Decarbonising Australia's economy

As climate policy takes shape, can business maintain its constructive stance?

The broad outlines of a national framework for deep decarbonisation are becoming clear to policy watchers. We now have enshrined in law the 2030 goal of reducing emissions by 43% from 2005 levels, although this is a signal of commitment more than a binding obligation. We can plausibly expect to see a five-yearly cycle of targets that increase in stringency, following the ‘ratchet’ mechanism of the Paris Agreement. And even though the targets are not operationalised through any policies yet, companies should build the expectation of stronger decarbonisation policy into business forecasts.

Of course, getting legislation through Parliament is the easy part. As many experts have warned, the government now has to negotiate 215 emissions baselines in the Safeguard Mechanism, deal with an energy system whose accelerating transition is vulnerable to geopolitical shocks and plug other major holes in the climate policy framework. This will be ugly and difficult.

It’s worth briefly reviewing the business reaction to the Clean Energy Future Package passed by Julia Gillard’s government in 2012. There were some supporters, but many very loud detractors. Campaigns against the carbon price were run by the Business Council of Australia, the  Minerals Council of Australia,  the Australian Chamber of Commerce and Industry, the Food and Grocery Council. The focus was on the cost of compliance, the cost to consumers, the competitive disadvantage that would be created by what was continually called the highest carbon tax in the world.

The private sector is in a completely different place this time around.

Once the carbon price was repealed in 2014, the Renewable Energy Target reduced, and a range of energy efficiency policies axed, businesses quickly learned some important lessons. First, that Australia cannot defy global technology trends; second, that uncertainty also imposes costs (and the costs of ongoing uncertainty are very high); and third, that climate change itself ensures that pressure to decarbonise will only grow. A fourth lesson took a while to emerge but may be the most important: the transition to a clean economy is full of opportunity.

In the last few years we have seen major businesses setting their own decarbonisation goals, industry groups working together to support more ambitious national targets, and major advances in financial institutions’ approaches to climate-related risk. But now that decarbonisation shifts back from a voluntary signal of sustainability credentials to a government-mandated activity, can the private sector maintain its constructive stance?

A key test of the private sector’s progress will be its response to the government’s redesign of the Safeguard Mechanism, for which a consultation paper was recently released. The most striking features of the paper are:

• An indicative sectoral emissions budget to 2030, in line with net zero by 2050. Assuming entities under the Safeguard Mechanism retain a 28% share of national emissions, they would get an aggregate carbon allowance of 1227 MtCO₂-e for the decade (of which about one-third[1] will already have been expended by the time the new baselines start operating in mid-2023)[2].
• Indicative baseline decline rates of between 3.5% and 6% per year. This is broadly consistent with the Science Based Targets Initiative, which requires companies to set annual emissions reductions equivalent to 4.2% of their 2020 emissions to be aligned with the global 1.5°C goal. The fact that Australian Safeguard Baselines won’t be implemented until mid-2023 implies the need for steeper reductions to make up for lost time.
• The broad range of flexibility options that may be included within the scheme. In addition to production-adjusted baselines and access to ACCUs, flexibility options include extended multi-year monitoring periods, so that companies can bank below-baseline credits (Safeguard Mechanism Credits or SMCs) or borrow allowed emissions from future years; the introduction of SMC trading; and eventually the use of international offsets to meet some portion of an entity’s liability (subject to the finalisation of rules under the Paris Agreement).

By setting out the parameters of the abatement task the government is anchoring expectations. And by proposing multiple means by which facilities that face significant hurdles to direct decarbonisation can comply with tightening emissions constraints, it is hoping to weaken attacks on the abatement parameters. Assistance, particularly for trade-exposed emissions-intensive industries, will also likely form part of the package, although as the paper emphasises, relaxing emissions constraints on some entities transfers the burden to others or allows it to accumulate in the future.

How will industry respond? Call it the Emitters’ Dilemma where the first round ended in mutual defection and the abatement task grew. This time, business leaders must avoid the temptation to focus only on the risk of short-term pain.

After all, many companies facing the prospect of declining baselines under the mechanism have already set themselves net zero commitments. Having publicly stated that decarbonisation is in their long-term strategic interests, it’s hardly credible to oppose a policy designed to get them there. There will no doubt be furious lobbying over some of the details, particularly with regard to flexibility and assistance provisions. But it’s not too much to hope that enlightened self-interest will prevail.