Climate policy toolkit: What impact will state tinkering have?

The Climate Change Authority (CCA) has just released a 240-page research report titled Prospering in a Low-Emissions World: An Updated Climate Policy Toolkit for Australia (the Climate Policy Toolkit). This Toolkit aims to ensure Australia maintains a coordinated national approach to meeting its commitments under the Paris Agreement. The release is timely, with New South Wales unveiling its 2021-2030 plan for achieving net-zero emissions by 2050, and Victoria readying to do the same.[i]

What implications then do these state-based policies have for the long-term climate change strategy proposed in the Climate Policy Toolkit?

Who is the Climate Change Authority?

The CCA began operations in 2012 as an independent government advisory body on matters relating to federal climate change policy. In addition to its legislative responsibilities to periodically review Australia’s Renewable Energy Target, Carbon Farming Initiative and National Greenhouse and Energy Reporting,[ii]  the CCA performs a Special Review into Australia’s current and future emission reduction policies in light of international trends. The Climate Policy Toolkit represents the third phase in this process and advances 35 economy-wide and sector specific recommendations to facilitate Australia’s smooth and orderly transition to a low-emissions economy. Its primary recommendation is for Australia to ‘develop a long-term climate change strategy’ consistent with the goals of the Paris Agreement.[iii] 

Developing a long-term climate change strategy

The national strategy should ‘help align and coordinate the various state commitments’ and provide ‘a clear pathway for an orderly economic transition’.[iv]   The need for a coordinated approach is particularly crucial for the electricity sector, for which the largest grid is the National Electricity Market (NEM), and the CCA’s sector-specific recommendations appropriately reflect this. The authority states that NEM jurisdictions should:

1. ensure their renewable energy policies align with the Australian Energy Market Operator’s Electricity Statement of Opportunities (ESOO) and its Integrated System Plan (ISP), and;

2. be willing to support projects outside their jurisdiction if it ‘maximises benefits for their electricity consumers and the NEM generally’.[v]

New South Wales’ 35 percent emissions reduction target by 2030 and Victoria’s anticipated 45-60 percent emissions reduction target by 2030 are both underpinned by extensive renewable energy policies. While New South Wales has not committed to a renewable energy target, it has announced plans to create three renewable energy zones (REZs), the first of which will be 3,000MW in size.[vi] Victoria meanwhile has a legislated target of 50 per cent renewables by 2030.[vii]

Both approaches have strengths and weaknesses for achieving the national coordination that the CCA desires. Promisingly, New South Wales REZs have been developed to align with AEMO’s ISP, allowing AEMO to better forecast what transmission augmentation may be needed. Whether they can stay aligned is the next test. Already, some divergence appears to be emerging with AEMO listing REZs as a priority for after 2030 while NSW is preparing for 2022.[viii] For Victoria, having a legislated goal provides AEMO with some clarity in system planning but is inferior to national approaches.

Probably the biggest concern though for national coordination is that these ambitious renewable policies are resulting in the states focusing inwardly rather than supporting the NEM generally. These concerns have become particularly heightened in Victoria since the passing of legislation that allows it to bypass the national electricity rules framework for transmission upgrades. This move appears highly inconsistent with the CCA’s guiding principles for national coordination and the CCA has warned that ‘the propensity for jurisdictions to deviate from established NEM rules also raises some risks in terms of the achievements of the broader goals of the NEM’.[ix]  While New South Wales is yet to go as far as Victoria, it too has showed signs of deviation from the established Regulatory Investment Test for Transmission (RIT-T) overseen by the Australian Energy Regulator (AER).[x] National coordination therefore looks likely to be a major challenge going forward.

Maintaining an orderly transition

The need for a nationally coordinated approach is particularly evident in light of recommendation 13 of the Climate Policy Toolkit, which asks government to ‘identify and implement measures for providing greater certainty on the timing of the retirement of ageing coal generators to facilitate timely investment in replacement capacity and storage and to enhance planning for measures to support local workforces and communities affected by closures.’[xi]  While most coal-fired power stations have a publicly listed scheduled closure date with AEMO, this recommendation appears to acknowledge that ambitious emission reduction and renewable energy targets has the potential to drive earlier withdrawals.

Already, in Victoria, Energy Australia has cautioned that Yallourn coal-fired power station will likely be forced to withdraw earlier than 2032 if Victoria follows through with the anticipated 45-60 percent emission reduction target.[xii] If this were to occur, it would potentially follow in the footsteps of Hazelwood power station’s abrupt closure, which led to a marked increase in wholesale prices across the NEM. That closure also raised concerns about ongoing reliability in the NEM and perversely prompted new federal and state-based market interventions. This ultimately highlights the challenge of using state-based initiatives to drive emissions reduction in electricity: while carbon-intensive electricity generators might be stationed within certain state borders, they produce electricity for the entire NEM and their premature closure has implications for the affordability and reliability of electricity across all interconnected states. It is understandable then why the Climate Change Authority sees national coordination as critical to an orderly transition away from coal.

