The King Review: changes on the cards for the Emissions Reduction Fund - Clean Air / Pollution

On 19 May 2020, the Commonwealth Government released its response to the King Review and its 26 recommendations that are targeted at ensuring Australia exceeds its 2030 emissions reduction commitments under the Paris Agreement. Practically, the King Review recommends that this must occur via an expansion of the voluntary demand for Australian Carbon Credit Units (ACCUs) and abatement while simultaneously creating a more dynamic supply where abatement occurs across a greater range of sectors and technologies.

Background to the King Review

In October 2019, an expert panel, chaired by Grant King (former President of the Business Council of Australia and CEO of Origin Energy), was commissioned by the Minister for Energy and Emissions Reduction, Angus Taylor, to report on how best to unlock low cost carbon abatement across the economy. A particular emphasis was placed on low cost carbon abatement opportunities in the industrial, transport and agriculture sectors.

The government asked the panel to focus on mechanisms that could be adopted to use government funds to leverage co-investment from the private sector and to identify changes that could be made to the government's Emissions Reduction Fund (ERF) that would unlock further abatement opportunities.

The expert panel provided its final report to the government on 14 February 2020 (the King Review).

What is the Emissions Reduction Fund?

The ERF is a key policy instrument that the government has relied on since 2014 to encourage the uptake of abatement technology in Australia. The ERF works by allowing participants in the scheme to earn an Australian Carbon Credit Unit (ACCU) for every tonne of carbon dioxide equivalent they store or avoid emitting. ACCUs can be sold to the government under a carbon abatement contract, which are awarded by the Clean Energy Regulator, or traded on the secondary market.

A related scheme, the Safeguard Mechanism, applies to Australia's largest emitters and is designed to ensure that the abatement purchased by the ERF is not displaced by emissions increases elsewhere in the economy. The Safeguard Mechanism requires facilities that produce more than 100,000 tonnes of carbon dioxide per year to keep their net emissions at or below their emissions baseline. Compliance with the mechanism is encouraged in that for every tonne of carbon dioxide a facility emits above its baseline, in its applicable reporting period, it must surrender the corresponding number of ACCUs.

In March 2019, the ERF was replenished with $2 billion from the government, on the expectation that it would deliver a further 100 million tonnes of abatement, and rebranded as the Climate Solutions Fund.

King Review recommendations

The King Review contains 26 recommendations. Of the recommendations 16 were agreed to, five were agreed-in-principle and five were noted by the government. No recommendations were expressly rejected.

A complete list of each recommendation and the government's response can be found here.

While each recommendation is distinct, the King Review categorised the recommendations into three themes.

Theme 1: Improving the Emissions Reduction Fund

This theme focuses on how to change the ERF to attract a wider range of projects into the scheme and thereby drive increased emissions reduction through the ERF.

The key recommendations include:

incentivising projects with higher upfront capital costs by allowing ACCUs to be awarded on a compressed timeframe and ahead of when abatement is achieved;
creating a fixed price purchasing desk for ACCUs from small projects;
facilitating method stacking (i.e. where multiple ERF projects on the same property using different ERF methods are allowed to share the regulatory and transaction costs associated with their abatement projects). For example by submitting a single, aggregated offsets report covering each component of the stacked project; and
amending the ERF legislation to enable an ERF method to be developed for carbon capture and storage or carbon capture, utilisation and storage, which does not currently qualify.

Theme 2: Incentivising voluntary emissions reduction on a broader scale

This theme targets methods to encourage voluntary abatement action on a broader scale. The theme also recommends leveraging the Safeguard Mechanism to accelerate genuine emissions reductions in Australia's largest facilities as well as changes to the ERF to facilitate a greater level of trading of ACCUs in the secondary market.

The genuine emissions reductions will be achieved through an alternative credit regime with Safeguard Mechanism Credits (SMCs), which will be earned by facilities that fall within the Safeguard Mechanism if they can reduce their emissions below their baseline. Under the alternative credit regime it is proposed that SMCs are distinct from ACCUs, in that they will not be credited with the same value as an ACCUs. Importantly however, SMCs, like ACCUs, will be able to be purchased by the private sector on a secondary market.

How this would work on a practical level is unclear as the government is yet to provide any prescriptive guidelines around how demand for SMCs will be created. This is an important issue to be resolved by the government before the proposed alternative credit regime is implemented.

Theme 3: Unlocking the technologies needed to transform key sectors

The recommendations in this theme are targeted at accelerating the uptake of potential high abatement technologies that are not currently cost competitive. The key recommendations are:

the establishment of a goal-oriented abatement technology co-investment program (Co-Investment Program) that will target similar success to what ARENA and the CEFC have achieved with respect to encouraging renewable investment in Australia; and
the expansion of the mandates of ARENA and the CEFC to include a technology-neutral remit to allow ARENA and the CEFC to be used as the delivery vehicles for the Co-Investment Program.

Suggested parameters for the Co-Investment Program include:

a focus on the 'hard-to-abate' sectors, for example, heavy industry, freight transport and aviation, where capital costs of abatement are high and progress in driving down costs has been slow;
targeting novel and ambitious technologies with the potential to transform key sectors;
co-investment by the government and industry, with government funds provided substantially upfront;
collaboration with, and co-investment by, State and Territory governments; and
assurance provided through the program design that funded projects are technically and commercially feasible.

Next steps

While the government agreed or agreed-in-principle to the majority of the King Review recommendations, it has indicated that it will require further industry and stakeholder consultation before it actions the majority of the recommendations. As a consequence, it is unclear when industry can expect changes to the ERF. However, given the ERF is sitting on $2 billion in funding, any changes to the ERF should be watched with interest by industry as there may be opportunities to utilise these funds for operational cost savings while also satisfying other social and environmental governance goals.

As to changes to the mandate of ARENA and the CEFC, ARENA is expected to exhaust its current funding by the end of 2020 and the government has not indicated that this will be replenished. That leaves the CEFC as the most likely target for a new 'technology-neutral remit' investment mandate.

A copy of the King Review can be accessed here.

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