The Real Price of Direct Action

In 2012, in an article published in the WME online blog, MRA wrote: “Here we are at the end of a 6-year negotiation that began with the CPRS and NGERS and has finished with the Carbon Pricing Mechanism (CPM) and the Carbon Farming Initiative (CFI)”.

We all thought this was the end of the theoretical road and the start of the implementation phase of meaningful climate action. Yet, with the Government’s pre-Christmas release of its Emissions Reduction Fund (ERF) Green Paper, here we are – two years later – still arguing about which is the best way to reduce Australia’s emissions by 5% by 2020: a cumulative emissions reduction of around 431 MtCO2-e from 2014 to 2020, (revised down from the estimated 591 MtCO2-e thanks to the first Kyoto period carry-over and the results of the previous government’s actions.)

That is an annual decrease ranging from 45 MtCO2-e in 2015 to 131 MtCO2-e in 2020 on current trajectory (see Figure 2 and first line of Table 1 below).

To achieve this target, the Coalition’s policy is to set up an Emissions Reduction Fund that will commence operation on 1 July 2014, with an initial allocation of $300 million, increasing to $500 million in year 2 of the scheme, $750 million in year 3 and $1 billion by the fourth year of the scheme. It is envisaged that the Fund will invest an annual average of around $1.2 billion in direct CO2 emissions reduction activities through to 2020 (subject to review of the Direct Action scheme in 2015).

The Government proposes that the Clean Energy Regulator operate the procurement process, using a reverse auction system to create competitive pressures which would enable the lowest-cost emissions reductions to be identified and purchased by the Emissions Reduction Fund.

Although the Green Paper, being a discussion paper, remains a bit light on details, we can start making some assumptions what it will mean for the 90 or so CFI projects currently in operation (mainly form the waste sector).

The CFI has delivered just over 4MtCO2-e to date. If we are to achieve our emissions targets domestically through the ERF, we will need to see a 100-fold increase in the number of abatement produced over the next 5 years.

That is a huge – but not impossible – task that may only be successfully undertaken if CFI projects proponents are given some certainty on the price of GHG abatement.

To that effect, the Government has proposed to enter into forward contracts with successful bidders to help businesses secure project finance before projects are implemented.

The Clean Energy Regulator would also apply a ‘benchmark price’ — being the maximum amount it will pay per tonne of emissions reduced — with only bids costing less than the benchmark price being considered. The benchmark would be confidential to Government.

MRA has tried to estimate what this ‘benchmark price’ may be, based on the task at hand and the proposed allocated funds. Table 1 and Figure 2 summarise the results of our analysis and show what we would expect the maximum price of emissions reduction credits would be (we think about $6.65 in 2015).

Table 1 – MRA’s analysis of emissions reduction task and likely maximum abatement price

2013*

2014*

2015

2016

2017

2018

2019

2020

Abatement task (MtCO2e)

13

25

45

69

86

104

118

131

Direct Action pool of Funds ($m)

n/a

n/a

$300

$500

$750

$1,000

$1,200

$1,200

Max. abatement price –expected benchmark price ($/tCO2-e)

$23

$24.15

$6.65

$7.22

$8.69

$9.66

$10.15

$9.19

*covered by the Carbon Price Mechanism and the Carbon Farming Initiative (about 4MtCO2-e) – together assumed to have achieved 38MtCO2-e.

What does this all mean for the waste sector?

The success of Direct Action – like the CPM before it – partly relies on the Government’s assumption that emissions from the waste sector will remain relatively stable at 15 Mt CO2-e through to 2030. Waste generation is expected to grow, so improvements in methane capture and the diversion of organic waste from landfill will be necessary to limit emissions growth.

Figure 0‑1: Emissions from waste projection 1990 to 2030 (National Greenhouse Gas inventory-NGGI)

The proposed Direct Action scheme will penalise existing CFI projects, which currently (and until February 2015) benefit from a strong carbon price of about $24/tCO2-e. This is because the price is currently underpinned by the Carbon Tax.

On the other hand, the green paper proposes to significantly simplify the administrative requirements to participate in Direct Action, and to dramatically increase the number of approved methodologies from the current 22, to probably 200 or so.

There also are provisions to facilitate the aggregation of emissions reductions across projects and activities, and allow for CFI professionals (known as ‘project aggregators’) to act on behalf of a group of land owners and/or project proponents.

That’s great news for a range of small to medium landfills in regional settings that cannot afford the capital expenditure of a landfill gas capture system, or even the administrative costs of participating in the scheme.

The intent behind the green paper is that these small landfills could now claim credits through project aggregators for their small scale GHG mitigation efforts such as organics diversion (think Groundswell or MAF composting) and/or landfill biofilters and/or phytocaps.

Time to act

The government is now calling for submissions on a number of design issues. Councils, landfill operators and composters should make good use of the coming consultation phase to ensure that the following activities be recognised under the Emissions Reduction Fund:

  • Capture and combustion of landfill gas from both legacy and non-legacy waste
  • Diversion of both legacy and non-legacy Municipal Solid Waste (MSW) from landfill through AWT facilities
  • Diversion of Source Separated Organics (mixed food and garden organics waste, aka “FOGO”) from landfill through controlled composting facilities
  • Diversion of green/garden waste from landfill through controlled composting facilities
  • Soil Carbon (e.g. sequestration through application of compost and biochar on land)
  • Avoided emissions through recycling of materials with high embodied energy
  • Avoided emissions by replacement of superphosphate fertilisers with compost
  • Transport (biofuel)
  • Energy Efficiency

We, as an industry need to ensure that the CFI is expanded to all waste, including “non-legacy” waste, and that we work together to develop simple methodologies for diversion of Source Separated Organics from landfill, diversion of green/garden waste from landfill, soil carbon sequestration, avoided emissions through recycling etc.

Direct action should also provide transitional arrangements to drive immediate uptake of abatement activities such as landfill gas flaring, and help existing projects adapt to a lower abatement price.

MRA is already working with clients on a number of these methodologies and representing their interests in Canberra. The more at the party the stronger our sector’s voice will be. If any of the above measures apply to you, feel free to get in touch with us at mraconsulting.com.au.

Submissions for the Green Paper close on 21 February 2014.