POLICY:

Australia prepares reverse auction approach to replace carbon tax

MELBOURNE, Australia -- After imposing the highest carbon tax in the world, Australia was primed to become the first developed nation to test the idea that a link with the European Emissions Trading System would lead to a functioning global cap-and-trade CO2 market and more efficient carbon abatement.

Then last fall the Labor Party lost the parliamentary election, and the new government is embarking on a climate policy experiment of its own.

While eliminating the carbon tax, dismantling many of the green programs of the previous government and officially banning Australian carbon polluters from buying carbon credits outside the country, the new coalition nevertheless reaffirmed the country's pledge to cut emissions by 5 percent below 2000 levels by 2020.

The centerpiece of Prime Minister Tony Abbott's climate Direct Action Plan is a reverse auction at which polluters are supposed to compete for about $3 billion in government funding over five years by bidding with their cheapest ways to eliminate emissions. The Emissions Reduction Fund would award credits to companies that cut pollution faster than their peers, Environment Minister Greg Hunt wrote in a working paper published by the government.

"We will use architecture that is already in place and working well," Hunt said in a speech in Melbourne. "We agree on the science. We agree on the targets. We agree on market mechanisms. We disagree absolutely on what is the right market mechanism."

The fund is scheduled to start July 1, and it will initially deal only with rewarding emission reductions, without specifying penalties for carbon polluters that fail to meet their emission targets.

"By buying up the 'abatement cost curve,' we will provide powerful incentives for businesses to bring forward the lowest cost emissions reduction projects," Hunt said. "There is no need to tax the economy as a whole. The important thing is to focus on the gap and then purchase the reduction necessary to fill that gap. The lowest cost abatement may involve a whole range of projects including those to clean up waste coal mine gas, clean up power stations or to capture landfill gas."

First priority: carbon tax repeal

The first order of business for the new Senate, which will be seated in July, will be to repeal the carbon tax. Hunt called the tax, which made Australian carbon the most expensive in the world at 24.15 Australian dollars ($21.81) a metric ton, "a punitive electricity tax unequivocally rejected by the Australian people at the recent election."

Even though the tax was raising $9 billion a year in its first three years, it did not result in emissions saved. Its repeal will save each household AU$550 in the first year through lower electricity prices.

"Under the carbon tax, our domestic emissions have been predicted to go up, not down," Hunt said. "The previous government's own modelling from December 2012, which it submitted to the United Nations Framework Convention on Climate Change, shows that our emissions increase under the carbon tax from around 560 million tons in 2010 to 637 million tons in 2020."

The new Australian government is careful to point out it doesn't reject the science of climate change.

"The fact is that climate change is driven by greenhouse gas emissions, and these emissions are a byproduct of the things that improve our quality of life," Hunt said. "We accept that climate change is real. We accept that humans are contributing to it. We accept the need for action. We need new technologies and innovations that will allow us to achieve these same benefits, but without the accompanying greenhouse gas emissions."

However, the government has been criticized for appointing businessman and prominent climate change skeptic Dick Warburton to lead a review of the country's 20 percent renewable energy target. "I am not a denier of climate change, but I am skeptical about some of the aspects of global warming and what might be causing it," Warburton was quoted as saying in Australian media. He added that he had promised the prime minister he would complete the review with "a very open position for all sides of the discussion."

Meanwhile, Hunt said the country's abatement challenge is actually lower now, at around 440 million metric tons to 2020 rather than the 750 million metric tons assumed before the election. The revised figures are due to a range of factors, such as reduced emissions in the industrial and manufacturing sectors as a consequence of the collapse in overseas demand and changes in the land and forestry sectors, as well as Australia's carryover from the first Kyoto period.

At the same time, the government plans received mixed reviews from carbon advisory firm RepuTex, which said that although Direct Action would result in more emission reductions than the current carbon price, it would still fail to achieve the country's 5 percent reduction target.

Cut link to European carbon market

The previous government's plan to allow Australian companies to use European carbon permits to meet up to 50 percent of their liabilities under a domestic cap-and-trade program scheduled for 2015 will be scrapped.

"We believe that acting with other countries to tackle climate change is critical to Australia's future," Hunt said. "Australia will exercise a constructive role in international climate change negotiations."

Although the official link to the European ETS will no longer materialize, Hunt said the government won't stop companies that wish to trade emission credits from doing so, even outside Australia.

"What people do with their private property is not our concern," he said. "Holders could sell permits to the government, keep them, or sell them to voluntary or international markets."

But buying permits on international markets might actually be the easier way for Australia to meet its targets, according to the Australian Industry Group, which proposes buying cheap carbon credits from the United Nations' Clean Development Mechanism as insurance against not meeting its reduction target with domestic measures.

Other businesses, including Westpac, the country's second-largest bank, have joined voices with the defeated Labor Party to argue that an Australian emissions trading system should still be set up.

The Labor Party and its Greens allies are trying to weaken the government proposals as much as possible, first by breaking up the new climate bill so the Senate will have to vote separately on ending the carbon tax and on dismantling the Clean Energy Finance Corp., a AU$10 billion fund for renewable energy. The fund itself is also lobbying to stay in business, saying it already invested about AU$500 million and is making a profit of AU$2.40 per ton of carbon abated.

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