This is an ACSI submission in response to the Department of Climate Change, Energy, The Environment and Water on Safeguard Reform.
Summary position
ACSI’s contribution to this review reflects our work supporting long-term institutional investors, including extensive engagement with listed companies.
Recently, this has included ACSI facilitated discussions between investors and companies on climate policy (including the Safeguard Mechanism) where views aligned on the need for effective policy to provide a clear and predictable long-term investment signal, strengthen incentives for genuine decarbonisation, and recognise the different commercial and technological circumstances facing sectors and facilities, while promoting decarbonisation.
There is a strong economic case for an orderly transition. Debate often focuses on the costs of decarbonisation, without giving equivalent attention to the economic costs and financial risks of delay and inaction. The objective should therefore be policy settings that drive decarbonisation and support investment now, while retaining appropriate flexibility and complementary support where genuine barriers to abatement remain.
Background: The economic case for decarbonisation
Earlier this year, ACSI convened round table discussions between listed companies and investors to examine Australia’s current policy settings in relation to climate change mitigation and identify priorities for reform.
Climate policy debate often focuses on decarbonisation costs while giving insufficient weight to the economic costs of delay and inaction. Long-term investors and companies seeking sustainable returns must consider both.
Although these costs can be modelled in different ways, the physical impacts of climate change are expected to impose significant economic costs, including estimates that suggest:
- Australia faces at least $73 billion worth of annual economic costs associated with natural disasters alone by 2060 (4% of Australia’s GDP in 2020)¹.
- a decrease greater than 70% in global GDP by 2100² if the world fails to transition;
- impacts on global GDP (using Network for Greening the Financial System scenario modelling) as follows:
- The negative impacts from mitigating emissions are significantly less than the chronic and acute physical risks.
- The decrease in GDP associated with transition risks is more than compensated for by the decrease in physical risks impacts, due to the lower expected increase in global mean temperature. Thus, as early as 2030, the NGFS ‘Net Zero 2050’ scenario is associated with better global economic outcomes compared to the NGFS ‘Current Policies’ scenario.
- The sooner and the greater the emission cut (i.e. the ‘Net Zero 2050’ scenario) the greater the total economic impact is reduced, compared to the ‘Current Policies’ scenario and, from 2035, compared to the ‘Delayed Transition’ scenario.
- Over the long-term, sooner and more ambitious emission reductions lead to fewer negative impacts on Australian GDP.
Taken together, this evidence supports the economic case for timely decarbonisation: transition entails costs but delaying action can increase both physical climate impacts and the accompanying cost.
We observed that:
- Investors and companies are aligned on the need to decarbonise the Australian economy, with participants recognising the economic imperative for effective and efficient climate policy.
- Progress has been made towards the decarbonisation of the Australian economy, but the transition has reached a more complex phase.
- Policy consistency over time and across levels of government is important.
- Australia’s mandatory climate-related financial disclosure requirements have concentrated attention on the understanding and communication of climate risks, along with promoting structured, coordinated approaches across organisations.
These discussions provide important context for the Safeguard Mechanism review. The review should promote policy certainty, strengthen incentives for decarbonisation on the basis that it is economically rational, and consider accompanying policy that recognises commercial realities over the shorter term and encourages investment.
ACSI recommendations
The following recommendations take into account investor and company perspectives, and are informed by the more detailed modelling undertaken by the Investor Group on Climate Change and EY-Parthenon Strategy.
ACSI is a member of the IGCC and supports its work and modelling on Safeguard Reform. That modelling suggests:
- By 2040, under current ACCU settings, half of abatement could be met through offsetting ACCUs. A plateau in additional on-site abatement may happen between 2030 and 2035.
- Aligning decline rates to the 2035 target appears to be not enough to appropriately incentivise on-site abatement. Demand for ACCUs under decline rates aligned to the 2035 target appear not to increase the ACCU price enough to motivate even the low-cost abatement before 2040. Thereafter, it is unlikely to rise high enough to motivate sufficient decarbonisation before 2050.
- Some facilities have significantly more abatement available under $120/t than others.
- Improving the flexibility and durability of financial supports could add another ~20% (up to an additional 10Mt per year from 2030-2035) of on-site abatement. The key intervention modelled that meaningfully brings forward on-site abatement is a capital subsidy. This suggests that the quantum of the on-site abatement challenge exceeds that which the ACCU price will motivate. In addition, this does not account for local deployment challenges that arguably need a stronger signal, or more support to overcome.
- Differentiated decline rates can shift compliance burdens based on ability to transition in the near-term and associated costs, without increasing gross abatement or changing the ACCU price.
- There appears to be a mismatch between the current ACCU price and the cost of decarbonising industry. There is an opportunity to address this in the scheme’s design, and signalling changes early can help the market to adjust. Methods for supporting more on-site abatement should be flexible and recognise commercial imperatives.
This modelling suggests that changing the baseline decline rate alone is unlikely to deliver the level of on-site abatement required. A credible post-2030 trajectory remains important, but it needs to operate alongside measures that improve the commercial case for on-site investment and address sector-specific barriers to abatement.
There is merit in considering the IGCC’s core recommendations, in particular:
- Proportional share: Support for continuing the current proportional share approach.
- Decline rates: The decline rate should align with the 2035 target range, and differential decline rates should be considered, calibrating to sector specific circumstances according to marginal abatement cost curves (MACC). Additional analysis of MACC curves should be undertaken to promote confidence, aligned with the Government’s sector plans as a starting point.
- Balance flexibility with on-site abatement: Consider how the Government can maintain flexible compliance mechanisms and ACCU use where it is required in hard to abate sectors, while also encouraging on site abatement. This balance may change over time, in line with MACC and as technology solutions become feasible. Confidence in the integrity of ACCUs should be prioritised and there is value in integrating the mitigation hierarchy principles into the reforms.
- Reinvestment contribution: A reinvestment contribution, where an amount is taken at ACCU surrender and then accessible to facilities for deeply concessional and meaningful financial support calibrated on the basis of abatement options is worth consideration. It could also be deployed towards unlocking other transition dependencies, like access to renewable energy, prospective studies, and research and development. Further scoping and consultation would be required.
- Financial support mechanisms: Durable and flexible financial support will be important for onsite abatement. Current funding support is arguably under-utilised, with feedback from company engagement indicating that accessing it is time consuming and unnecessarily unwieldy.
- Threshold: Lower the threshold, at a predictable pace, including taking account of those entities that might fall under the 100,000 tonnes per annum rate as their emissions reduce.
Across our engagement, investors and listed companies have consistently emphasised the importance of policy certainty, coordination and complementary policy. Safeguard Mechanism settings should therefore be considered as part of the broader environment for industrial decarbonisation. Clear long-term signals need to be accompanied by policy that improves the shorter-term commercial risk-reward equation, addresses genuine barriers to investment and supports and orderly transition. Such measures should be specifically considered in conjunction with reform of the Safeguard mechanism.
