Some implications of the Paris climate agreement for Australian agriculture

Mick Keogh, Australian Farm Institute

The recent United Nations Climate Change Conference in Paris was overshadowed by the horrific terrorist attacks that preceded it, with the result that the possible implications of the agreement have not been given as much attention as might be expected. This is especially the case for the Australian agriculture sector, which contributes approximately 15% of total national emissions, and is therefore likely to be included in policies that are developed with the aim of achieving Australia’s future emission targets. While it is possible to project some future scenarios for agriculture, a major uncertainty is likely to be the confusion created by overlapping Australian and state government policies. Unless these are better coordinated, they will make Australia’s emission target much harder to achieve.

Australia’s future emission target

As part of the Paris Climate Agreement, Australia committed to take actions to limit the nation’s 2030 emissions to between 26 and 28% less than the level of emissions in 2005. Australia’s total emissions in 2005 were calculated to be 612 Mt CO2-e, using the most recently agreed emissions calculation methodology, and including land-sector emissions. This means that Australia’s target is for 2030 emissions of between 441 and 453 Mt CO2-e, a reduction of between 171 and 159 Mt CO2-e per annum from 2005 emission levels. This target could be adjusted as part of five-yearly reviews incorporated into the agreement, and hence could mean that the eventual emission reduction challenge is increased over time.

Leaving that aside for the moment, the question of whether or not the current target is achievable under current policy settings, and what additional policies might be needed to ensure that target is met are critical questions for policy-makers. They are also important questions for the Australian agriculture sector, because of the significance of the sector in Australia’s national greenhouse inventory.

An examination of trends in emissions from different sectors of the Australian economy over the period from 1990 to 2012 (the period covered by Kyoto Protocol obligations) provides some guidance in making a judgement about future emission trajectories. Figure 1 shows the trends in greenhouse emissions calculated for different sectors of the national economy over the relevant period, and a number of key issues emerge from this.

Figure 1: Australia’s greenhouse emissions over the Kyoto Protocol commitment period.

Source:  Australian Government.

The first is the dominant role played by the energy sector in total national emissions. In 2013, energy sector emissions (predominantly emissions from coal-fired power stations) comprised almost 75% of total national emissions. While the annual rate of growth of energy sector emissions had slowed, over the 23 year period annual missions from this sector increased by 40%. Emissions from industrial processes also increased by around 25% over the period, and energy and industrial processes were the only two sectors for which emissions increased.

A second major issue to emerge from the data displayed in the graph is the absolutely fundamental role played by land-sector emissions in Australia meeting it’s Kyoto Protocol commitment of limiting 2012 emissions to no more than 108% of 1990 emissions. In 1990, it was estimated that around 120 Mt CO2-e of emissions were created annually by land clearing, mainly occurring on farm land. Australia was able to count these emissions in its initial 1990 inventory, and the subsequent decline in those emissions – partly as a consequence of land clearing bans implemented by the NSW Government in 1995 and the Queensland Government after 2000 – delivered windfall emission reductions for the entire economy that ensured Australia could meet its Kyoto Protocol target. It should be noted that these bans imposed substantial costs on individual landholders for the benefit of the entire community, an inequity noted in subsequent ABARES and Productivity Commission reviews.

In the absence of this emission reduction, the national emission inventory would have increased by 26.5% over 1990 levels by 2012 – well in excess of the Australian Kyoto Protocol target.

Both these issues have implications when it comes to thinking about future emission targets and trajectories for Australia. The dominant role played by the energy sector in the national inventory highlights that the emission performance of that sector is crucial to future success in reducing national emissions. The windfall gains arising from banning land clearing have enabled to nation to meet (in fact exceed) initial emission obligations, and have provided some leeway in relation to Australia’s 2030 emission target (given there was an estimated 80 Mt CO2-e of emissions from this source included in the 2005 baseline which had reduced to less than 10 Mt CO2-e by 2013). However, this was a once-only gain and there is little if any likelihood of any future emission reductions from this source.

To meet Australia’s recent commitment as part of the Paris Climate Agreement, emissions in 2030 will need to be limited to a maximum of 453 Mt CO2-e. To gain some sense of the effort involved in achieving that target, it is useful to develop some projections of future Australian emissions. The Australian Government Department of the Environment has published projections of Australian emissions to 2020, incorporating some assumptions about the impact of current policy measures including renewable energy targets etc. A simple linear extrapolation of the trends for each of the major emission sources included in that analysis forward from 2020 to 2030 provides a crude estimate of the likely scale of the challenge involved in Australia’s 2030 target, in the absence of any additional policy measures.

