RepuTex modelling indicates that the Direct Action Plan will provide relief to the coal industry through avoiding carbon liabilities – and if calibrated to meet Australia’s commitment to reduce emissions by 5% from 2000 levels by 2020 – could achieve emissions reductions at far lower cost through direct investment by industry, with support from government.

According to RepuTex, under the Carbon Price Mechanism the Australian coal mining industry is estimated to face a net carbon cost of $1.5 billion from 2015-2020, however, should the CPM be replaced by Direct Action from July 2015, the coal industry could achieve the same level of abatement through a net investment of $700mn from 2015 to 2020, a saving of $800mn.

RepuTex analysed abatement under Direct Action in order for the Australian market to achieve its 5% emissions reduction commitment, with emissions reductions purchased by the government up to its allocated budget of $5.6bn through to 2020.

All other emissions abatement on top of this allocation was assumed to be paid for by industry in order for Australia to meet its emissions reduction target.

“Should Direct Action be calibrated to meet equivalent emissions reductions achieved by the CPM, the coal industry could face an emissions reduction target of between 2-6 Mt CO2-e per annum, which will cost approximately $1.2bn to abate through coal mining emission reduction projects” said Bret Harper, head of energy and carbon research at RepuTex.

“Under the Emissions Reduction Fund, lowest-cost abatement will be rewarded, meaning the coal industry, with high abatement costs, is only estimated to be able to capture around $440mn in government funds – leaving a funding shortfall of just over $700mn for the industry to abate its full 2-6 Mt CO2-e per annum”

Direct Action fine-tuning required

RepuTex states that the savings could amount to a more efficient emissions reduction market in Australia, but would require some critical amendments to the Direct Action Plan in order to drive emissions results.

“At present, Direct Action removes the carbon price and fails to replace it with any effective incentive or target for industry to reduce emissions, so as a result, we would see emissions rise under Direct Action as it is currently structured,” said Harper.

“Should Direct Action be reconfigured to implement a declining emissions baseline and a high penalty price, it could drive equivalent abatement as the CPM, but at far lower cost through direct investment.”

The use of domestic or international carbon offsets could further reduce the cost to industry, while keeping emissions on a downward trajectory.

“As Australia develops a new strategy to meet its 5% emissions reduction target it’s is unlikely the coal industry will be able to continue to increase production without contributing to the national emissions reduction goal. The use of offsets in the new Direct Action market may enable the coal mining industry to more cost effectively pay for their share of emissions reductions, meaning Australia’s climate commitment could be met at a lower cost,” Harper added.

RepuTex currently anticipates that the earliest the Direct Action Plan could be implemented is 1 July 2015, with the carbon tax repealed by the end of 2014 – mid way through the carbon tax’s final compliance period.

RepuTex also noted that it expects the final design of Direct Action to ultimately place some form of obligation on industry to offset or pay for its emissions.

“It is very unlikely for any scheme that costs tax payers or industry but doesn’t achieve Australia’s 5% emissions reduction target will be agreed to by the new Senate," Harper noted.

“The market is assuming that there will be no free lunch, and moreover, most firms are willing to pay to offset their emissions, so we anticipate more fine-tuning of the Direct Action Plan, particularly with respect to baselines, penalty prices, targets and the use of offsets."