Sep 29 2022

Another cook enters the kitchen: NSW EPA to set its own carbon limits

Earlier this month, the NSW Environment Protection Authority (EPA) released its Climate Change Policy and Action Plan. This announcement received some media attention as it is the first time an Australian jurisdiction has labelled carbon dioxide a pollutant, a move the ABC called ‘groundbreaking’. While symbolically significant, the substantive elements of the policy are still to be consulted on and will be shaped by stakeholder input.

Here we take a closer look at some of the key things the regulator will need to consider.

What led to the Climate Action Plan?

The Climate Action Plan came about following an adverse court ruling that directed the NSW EPA to take additional steps to safeguard against climate change. The Court determined that the EPA’s existing instruments were inadequate in addressing climate change. In directing the EPA to develop an instrument that directly protects against climate change, the Court also made clear that ‘this does not demand instruments … such as regulating sources of greenhouse gas emissions in a way consistent with limiting global temperature rise to 1.5C above pre-industrial levels’. In other words, the regulator has discretion over whether it sets emissions targets and what these targets might be.  

Why is this only happening now?

While this policy development might sound intuitive, it is not without its challenges. Climate change regulation is generally considered a federal responsibility given it is a matter of both national and international significance. The usual rationale for states getting involved is “inaction at the federal level”, but this latest development goes down a further layer, giving power to an independent statutory state agency. In fact, the US Supreme Court recently ruled that the US federal EPA had only limited powers to regulate carbon because climate change was a matter of national significance, and therefore any substantive climate policy must face parliamentary scrutiny.

Fortunately, aspects of the NSW court decision alleviated some of these procedural concerns, but we are still at risk of having “too many cooks in the kitchen”. With the Federal Government, state governments, and now state regulators all setting carbon targets, the potential for administrative overlap and inefficiency has increased. The NSW EPA has flagged awareness of this, promising that its actions will ‘complement’, not duplicate, existing government policies.

So how exactly will this work in practice?

How will this policy regulate carbon emissions?  

While the finer details are subject to consultation, the consultation material outlines the broad direction the NSW EPA intends to take:

  • Require licensed facilities to prepare and implement a Climate Change Mitigation and Adaption Plan, and report on its progress, as well as ensure their Pollution Incident Response Management Plans are progressively updated to incorporate climate-related risks.
  • Strengthen existing actions, including behavioural change and methane leak detection programs.
  • Develop evidence-based greenhouse gas emission reduction targets for licensed sectors.
  • Enforce evidence-based greenhouse gas emission limits (and other requirements) on licensees.

It is these last two policy actions that have the most significance. The EPA has stated that ‘the [sectoral] targets themselves will not be enforceable’ since they apply sector-wide rather than to an individual licensee. Instead how it works is the sectoral target will inform the licence conditions of individual facilities within that sector. This approach creates an intriguing conundrum – a licensee can face penalties for failing to meet its conditions, but if the sectoral target is not met, does legal responsibility then fall on the EPA for not fulfilling its duty to protect against climate change?  

Regardless, the EPA has indicated that it will not set sectoral targets for all sectors, instead focussing on sectors ‘where there is no explicit policy in place to reduce emissions, and where there are still significant opportunities for [the EPA] to both influence and require emission reductions’. The Authority uses electricity generation as an example of a sector unlikely to be targeted because there are existing policies in place to drive emissions down via the NSW Electricity Infrastructure Roadmap and Electricity Strategy.

This premise is sensible but may nonetheless create some difficulties down the track. These existing government policies are electricity generation, not carbon emission, policies. The emission reductions are a by-product of new low or zero emission generation being built, but how fast and to what extent these reductions will occur can only be projected. Presently, the emissions modelling underpinning the NSW Government’s interim target of 50 per cent projects a more aggressive closure of power stations than currently announced. While earlier closures are expected, whether they align with this emissions modelling is less certain.

Depending on how the regulator designs the sectoral targets (i.e. if they are designed to align with a 50 per cent reduction by 2030), this discrepancy does leave the policy vulnerable to some politicisation, because the interim target relies heavily on reductions from electricity generation (see figure below). It would be problematic to see limits placed on electricity generation simply to ensure these projections are met – an evidence-based process must also give regard to energy reliability and security.

Figure 1: Inventoried and projected NSW emissions by sector with currently Net Zero Plan Stage 1 policies implemented, 2005-50

As for other sectors, there will be much interest around how the environmental regulator determines whether a sector has an existing explicit policy in place to drive emission reductions. Some large industrial facilities will likely contend the revised Safeguard Mechanism means they are now covered by an explicit policy, despite their emission reductions stagnating or being projected to go in the wrong direction by 2030. If these sectors (alongside electricity) were classified as already covered, it would significantly limit the emissions coverage of this policy.

Irrespective of overall scope, there are many other unknowns the regulator will need to address when designing its facility limits. For example:

  • Can a facility exceed its licensed carbon limit so long as the difference is offset via the purchase of Australian Carbon Credit Units (ACCUs)?
  • The closure of some sectoral facilities (like a coal fired power station) might lead to slight carbon increases at remaining facilities, even though overall carbon emissions from that sector will decline. How will this be accounted for in individual facility limits?
  • How to place limits on facilities that have cross border operations?

Can we expect similar policies in other states?

When making the announcement, NSW EPA CEO, Tony Chappel, laid down his view that “I expect other regulators will make similar moves”. Environment groups are equally hopeful this precedent will compel other state EPAs to follow suit. There is already legal action underway in Victoria that will test whether the functions of the Victorian EPA are compliant with Victoria’s Climate Change Act 2017. The Supreme Court is set to make its decision in mid-October.

Conclusion

The NSW EPA’s Climate Change Policy and Action Plan is a new entry into the vexed world of Australian carbon policy. It has understandably been met with excitement by some and reservation by others. Whichever way the regulator decides to take it, the scope must be clear, independent, and complementary to existing or prospective government policies.

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