The result of this projection is shown in Figure 2, which also includes the projected emissions trajectory required to meet the 2030 target. It shows a ‘business as usual’ projection of current national emissions would result in approximately 620 Mt CO2-e of emissions in 2030, a result that is roughly 167 Mt CO2-e above Australia’s Paris commitment. It should be noted that this figure does not include the emission reductions purchased in the first two rounds of the Emission Reduction Fund tenders.

Figure 2: Australian emissions to 2015 and projected to 2030, in the absence of major policy changes.

Source:  Australian Government and AFI projections.

This figure of approximately 170 Mt CO2-e can be regarded as a crude estimate of the size of the reduction in annual emissions that will need to be achieved in the year 2030 to meet Australia’s current Paris Climate Agreement commitments. The critical question for policy-makers is whether this target is achievable, given current policy measures.

Australia’s current emission reduction policies

While much of the focus of discussion about Australian emission reduction policies has been on the government’s $2.55 billion Emission Reduction Fund (ERF), in reality this policy is just one of a range of different measures that all aim to contribute towards a reduction in greenhouse emissions over time. These are discussed in further detail below. It is also not widely understood that measures have been enacted that will in the future enable the current ERF to be converted from a government funded program to one that is funded largely by the 140 largest emitters in Australia that currently emit more than 100,000 tonnes CO2-e per year. Those that are quick to dismiss the current ERF as an inefficient and poorly designed mechanism to achieve lower emissions perhaps need to look a little more closely at the policy and its associated measures.

The Emission Reduction Fund

The Australian Government has committed $2.55 billion to fund the ERF, which is in many ways the cornerstone policy of current emission reduction efforts. Under the policy, persons who meet certain eligibility requirements and who agree to undertake certain actions as part of an emission reduction project can participate in a tender and, if successful, will be paid by the government for the emission reductions that project delivers.

The process of participating first involves registering an emission reduction project, which requires the proponent to adopt and implement one of the approximately 30 Methods that are recognised under the ERF legislation. A Method details the actions that are required to be undertaken, the record-keeping and reporting requirements, the project auditing requirements, and the way that the volume of emission reduction achieved will be calculated. Once a project is registered and meets periodic audit and reporting requirements, it generates one Australian Carbon Credit Unit (ACCU) for each tonne of greenhouse emission reduction achieved (either via reducing some existing emissions, or through sequestering greenhouse emissions from the atmosphere into the soil or vegetation). These ACCUs can be sold to the government via a successful tender in an ERF auction, or can be retained and later sold to non-government buyers who may need them to achieve either voluntary or mandatory reductions in their net emissions. If sold to the government, then these can be cancelled and the emission abatement achieved will be counted in calculating Australia’s national emissions inventory.

The first two ERF auctions were conducted in 2015, and resulted in the Australian Government purchasing almost 93 Mt of emission abatement from 275 projects, at an average cost of approximately $13.12 per tonne CO2-e. Of the emission abatement purchased, 66.7 million tonnes or 72% were from agricultural and vegetation projects, highlighting the significance of the land sector in the emission abatement achieved under this policy to date. The contracting period for the delivery of these ACCUs ranges from three to 10 years with standard contracts of seven years, so the ERF to date has achieved an average reduction in annual net emissions of approximately 13 million tonnes per annum over the next seven to 10 years, once these are accounted for in the national inventory. The vegetation-based projects need to be maintained for a minimum of 25 years, and these projects will continue delivering annual greenhouse abatement through to 2030 and beyond, with the project owners generating ACCUs over the entire crediting period. The ACCUs earned after the ERF contract period has expired will be able to be sold to either government or non-government buyers.

The first two ERF auctions have resulted in the allocation of approximately $1.2 billion, which is approximately half of the total funding commitment allocated to the ERF. The amount of abatement achieved by the time the full $2.55 billion of the current ERF funding commitment is allocated will depend on ACCU prices realised in future ERF tenders, and it is difficult to project what these might be. A reasonable assumption might be that in total, the current funding allocation for the ERF may achieve up to 30 Mt CO2-e of emission abatement of the 170 million that will be required in 2030. Whether a future government will allocate further funding to the ERF is unknown.

