions Reduction Fund, Greg Hunt and Local Government

Alexi Lynch
May 2014

There has been a lot written about the Federal Government’s Direct Action policy and the centrepiece Emissions Reduction Fund (ERF), but we’ve found less about the impacts and opportunities for local government. In this article we analyse the ERF from a council point of view and summarise the main themes that the Environment Minister Greg Hunt has been conveying, most recently at the Municipal Association of Victoria (MAV) Environment Conference in May 2014.

In our reading it seems to get down to three key words for councils: Aggregation, aggregation and aggregation.

Direct Action, the Emissions Reduction Fund and the Budget

At the MAV Environment Conference in May 2014, Environment Minister spoke about some innovative approaches to long-term land management and reclaiming “dead spaces” (for example, undergrounding huge overhead electricity transmission infrastructure), re-forming our cities as a social issue, and cultivating “green canopies” for our cities by planting millions of trees. However most were keen to hear about Direct Action and the Emissions Reduction Fund.

The Emissions Reduction Fund (ERF) is the centrepiece of Direct Action. May’s Federal Budget increases funding allocated to the Emissions Reduction Fund by an extra $1billion, but the profile of spending means less allocated funding over the next four years than initially forecast. The high level numbers are that the budget allows for $2.55 billion over a ten-year period, rather than $1.55billion over four.

There has been a lot of analysis of the Budget and Direct Action in general in mainstream media as well as by great sources such as Renew Economy, Climate Spectator and The Fifth Estate. We’re not going to get into that here, however for background and macro-level discussion check out these sources or some of the links below.

The Emissions Reduction Fund "Reverse Auction"

The Emissions Reduction Fund will be a “reverse-auction” process, which means that the roles of the buyer and seller are reversed. Instead of buyers (in this case the Government) competing to obtain a product (in this case tonnes of greenhouse gas abatement) a reverse action means that sellers (companies, industries, councils) compete to get the Government’s business. In this situation, prices (cost per tonne of greenhouse abatement) decrease as sellers try and undercut each other. 

Those emissions-reductions projects with the lowest cost per tonne of carbon would be allocated funds. This is in line with what Minister Hunt has been saying publicly and to stakeholder groups for months – that the government will be “blind to the source”. They will simply purchase the lowest-cost abatement regardless of whether the project is, for example, energy efficiency, reforestation or improvement of soil carbon.

This has raised a few concerns for councils. Firstly, Australian local governments have been leading the way for over a decade when it comes to reducing greenhouse emissions. Since the late 1990s, when other levels of government and industry were essentially in denial around climate change, councils were participating in the Cities for Climate Protection (CCP) program (covering 84% of the population), retrofitting council facilities, implementing energy efficient street lighting, flaring waste resources and supporting their communities. While there’s a lot of work to go, for many councils the low-cost-per-tonne abatement or “low hanging fruit” has already been implemented. They will simply be priced out of the market – competing with heavy industry, manufacturing and other industries where polluters can install new technology that reduces their emissions relative to their business-as-usual level and then seek under the reverse auction scheme.

We think this is legitimate concern and individually councils may struggle to compete in this type of reverse-auction market. The size and scope of council projects may simply be dwarfed by what other industries can bring to the table.

However this may not play out in practice.

We have heard from quite a few carbon market industry sources that many industries and large companies have been pretty apathetic towards the ERF and there may not be “massive amounts of low-cost abatement” that other sectors are ready to throw at the reverse auction. Quite simply, a lot of businesses are jaded by the policy changes and uncertainty from the past decade and given it’s a carrot rather than stick approach, there is no obligation to get involved. If larger companies don’t think that it’s worthwhile to bid for contracts through the ERF then the abatement that councils can bring to the table may in fact be affordable. 

Councils and the Reverse Auction

Initially ERF funds would only be allocated when a direct reduction in emissions has been proven – at the end of the project. However the Government appears to have shifted on its position and the latest White Paper proposes payment for emissions reduction as they occur during the term of the contract. This would certainly reduce the risk for councils to get involved, as many projects would involve large capital or up-front costs. 

What’s more, the Government will "retain discretion to enter out-of-auction contracts" for major projects, which can reduce emissions by over 250,000 tonnes of CO2-e a year. This indicates that the Government may be willing to consider large projects. So if a council had a low-cost emissions reduction project that would reduce emissions by 250,000 tonnes (and will only go ahead if they can access the ERF therefore proving “additionally”) then you can go and knock of the Government’s door now.