Other sectoral opportunities

While the electricity sector fairly receives the most attention in the Climate Policy Toolkit, the CCA recognises that abatement opportunities exist in other sectors too. These other sectors are more amenable to state-based policy action and the risk of distortionary effects arising across borders is less likely. One such sector is transport, where the CCA sees the growth of electric vehicles as offering a major opportunity for emissions reduction. For this to occur, the CCA recommends initiatives such as investment in public electric vehicle infrastructure and government fleet targets.[xiii] These recommendations are consistent with recent submissions[xiv] the AEC has made to electric vehicle strategy papers. Promisingly, the NSW Net Zero Plan has taken steps in this regard, committing to an Electric Vehicle Infrastructure and Model Availability Program that will ensure investment in electric vehicle public charging stations.[xv] It will be worthwhile monitoring what role electric vehicles play in Victoria’s strategy document given it has identified transport as ‘the next most important sector after the electricity sector to understand’.[xvi]

The Climate Policy Toolkit also shows regard to the waste sector, asking states to recognise the ‘benefits of a circular economy approach for emissions reduction’.[xvii] A circular economy means beneficially re-using products that may otherwise be disposed of as waste. It has the potential to unlock emissions reduction opportunities in typically hard to abate sectors, such as concrete manufacturing, which is a large contributor to greenhouse gas emissions globally. A supporting example of this is the ability of fly ash[xviii], which produces no carbon emissions, to act as a partial substitute for cement. Not only does this reduce the carbon footprint of concrete manufacturing, it also helps eliminate a waste stream. Intriguingly, the NSW Net Zero Plan has promised to establish a $450 million Emissions Intensity Reduction Program to support the transition of hard to abate industries and uses concrete manufacturing as an example. Supporting out-of-the-box initiatives, like making concrete out of fly ash, should be a worthwhile consideration then.

Conclusion

The Climate Policy Toolkit illustrates the benefits, but also challenges, national coordination brings. Ambitious state-based policy action has immense opportunity for emissions reduction in sectors like transport and waste, but it poses unique challenges for electricity, where policy action in one state has repercussions across the entire NEM. Getting the balance right will be crucial for Australia’s orderly transition.

[i] Miki Perkins, ‘Victorian emissions target decision likely delayed by coronavirus crisis’, The Age, 25 March 2020, https://www.theage.com.au/national/victoria/victorian-emissions-target-decision-likely-delayed-by-coronavirus-crisis-20200325-p54dt5.html.  

[ii] Climate Change Authority Act 2011 (Cth), s11.

[iii] Climate Change Authority, ‘Prospering in a Low-Emissions World: An Updated Climate Policy Toolkit for Australia’, Australian Government, March 2020, p53. 

[iv] Ibid. 

[v] Id at 10. 

[vi] Id at 78.

[vii] Renewable Energy (Jobs and Investment) Act 2017 (Vic).

[viii] Natalie Filatoff, ‘Beyond Blobs on a Map: NSW Central West REZ to be Shovel Ready in 2022’, 2 March 2020, PV Magazine, https://www.pv-magazine-australia.com/2020/03/02/beyond-blobs-on-a-map-nsw-central-west-rez-to-be-shovel-ready-in-2022/.

[ix] Climate Policy Toolkit at 82.

[x] Natalie Filatoff, ‘Beyond Blobs on a Map: NSW Central West REZ to be Shovel Ready in 2022’, 2 March 2020, PV Magazine, https://www.pv-magazine-australia.com/2020/03/02/beyond-blobs-on-a-map-nsw-central-west-rez-to-be-shovel-ready-in-2022/.

[xi] Climate Policy Toolkit at 86.

[xii] Energy Australia, ‘Submission to Final Report of the Independent Expert Panel: Interim Emissions Reduction Targets for Victoria (2021-2030)’, 23 July 2019, https://s3.ap-southeast-2.amazonaws.com/hdp.au.prod.app.vic-engage.files/2515/6714/0631/Submission_-_climate_change_targets_and_actions_-_Energy_Australia.pdf.

[xiii] Climate Policy Toolkit at 104-107.

[xiv] See https://www.energycouncil.com.au/media/18166/rpr-0012-electric-vehicle-issues-paper-review.pdf and https://www.energycouncil.com.au/media/18166/rpr-0012-electric-vehicle-issues-paper-review.pdf

[xv] NSW Department of Planning, Industry and Environment, ‘Net Zero Plan Stage 1: 2020 – 2030’, March 2020, NSW Government, p17.

[xvi] Independent Expert Panel, ‘Interim Emissions Reduction Targets for Victoria (2021 – 2030)’, March 2019, Victoria Government, p135.

[xvii] Climate Policy Toolkit at 127-129. 

[xviii] https://www.energycouncil.com.au/media/17938/20200131-aec-submission-to-senate-inquiry-into-australias-waste-management-and-recycling-industries.pdf