King-sized plans to accelerate abatement – are they big enough?

The Federal Government plans to accelerate abatement through changes to the Emissions Reduction Fund (ERF) and the Safeguard Mechanism, following the release of the King Review and its response on 19 May 2020.

The Expert Panel examining additional sources of low-cost abatement, chaired by Grant King (formally of the Business Council of Australia and Origin Energy), was tasked with advising on incentivising low-cost abatement opportunities to help Australia meet its international commitments under the Paris Agreement from 2030 onwards, through an energy neutral lens.

Its recommendations, and the Government's response, signal the Commonwealth's trajectory for its current (and future) emissions reduction framework; its Technology Investment Roadmap Discussion Paper incorporates some of the recommendations.

In this article we explore the recommendations, including two that stand out for their application to large facilities: a new credit scheme for the Safeguard Mechanism and an ERF methodology for carbon capture storage and carbon capture, utilisation and storage (CCS/CCUS).

King Review recognises room for improvement in the ERF

The $2.55 billion ERF was established in 2014, and given a $2 billion boost in 2019 by the Climate Solutions Fund, where registered projects bid to win contracts with the Government to generate abatement in accordance with an approved methodology. Contracted Australian Carbon Credit Units (ACCUs) and Government payments are issued yearly based on measured abatement. ACCUs generated by projects which are not bought by the Government can be bought by other ERF participants to meet abatement target obligations, large emitters to meet obligations under the Safeguard Mechanism, or elsewhere in the ACCU voluntary market.

The King Review acknowledged some of the shortcomings of the ERF, with participation, implementation and technology barriers resulting in land sector projects dominating uptake. These projects have long lead times for achieving abatement. Further, uptake of the three ERF methodologies open to large facilities subject to the Safeguard Mechanism has been slow.

In recognition of the need to expand participation to more sectors of the economy, the King Review makes various recommendations to improve the ERF design, many of which have been agreed, or agreed in principle by the Government. It recommends encouraging participation and scaling up abatement through initiatives like:

• awarding ACCUs on compressed timeframes for certain projects;
• fixed contract prices and subsiding measurement costs under certain methods; and
• more flexible options for method development, such as third party development and pilot methodologies and expanding methodologies to hydrogen-related fuel and energy projects and CCS/CCUS.

New opportunities for large facilities

For those large facilities covered by the Safeguard Mechanism, two recommendations stand out:

• CCS/CCUS methodology: to develop a new ERF methodology for CCS/CCUS.
• Safeguard Mechanism Credits: to create a new crediting scheme for large facilities implementing "transformative" abatement projects that lower emissions below reported baselines.

CCS/CCUS

The King Review recommended the development of a methodology for CCS/CCUS to drive abatement in sectors – such as heavy industry, freight transport, and aviation – that do not currently participate in the ERF.

CCS/CCUS technology involves capturing carbon released from industrial processes and storing or converting it. There has been significant public and private investment in developing CCS/CCUS technology and demonstration CCS/CCUS projects, though none are fully operational yet in Australia perhaps with the exception of Chevron's Gorgon project, which began capturing two-thirds of its emissions in mid-2019.

The recommendation for a new CCS/CCUS methodology has been agreed in principle by the Government and it has already begun taking steps to develop the methodology and the supporting legislative amendment.

Safeguard Crediting

The Safeguard Mechanism operates to require large emitters to surrender ACCUs for emissions over reported baselines.

The King Review provides an outline proposal for a low-emissions incentive deployment scheme, which essentially would create a new form of abatement credit for large emitters subject to the Safeguard Mechanism. The proposed Safeguard Mechanism Credits (SMCs) are distinct from the existing ACCUs.

Big emitters could earn SMCs by implementing "transformative" abatement projects that deploy low emissions technologies. The details of the new scheme are yet to be developed, but the King Review suggests that facilities looking to be credited would provide a "transformation statement" summarising the investment made to reduce emissions intensity and transform from business as usual practices, to avoid crediting for natural reductions in production or facility closures.

The Government has agreed to this recommendation and plans to start consultation with industry and development of the detailed design of the scheme. It has, however, made clear that participation in such a crediting scheme will be voluntary so as to avoid being characterised as a "baseline and credit" emissions trading scheme or creating a carbon price.

Some of the issues to consider with the proposed Safeguard crediting scheme are that it:

• does not propose to implement more robust baselines under the Safeguard Mechanism;
• creates the potential for added complexity in the existing ACCU market by introducing another type of credit unit, and may impact of the robustness of the voluntary ACCU market;
• limits policy innovation towards market mechanisms and away from direct Government contributions to achieve abatement; and
• could detract from clean technology investment and development.

The Commonwealth Government's adoption of these recommendations reflects that actively incentivising abatement from top emitters is one of the limbs of its strategies to meet Australia's Paris commitments. With each State and Territory now committed to a net zero target by 2050, each investment needs to be balanced against relative emissions gains and alternative low emissions solutions.

Other key recommendations

Some of the other recommendations of the King Review are the:

• review of the ERF governance processes;
• expansion of the ambit of the Australian Renewable Energy Agency and the Clean Energy Finance Corporation to be technology-neutral and not restricted to renewables;
• expansion of the NABERs energy efficiency scheme to apply to more commercial buildings, such as hotels; and
• creation of a co-investment program to accelerate the uptake of transformative, high abatement potential technologies that are not currently cost competitive.

Next steps for emissions reduction and more participation in the Emissions Reduction Fund

The Government will now move to the detailed design and implementation phase, which will include further industry consultation on the specifics of the proposed reform.

Government's steps to incentivise ERF participation are ongoing, with the Clean Energy Regulator extending the deadline for submissions on its draft Guidance on meeting the regulatory additionality requirement for the Emissions Reduction Fund. This Guideline seeks to reconcile the requirement of additionality under the ERF, and the growing body of State and Territory law that create emissions targets or limits. Public consultation on this paper is now open until 5 June 2020.

The King Review indicates that we can expect further changes to the ERF framework this year aimed at contributing to the goal of meeting Australia's obligations under the Paris Agreement. It also confirms that the Commonwealth's approach to achieving abatement (and the elusive net zero by 2050 target) will be in co-operation with initiatives of the States, Territories and business.

Initiatives to accelerate abatement opportunities, such as the King Review, are important in addressing the supply side of the emissions abatement equation. What is still missing is creating the demand for emissions reductions which will drive investment in the development and deployment of the opportunities identified through this review. The Government's long-awaited 2050 emissions reduction strategy may provide some insights but this now will not be released until closer to the COP26 conference.

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