Direct Action doomed to fail

On the eve of everyone disappearing for the Christmas break, on the afternoon of December 20 the government released its Green Paper outlining the design elements of their centrepiece climate change policy – the Direct Action Emission Reduction Fund.

But don’t worry if you failed to make it onto your summer break reading list. You only need to read to page four to learn the thing won’t be much good, whether you happen to be a businessman or an environmentalist. On that page it states:

“Standard contracts will be used to guarantee payments for verified emissions reductions. These would have a maximum duration of five years and include options for addressing under-delivery of emissions reductions.”

Essentially, the government is asking businesses to make upfront investments in the realms of tens to hundreds of millions of dollars in new equipment and projects to reduce emissions with lifetimes commonly approaching or exceeding 20 years. Such projects are supposed to be unviable were it not for government support, so the Green Paper tells us. But in return the government will only guarantee it will be interested in paying for the emission reductions from these projects over the first five years, after which you could get nothing.

Sound like a good deal?

Yes, it’s possible the government might be interested in rewarding the abatement flowing from these projects after the five-year contract expires. For example, they might come to their senses and reintroduce an emissions trading scheme. But as any major power or abatement project developer will tell you, bankers will accord this approximately zero value.

Without bank finance and the need to recover your investment within five years, you’ll need to make very high returns.

But based on the scant detail we have on funding for the Emission Reduction Fund, the government can only afford to pay about $10 to $15 per tonne of abatement. Ten years of experience from a range of prior government abatement programs will tell you that even with a 15-year contract from the government – or even better, an upfront payment from the government on construction of the project – $10 to $15 per tonne plus a load of government bureaucratic hassle will struggle to get project financiers out of bed and, consequently, make any serious dent in Australia’s emissions.

Unless the government indicates a willingness to shift on the five-year term for its abatement purchasing contract, there’s really not much point worrying about the other 60 pages of the Green Paper.