The Renewable Energy Target

The Renewable Energy Target (RET) is a legislated scheme that aims to reduce greenhouse emissions associated with electricity generation by ensuring that 20% or more of the electricity used in Australia in 2020 is generated from renewable sources, including hydroelectricity, wind, biomass and solar. The scheme provides an incentive for renewable electricity generators by crediting one Largescale Generation Certificate (LGC) for each megawatt hour of electricity generated using renewable resources. The ‘buy’ side of the system is created by a requirement that electricity retailers must purchase and surrender to the government a certain number of LGCs each year, with this requirement being progressively ramped up to the point whereby in 2020 some 33,000 Gigawatt hours of electricity will be generated using renewables – estimated to be approximately 23.5% of generation capacity in that year. The existing legislation (amended during 2015) also requires that the renewable generation target from 2020 to 2030 is maintained at 33,000 Gigawatt hours. There is also a related scheme to incentivise the use of small-scale renewable energy sources such as rooftop solar cells. According to the Australian Government’s second biennial report to the United Nations Framework Convention on Climate Change, the RET is projected to deliver approximately 18 Mt CO2-e of emission abatement in 2020. Based on the current legislation, this is also the abatement that will be delivered in 2030.

Aside from the RET, there has been a change in the nature of electricity generation in Australia, as older coal-fired generation capacity has been retired, and the use of gas and renewable generation capacity has increased. This has contributed to a decline in the emissions intensity of electricity generation more generally. This will be offset over the period to 2030 by population growth (it is projected that Australia’s population will increase from 24 million at present to 30 million by 2030) and economic growth, both of which will trigger growth in total electricity consumption.

The Australian Government could increase the RET target over the period between 2020 and 2030 to reduce national emission levels, so the likely abatement achievable in 2030 is uncertain. Assuming a government increased the RET to approximately 30% by 2030, the amount of abatement delivered in that year might be in the region of 30 Mt CO2-e.

Vehicle fuel efficiency program

Emissions from transport (which includes road, rail, domestic shipping and domestic aviation) totalled 93 Mt CO2-e in 2014–15, and have increased by 25% over the past 15 years. They are projected to grow by a further 11% over the period to 2020, due to population and economic growth. The Australian Government convened a Ministerial Forum in late 2015 which aims to consider ways to reduce transport-related emissions, regulation of the transport sector involving both the Australian and state and territory governments. Implementation of Euro 6 emission standards, a variety of emission testing and infrastructure programs and the introduction of incentives for faster fleet turnover are all potential measures that may be implemented to limit transport emissions, and the Safeguard mechanism (discussed later) may also be applicable for large fleets. These may conceivably reduce transport emissions over the period to 2030, although the legacy of older vehicles in the national vehicle fleet, in combination with overall growth in vehicle numbers linked to population growth will make it quite difficult to achieve net emission savings, even if transport emission intensity is reduced.

Energy productivity and efficiency programs

In December 2015, Australian governments developed a National Energy Productivity Plan (NEPP) involving all state and territory governments, which has the objective of increasing national energy productivity by 40% between 2015 and 2030. Through programs targeting consumer appliance and motor vehicle efficiency, residential and commercial building energy efficiency and improved energy markets, governments believe it is possible to deliver benefits to individuals and businesses, while at the same time generating reductions in emissions. These measures in combination are projected to result in annual emissions abatement of 54 Mt CO2-e by 2030 (see Figure 3), noting this also includes projected savings in the transport sector.

Figure 3: Estimated emission savings associated with improved energy efficiency.

Source:  National Energy Productivity Plan 2015–2030.

Other measures

The Australian Government has implemented a number of other policy measures, including the 20 million trees program, the Solar Cities program, low-emission fossil fuels technology programs, and the National Carbon Offset and Carbon Neutral programs. It is anticipated that each will deliver some emissions abatement by 2030, although some of the likely abatement may be double-counted under other measures. Net emission savings from these programs in 2030 are likely to be only minor.

The ERF Safeguard Mechanism

The Safeguard Mechanism is a legislative instrument that was enacted in October 2015, and which comes into effect from July 2016. It applies to the 140 businesses that are the largest emitters in Australia, each producing in excess of 100,000 tonnes CO2-e per annum. Collectively, these businesses account for approximately 50% of national emissions. Put simply, the Safeguard Mechanism requires these businesses to establish their baseline level of emissions (utilising information already supplied to the government under the National Greenhouse and Energy Reporting Scheme) and then imposes a requirement that future net emissions produced by that organisation in any year may not exceed the baseline level. In the event that gross emissions during a year exceed the baseline, the organisation may purchase ACCUs (generated from accredited ERF projects) in order to achieve the required net emission level. There are arrangements in place to accommodate business expansion and investment in new technologies.