At the MAV Conference Minister Hunt urged councils to put in proposals as local government can move from ideas to market faster than other sectors. He specifically mentioned street lighting and buildings.

Do any Councils have 250,000 Tonnes of Abatement Lying Around? 

And we come to the crux of the issue.

250,000 tonnes is a lot of abatement for a council. For many councils, 2,000 tonnes is a lot of abatement.

By way of comparison, there are 64 councils in Victoria currently undertaking (or about to begin) street lighting “bulk change” projects where they are changing all of their residential street lights to energy efficient alternatives. The savings per light is 68% to 77% and we’re talking 232,000 lights all up. So for around 60 councils this is the single largest emissions reduction project they have ever undertaken and the cumulative reduction in greenhouse emissions is 1.56 million tonnes – over 20 years. 

Another comparison of this sort of scale is the old CCP “Measures Reports” which essentially aggregated the cumulative council emissions reduction across every council that was a participant in CCP. The program finished in 2008 but looking back at historical data from the 2006-2007 financial year, the cumulative corporate emissions reduction across the whole country in that year was 569,859 tonnes of abatement. 

With less than 250,000 tonnes you can still be involved in the reverse-auction process however the advantage of hitting this amount is that you can enter an "out-of-auction contract" and contact the Government now. 

Aggregation 

One of the biggest barriers to participation in the ERF will be the administrative cost to councils in commencing projects, such as ensuring that an emissions reduction method applies to the project and determining what the additional emission reductions are. 

Four “reverse-auctions” will be held in the first year, with an initial minimum bid size of 2,000 tonnes of CO2-e per year. We’d be surprised if a project with 2,000 tonnes of emissions reductions would be in a council’s best financial interest due to the administrative burden or “transaction costs”.

What makes more sense is councils working together and bringing a large amount of “aggregated” greenhouse emissions reductions to the table. There is a great opportunity for an organisation or local government body to act as such an aggregator and bid into the market as a group on behalf of councils. To do so you’d have to: 

  1. Ensure that you could secure enough cumulative abatement to make it cost-effective
  2. Ensure that all of the abatement is genuinely additional and meets the final conditions. In Minister Hunt’s words from the MAV Conference the two tests are “is it real reduction?” and “can we verify it?” If so then you can have the certainty of a 5-year government contract.
  3. Ensure that your calculations are correct and the payment from the reverse-auction can cover your administration costs.

An organisation that fills this breach is of course taking a risk. You could spend a lot of time setting this up, getting relevant accreditations (if required), administrating dozens or even hundreds of councils and projects only for it to fall through or not meet required thresholds. We know from experience as an accredited NSW Energy Savings Scheme (ESS) certificate creator that while it only costs a few hundred dollars to join the scheme, it costs tens of thousands in human resource hours to develop and maintain the systems required.

That’s not to say it’s not worth it. We’re aware of dozens of council projects that could bring hundreds of thousands of tonnes of abatement to the table – especially large facilities and in states where street lighting has barely moved out of first gear – so there is a lot of potential. The operation of water and sewerage plants offers chances for some councils in NSW and Queensland to get involved on their own. There also could be an opportunity for carbon farming and councils themselves to act as aggregators in their community. However for most councils someone needs to come forward and take on some risk to play the aggregator.

The Known Unknowns

Also known as politics. Will Direct Action pass the senate? Does it need to pass through the senate? What about other energy efficiency and renewable energy policies? 

This gets into the realm of political horse-trading. The new Senate has repealed the carbon price however the Palmer United Party (PUP) - along with some of the independent Senators – have been critical of Direct Action and said they would not support it. The Government has also indicated that it will put funding for the Emissions Reduction Fund in “budget appropriation bills” which are customarily not blocked, meaning it should pass.  

Ironbark staff have met with Mr Hunt on a few occasions over the last few years and have noted that while he is an intelligent politician who truly believes the science of climate change and the need to act, his greatest challenges come from within the cabinet. 

So while it seems the ERF will be implemented, there is always a risk around the politics of the day getting involved, as we have seen with countless changes to legislation around solar credits and feed-in-tariffs and most recently in Victoria with the dismantling of the Victorian Energy Efficiency Target

Watch this space and if you hear of councils or other stakeholders interested in a local government sectoral response to aggregate emissions reductions then please let us know

More Information 

The following articles provide more high-level analysis on Direct Action, the ERF and the Budget but do not necessarily have a local government focus. They do however provide some great overviews and background information. 

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