How much can the Emission Reduction Fund really achieve? Policy Brief

Nov 11, 2015 - 12:01am

The Climate Institute updated the calculations of the ERF's capacity to achieve Australia's emission goals following the release of results of the ERF's second auction. These are available in the media release 'ERF II auction over: Now it’s time for a real debate on policies', 12 November 2015. 

The taxpayer-funded Emission Reduction Fund (ERF) is currently the government’s primary carbon pollution reduction policy. Similar emission reduction purchasing policies are used internationally in support of carbon prices or regulations, not as core policy tools. The role of the ERF in Australia should be similar - a provider of narrowly targeted support to sectors not better reached via other policies. Taxpayer funds should not be used to assist major polluters to reduce their emissions unless it can be demonstrated that no other mechanism would be as effective.

All policy now needs to be considered in the context of the requirement for countries like Australia to reach net zero emissions or below. This is needed to achieve the globally agreed goal to limit climate change to less than 2°C above pre-industrial temperatures (“<2°C limit”). Reaching net zero emissions is an objective acknowledged by mainstream international and domestic organisations.1 The ERF cannot meet reductions consistent with Australia’s fair share of the 2°C limit. Nor can the ERF achieve the government’s inadequate 2030 emission reduction target of a 26-28 per cent reduction below 2005 levels.

Recent government announcements suggest the ERF’s total budget to 2030 is $4.95 billion. If this is spent at the same price per tonne as in the ERF’s first auction, the ERF will be able to purchase 355 million tonnes of emission reductions. This represents:

  • 3 per cent of Australia’s projected 2015-2030 emissions;
  • 7.5 per cent of the reductions required by 2030 for Australia’s fair share of the <2°C limit
  • 14 per cent of the reductions required for the government to achieve its 2030 target

The ERF has strengths, but also major weaknesses. Strengths include its ability to drive reductions in sectors, such as carbon farming not easily reached by other policies. Weaknesses include: reliance on federal funding and exposure to annual budget risks; lack of broad incentives to reduce emissions; and transfer of responsibility for reducing emissions from polluters to taxpayers.

The government acknowledges that new policies are needed to achieve Australia’s 2030 emission reduction goals. Moves on hydrofluorocarbons (HFCs) and vehicle emission standards are welcome and the development of a National Energy Productivity Plan is long overdue. However, further policy development should begin earlier than the government’s planned climate policy review in 2017. Priority should also be given to the regulated replacement of ageing coal stations - the largest single source of domestic emissions - with clean energy to modernise our pollution-intensive power sector.

This brief examines the following issues:

  1. The ERF is the government’s main emission reduction tool.
  2. The ERF’s safeguard mechanism allows emissions to rise.
  3. The ERF cannot reduce emissions enough to meet Australia’s fair share of the <2°C limit. 
  4. The ERF falls well short of the government’s inadequate 2030 target.
  5. The ERF has important strengths but major limitations.
  6. Significant new policies are needed to put Australia on track to net zero emissions or below.
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