Carbon Regulation Review
Tyndall Asset Management
Climate regulation in Australia
While Australia is in line with other regions in its commitment to the Paris Agreement, in other areas Australia either lags or has less onerous requirements. While the industrial mix in Australia is markedly different from those other regions, rising political pressure will likely lead to moves by the government to close the gap.
A timeline of Australian climate regulation
Australia's primary emission reduction policy came into force via the Carbon Farming Initiative Amendment Bill 2014, which established the Emissions Reduction Fund (ERF). The ERF is a voluntary scheme that aims to provide incentives for a range of organisations and individuals to adopt new practices and technologies to reduce their emissions. It offers Australian carbon credit units (ACCUs) to eligible activities, with one ACCU earned for each tonne of carbon dioxide equivalent (tCO2-e) stored or avoided. ACCUs can be sold to generate income, either to the government through a carbon abatement contract, or in the secondary market. This legislation followed the July 2014 repeal of the Carbon Price Mechanism. Eight 'carbon tax repeal' bills were passed by the Senate, making Australia the world's first nation to reverse action on climate change.
The Renewable Energy (Electricity) Amendment Bill 2015 came into effect. This bill reduced the large-scale Renewable Energy Target from 41,000 GWh to 33,000 GWh of additional renewable electricity generation by 2020 (or 23.5% of the estimated electricity generation for 2020), with this level to be maintained until 2030 once achieved.
Post-2020 emission reduction targets were announced: to reduce greenhouse gas emissions by 26-28% below 2005 levels by 2030.
The 2030 Agenda for Sustainable Development was adopted by all United Nations Member States. i.e. the 17 Sustainable Development Goals (SDGs).
The government announced a temperature commitment to keep global warming to 2 degrees Celsius compared to pre-industrial levels.
The government announced a target of net zero emissions by 2100.
Australia signs the Paris Agreement, a legally binding international treaty on climate change to limit global warming to well below 2 degrees Celsius compared to pre-industrial levels (but preferably to 1.5 degrees). The 194 signatory countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve climate-neutrality by mid-century.
The safeguard mechanism, part of the ERF, came into effect. This mechanism placed a legislated obligation on Australia's largest greenhouse gas emitters to keep net emissions below their emissions limit (or baseline). The safeguard mechanism operates under the framework of the National Greenhouse and Energy Reporting Scheme and applies to facilities with direct scope 1 emissions of more than 100,000 tonnes of carbon dioxide equivalent (tCO2-e) per annum. It mostly impacts mining, oil and gas extractors, manufacturers, electricity generators and the waste industry, covering approximately half of Australia's emissions. Safeguard facilities will be able to surrender ACCUs to offset emissions over their baseline.
The Paris Agreement became effective and was ratified in Australia.
The ERF is rebadged as the Climate Solutions Fund, as part of the 'Climate Solutions Package'. This package provides an additional $2 billion over 15 years for carbon abatement programs, using the same process as the ERF.
The safeguard mechanism is amended. Among other changes, the amendments simplify the process of allowing facilities to increase emissions in line with production.
The Australian government commits to Net Zero emissions by 2050.
The greenhouse gas emissions target for 2030 is increased from a 26-28% reduction to a 43% reduction (from 2005 levels).
Global comparisons of emissions targets
In the US, the target to reduce emissions by 26-28% by 2025 from 2005 levels was announced in Mar 2015. This appears to have influenced the Australian target, which was for an identical reduction but with a later (2030) target date.
Comparison of carbon markets
The Australian carbon credits scheme is voluntary, with demand driven by a corporate's own emission reduction targets. In the UK and the EU, a "cap and trade" system is used, whereby there is an absolute limit on greenhouse gas emissions for entities covered by the system. This cap is reduced over time to reduce total emissions. Within the system, carbon credits can be traded, allowing emissions reduction to be achieved by the lowest-cost alternative.
In Australia, Task Force on Climate-Related Financial Disclosures (TCFD) reporting is presently not mandatory. However, Chris Bowen (Minister for Industry, Energy and Emissions Reduction of Australia) recently confirmed that climate reporting would become mandatory. Although further details have not yet been provided, since reporting requirements in other regions are higher, it is expected that reporting requirements in Australia will increase over time, including a requirement to report scope 3 emissions.
How is Tyndall responding?
We expect the Labour government to increase regulation given Australia appears to lag behind global peers.
The questions we are asking corporates are:
The responses to these questions, amongst others, enable us to better assess long-term cashflows and assess the risks to these cashflows under different scenarios.
Author: Craig Young, Senior Research Analyst
Funds operated by this manager:
Tyndall Australian Share Concentrated Fund, Tyndall Australian Share Income Fund, Tyndall Australian Share Wholesale Fund
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