The Turnbull government is hedging its bets on whether to allow energy companies to buy offsets to comply with their new 26% emissions reduction target.



A new 12-page discussion paper obtained by Guardian Australia addressing the emissions reduction architecture of the national energy guarantee (Neg) suggests the government is yet to make a decision about whether domestic or international emissions offsets are in or out.

Business has long supported the use of carbon credits as a low-cost means of reducing emissions, but the former prime minister Tony Abbott has styled himself as a fierce opponent, arguing offsets are a form of carbon trading where “Aussie consumers end up shovell­ing our money to foreign carbon traders – and we all know the ­potential for rorts there”.

Despite the lack of clarity both on the use of offsets and the treatment of Australia’s emissions intensive trade-exposed (EITE) activities, the commonwealth is pushing the states and territories to sign off on further work on the Neg when energy ministers meet this Friday.

Some of the jurisdictions were surprised to learn late last week that the Turnbull government would circulate its own paper on the emissions reduction elements of the Neg in the lead-up to the meeting, in addition to technical work supplied by the Energy Security Board.

The Energy Security Board has provided all jurisdictions with a 54-page document outlining the technical design of the new scheme and the mechanisms that will be deployed under the Neg, a policy that would impose a reliability obligation and an emissions reduction requirement on energy retailers and a small number of large electricity users from 2020.

The new commonwealth paper confirms the emissions reduction target for electricity in the proposed Neg will be a 26% reduction on 2005 levels by 2030, despite a new outbreak of internal restiveness on energy policy in which some Coalition backbenchers are arguing they have not signed off on that specific target.

The paper doesn’t make clear how the trajectory will be determined for emissions reduction, but it suggests the initial target will apply for 10 years, before being adjusted every five years “aligning with [the government’s] domestic policy review and refine cycle, and the five-yearly review under the Paris agreement”.

The government is not clear whether external offsets can be used by participants to help them comply with the emissions reduction obligation at least cost. It notes that some stakeholders have raised concerns about the quality of international units.

The paper says the commonwealth “is continuing to consider whether retailers should be able to use external offsets”.

“The government’s position is that if offsets were eligible, it should be in a manner that provides the greatest investment certainty, is technology neutral, helps address small compliance shortfalls and reduces market imbalances.”

The government is, however, clear that more ambitious emissions reduction activities undertaken by state and territory governments through their renewable energy schemes will not ultimately boost the federal target. Several jurisdictions have expressed concern about the Neg on the basis of the low-ball 26% cut.

The paper says: “Where states and territories pursued their own renewable energy targets, such as to achieve investment or employment policy objectives, this would not change the target under the guarantee.”

The discussion paper also makes it clear the government hasn’t yet resolved how to treat EITE activities.

The paper indicates the government is inclined to exempt EITE activities from the emissions requirement under the Neg, as it did under the renewable energy target, but the mechanism for doing it is not yet resolved.

The government has been warned by electricity generators that if retailers are able to remove EITE customers’ load from their emissions obligation, then it could unbalance the Neg. The discussion paper says the government will “carefully consider the issues raised by stakeholders in the design process”.

The chair of the Energy Security Board, Kerry Schott, has written to all ministers urging them to come to the table on Friday. “Providing long-term policy confidence and stability is critical to lowering investment risk in the national energy market and bringing down electricity prices,” her letter says.

Schott says the Neg will encourage investment in a least-cost portfolio of energy technologies and demand response that is both dispatchable and low-emitting.

She says the policy is technology-neutral and insists it is not a new trading scheme.

“The guarantee will use existing mechanisms for the purchase of electricity by market participants,” she says. “Electricity companies already buy electricity from each other to meet their requirements.”

The coming week is critical for the fate of the Neg because any single jurisdiction has the power to break the concept. Changes to the national electricity market rules require consensus between the commonwealth and the states.

While the federal energy minister, Josh Frydenberg, is confident he can get his colleagues over the line, Labor governments in the Australian Capital Territory, Victoria and Queensland are yet to signal public support.

Federal Labor is also yet to signal bipartisan support, and is highly unlikely to sign up if it doesn’t have flexibility to increase the ambition of emissions reduction in the scheme.