Research from carbon advisory firm RepuTex indicates that few companies are expected to face a penalty under the government's Direct Action Plan, with analysis revealing that while many companies will increase their emissions under the scheme, few will be at risk of exceeding their emissions intensity baselines, and will therefore not face a liability.
The setting of emission baselines is central to the operation of the government's proposed Direct Action Plan, with each company's baseline – to be derived from historic emissions levels – setting each company's obligation to reduce emissions, plus their ability to bid emissions abatement into the government's Emissions Reduction Fund.
Despite the key role that emissions baselines are set to play, the methodology to calculate the baseline for each business is yet to be defined by the government.
Emissions intensity may be expressed relative to financial factors (e.g. emissions per dollar of revenue, emissions per economic value-added) or relative to levels of production (e.g. emissions per unit of production).
According to RepuTex, which analysed a series of approaches to calculating emissions baselines, emissions intensity calculated according to production is the most appropriate way to set baselines under Direct Action.
"Emissions intensity calculated relative to a company's physical production is the most appropriate methodology to set baselines. This method would present the least risk to business in the form of external variables, such as commodity price or exchange rate fluctuations, and would mean entities would have more control over the variables that contribute to their emissions intensity calculations," said RepuTex head of research Bret Harper.
According to RepuTex, should such an approach be taken, few companies would be at risk of paying a penalty under the proposed scheme, with most entities likely to beat their baseline.
"Over the last five years, emissions per unit of production have decreased for most industries, meaning that most companies are already below their five-year historic emissions intensity average."
"Modelling indicates that emissions relative to output are not expected to rise to any significant degree in the period to 2019-2020, therefore, under an emissions intensity baseline, most businesses are expected to beat their target, and avoid being subject to any penalty," said Mr Harper.
"In total, we anticipate that fewer than 30 companies out of around 300 are likely to increase their emissions intensity and face the risk of paying a penalty. The majority of these companies are likely to be smaller, less diversified companies in high-intensity sectors such as energy and mining."
While the results are positive for industry, the environmental movement will be less pleased, with analysis indicating that the setting of emissions intensity baselines will do little to reduce national emissions levels.
"Under an emissions intensity approach, businesses can be fully compliant to their baseline emissions intensity, whilst overall emissions increase as the economy grows and business output increases." said Mr Harper.
"We currently anticipate emissions growth of approximately 14 per cent through to 2020, even with Direct Action, with Australia overshooting its 5 per cent emissions reduction target by around 15 per cent."
"This is likely to mean that Australia will need to find other means of enforcing the emissions target, either by building an emissions cap into Direct Action, or purchasing domestic or international offsets to comply with the target," said Mr Harper.
RepuTex's research comes on the eve of the resumption of parliament following the Coalition's election victory, with climate policy set to take much of the focus as the government seeks to repeal the carbon tax and enact its Direct Action Plan prior to the commencement of the final year of the carbon tax in July 2014.
"There's a long way to go before the final design of the new climate policy. How the mechanism is ultimately structured to minimise industry liabilities, reduce overall emissions, and ensure a stable market price for abatement investment, will be an interesting balancing act," said Mr Harper.