In effect, the Safeguard Mechanism creates a non-government market for ACCUs generated from ERF projects, which would be expected to expand over time and gradually become the main source of demand for ACCUs generated by ERF project owners. The more astute observers of climate change policy in Australia have noted that this effectively creates an emissions trading scheme for large-scale emitters, although with a relatively ‘soft’ start due to the way the initial emission baseline has been established. It would not be unreasonable to observe that, given the manner in which the baseline is established (via regulation), it would not be surprising if in the future the responsible Minister reduced the baseline emission levels for these organisations, an action that would simultaneously help the nation meet it’s 2030 emission abatement obligations and would also create a stronger market for ACCUs.

Implications for agriculture and the land sector

The preceding analysis has estimated that Australia will need to achieve net emission abatement (compared to projected business-as-usual emissions in 2030) of approximately 170 Mt CO2-e per annum in 2030 in order to achieve the commitment made as part of the Paris Climate Agreement. Some basic estimates are that the current ERF will likely generate approximately 30 Mt CO2-e of abatement in 2030, the Renewable Energy Target may also generate 30 Mt CO2-e (assuming post-2020 renewable targets will be increased to 30% by 2030), and the government projects that the Energy Productivity and Efficiency Programs will generate 54 Mt CO2-e of abatement in 2030. There is a degree of double counting in some of these estimates, so the projections are more likely to be overestimates than underestimates.

In combination, these measures are estimated to deliver 115 Mt CO2-e of abatement in 2030, which is 55 Mt CO2-e less than what is required under Australia’s Paris commitment.

This conclusion has some important implications for Australian agriculture, because it means that there is likely to be increasing demand for ACCUs earned from land-sector emission abatement projects, such as tree plantations, piggery effluent projects, revegetation projects, avoided deforestation projects (cases where farmers hold rights to clear trees, but undertake to retain those trees) and other projects involving changes to agricultural activities. The ‘demand’ for ACCUs generated by these projects will initially be the ERF auction process, but if the above projections are even roughly correct (and Australia remains committed to its Paris target), either the ERF will need substantial additional funding, or Australia’s major emitters will become very significant purchasers of ACCUs in the not too distant future. Given that agriculture and land-sector projects have comprised more than 70% of successful ERF project to date, this is likely to be an important new enterprise for owners of farm land in the future.

A complicating factor for future vegetation-based projects, however, is the interplay between state government and Australian Government policies. One of the key requirements for eligible vegetation-based projects under the legislation underpinning the ERF is that the projects must meet an ‘additionality’ test. That is, landholders are not able to generate ACCUs from activities that have already been carried out (for example tree lots that were established with Landcare funding) or that are mandated under state legislation. This means that if state legislation bans any clearing of trees from land that is less than 50 metres from a river, then a landholder cannot generate ACCUs from an avoided deforestation project that involves an agreement not to clear those trees.

What this means is that the more restrictive state laws are made in relation to the future management of native vegetation on farms, the more they will limit the ability of landholders to undertake eligible emission abatement projects based on the future management of vegetation on those farms. Overly restrictive state native vegetation legislation will not only limit the ability of landholders to generate payments for the public good environmental services they provide, but will also make the Australian Government’s Paris emissions abatement target more difficult to achieve.

The need for better Australian and state government coordination on these issues becomes even more apparent in the light of current proposals by state governments to create biodiversity offset and trading systems for those wishing to clear trees (for anything from mining or urban development to farming). Under such a scheme, a landholder wishing to remove native vegetation will effectively need to purchase biodiversity credits from another landholder, equivalent to the biodiversity that will be destroyed. The second landholder will be able to generate biodiversity credits (and hence revenue) by agreeing to undertake specific management actions on that land – such as establishing native vegetation.

If a landholder already has an ERF project recognised by the Australian Government that involves retaining or regenerating trees, then presumably that landholder could also use that same project area to generate biodiversity credits under a state biodiversity trading scheme. In that case, the landholder could be earning both biodiversity and carbon credits (ACCUs) from a single project area, as revegetation projects can quite legitimately generate both biodiversity benefits and emission abatement simultaneously.

However, if that same landholder first established a revegetation project to generate credits under a state biodiversity trading scheme, then that landholder would be ineligible to subsequently have that area registered as a project to generate ACCUs under Australian Government greenhouse abatement programs, as a consequence of the additionality requirement. This despite the fact, noted above, that a single project area can generate both biodiversity benefits and emission abatement.

Australian and state government policies are at long last starting to create systems to pay landholders for the environmental services they provide for the community, and addressing the well-recognised inequity that has been inherent in legislation for the past 20 years. It would be a great shame if a lack of coordination between governments simultaneously removed some of potential benefits available to landholders, and at the same time made Australia’s already challenging Paris emissions commitment even more difficult to achieve.

Image:  Mark Dixon