Abbott's first auctions prove Direct Action more slogan than policy

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The release of the Abbott Government's plans for its first auctions, the centrepiece of its $2.5 billion Emissions Reduction Fund, prove its Direct Action plan is more slogan than policy, writes RenewEconomy's Giles Parkinson.

TONY ABBOTT'S Direct Action plan to address Australia’s modest emission reduction targets finally hit the road this week. If the analysts are right, it will prove nothing more than the emperor has no clothes.

The Direct Action plan, and its proposal to “buy back abatement” from polluters, has been pilloried by all independent analysts because it probably won’t meet Australia’s small abatement target, and it won’t send a market signal for the decarbonisation that everyone knows is needed.

The first (silent) auctions were held this Wednesday and Thursday by the Clean Energy Regulator (CER), with the results likely to be released some time next week — most likely next Thursday.

The first auctions are likely to attract the cheapest and most readily accessible abatement. And that will almost certainly prompt the government to crow about its success.

But here’s the thing. According to Reputex, the market analysts, getting cheap abatement at the first auction will be self defeating, because it will simply mean that there is no incentive for major polluters to make the investments they need to reduce emissions.

“Penny wise, pound foolish” says Hugh Grossman, the chief analyst at Reputex. Grossman believes that if the auction does produce cheap abatement, then the Abbott government will struggle to meet even 20 per cent of the 236 million tonnes it needs to abate to meet its 2020 target of cutting emissions by 5 per cent below 2000 levels.

And if the government auction does produce results around the $20/tonne mark – enough to attract the interest, perhaps, of major polluters – it will simply confirm that the budgeted $2.5 billion will be enough to buy only half the abatement needed. Grossman continued:

“A low contract price has the potential to considerably deflate the new emissions market by discouraging investment to reduce emissions.

“If the price is high, we will see companies actively want to reduce their emissions and participate in the market. However if the price is low, we will see many firms simply sit on their hands and continue to pollute.”

The problem is compounded by the fact of the secrecy surrounding the auction. The CER has not revealed its “benchmark price”, or price cap, and it won’t release the details of the auction results, just the average price received.

And the CER has also given up on the pretence that the policy is designed to meet the 5 per cent abatement target, stating that it will only buy what it can afford. But no one knows how much that will be.

The problem is also compounded by another fact. There is no incentive now for major polluters to reign in emissions. The carbon price has gone, and the so-called safeguards mechanism that accompanies Direct Action is so generous it may allow some polluters to increase emissions.

The renewable energy target, which obliges utilities to invest in green energy, is also being wound back, and large-scale investment has fallen to virtually zero.

And the two biggest policy documents released by the government in the last few weeks – its discussion paper on future emissions targets, and the energy white paper – make no mention of the 2°C global warming target, only the scenario that allows for more fossil fuel burning and a catastrophic 4°C warming result.

It reminds some of the Hans Christian Andersen story about the emperor who commissioned clothes so magnificent that only the stupid and the incompetent could not see. And in modern Australia, no one in the Abbott entourage will admit that they cannot see a climate policy, even when it is patently obvious that none exists.

Abbott’s first auctions – the ultimate result of his “axe the tax” promise that marked his campaigning before and after the election – comes as the World Bank joins the chorus for carbon prices to be imposed on industry.

Chief executive Jim Yong Kim also called for the immediate repeal of fossil fuel subsidies, saying it was “crazy” to subsidise the burning of more coal.

“When I meet business leaders from the very carbon-intensive industries, their openness to a carbon price is striking. They say, ‘let’s do it’,” he told the Guardian.

The Abbott government, however, says it will not canvass a carbon price, indicating that even its longer-term targets would be met through the Direct Action mechanism. The Climate Change Authority and others have suggested a target of 40 per cent by 2025 or 2030.

Most analysts say that will cost billions if funded by Direct Action. Citigroup last week suggested up to $15 billion a year by 2030 if the target was for a 40 per cent cut, comparable with the actions of other major economies. It said the policy was expensive and inadequate.

Reputex hasn’t even bothered modelling it. As far as Grossman is concerned:

“It is so unlikely that this sort of scheme could do long-term targets, and so prohibitively expensive, that it would not be worth modelling.”

This article appeared in RenewEconomy on 14 April 2015 and has been republished with Giles Parkinson’s permission.

You can follow Giles Parkinson on Twitter @GilesParkinson.

Bruce Keogh's cartoons are available for sale from Keogh Cartoons.

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