Australia's Clean Energy Policy and Regulatory Framework

AUSTRALIA’S CLEAN ENERGY POLICY AND REGULATORY FRAMEWORK – CAN IT DRIVE INVESTMENT TO ACHIEVE AUSTRALIA’S INTERNATIONAL CLIMATE GOALS? ALLY BONAKDAR (2018) An Assessment of Polycentric Governance Measures to Promote Clean Energy Investment in Australia to Meet International Climate Change Commitments CONTENTS I Introduction 2 II Paris Agreement – A New Form of Governance? 3 A Paris Agreement – Overview 3 B Concept of ‘Governance’ – Is there an Optimal Model for Climate Change? 5 C Australia’s obligations under the Paris Agreement 9 III ‘Trilemma’ of Security and Reliability, Affordability and Emissions Reduction 11 A An Overview of the NEM 11 B Emissions Reduction and the NEO 12 IV Examining the Current Landscape of Australia’s Energy Sector 15 A Renewable Energy Target 15 1 Brief Overview 15 2 Performance of the RET 19 3 A Comparative Review – What are the Potential Improvements? 20 B Direct Action - the Emissions Reduction Fund 22 1 Crediting Emissions Reduction 23 2 Purchasing Emissions Reduction 24 3 Safeguard Mechanism 24 C Other Government Initiatives 27 1 Statutory Institutions to Facilitate Innovation 27 2 State and territory-based Initiatives 29 V Role of the State – Policy Mechanisms to Achieve Emissions Abatement 33 A Reflections on the Repealed Carbon Pricing Mechanism 33 B Alternative Policy Mechanisms 37 1 Emissions Intensity Scheme 37 2 Clean Energy Target 43 3 Direct Regulation 44 4 National Energy Guarantee 46 VI Role of the Private Sector – ‘Soft’ Levers of Change 49 VII Conclusion 54 1 I INTRODUCTION The energy and climate change debate in Australia has been responsible for the change in political fortunes of prime ministers and prevailing governments over the last decade. Against this backdrop, the 2015 Paris Agreement provided the national debate with renewed optimism and what appeared to be broad bipartisan support in view of the international momentum created in Paris.1 Indeed, the Coalition Government announced Australia’s target of reducing emissions by 26 to 28 per cent on 2005 levels by 2030,2 which although criticised as comparatively modest, represented an important step forward given the highly politicised nature of this issue in Australia.3 In light of the renewed political focus, the federal government commissioned numerous reviews on energy and climate change policies with the most significant review chaired by the Commonwealth chief scientist, Dr Alan Finkel, who was commissioned by the Energy Council of the Council of Australian Governments (‘COAG’) to develop a ‘national reform blueprint to maintain energy security and reliability’ by undertaking a ‘whole of system’ review of the national electricity market.4 Each review has made recommendations to government on the policy mechanism required to achieve the objective of emissions reduction, consistent with Australia’s international legal obligations. Notwithstanding these recommendations and the euphoria that followed the Paris Agreement, political gridlock has re-emerged on which policy and legal framework to adopt to assist with the transition to a low carbon economy. Meanwhile, the inertia at the federal level contrasts with developments at the state and territory level where sub-national legal and policy initiatives are providing the necessary support for new investment and facilitating the pathway to decarbonisation. This thesis will analyse Australia’s existing clean energy policy and regulatory framework and key policy mechanisms recommended to government and consider their ability to promote clean energy investment and assist with achieving Australia’s international climate change commitments. Specifically, Part II begins with an overview of the Paris Agreement – its decentralised, ‘bottom up’ approach to achieving its goal of limiting global warming to below 2°C – and examines the agreement through the prism of new polycentric models of ‘governance’ in contrast to the traditional ‘command and control’ hierarchical models. In Part III, the national electricity objective under the National Electricity Law will be reviewed to determine whether the ‘trilemma’ of security and reliability, affordability and emissions reduction are appropriately addressed and to determine whether the existing legal framework appropriately integrates environmental objectives. Part IV examines the current policy and legal landscape, together with the role played by key statutory bodies and state and territory-based initiatives. In Part V, the alternative policy and legal mechanisms available to achieve emissions abatement and promote new investment are examined, commencing with a brief reflection on the repealed carbon pricing mechanism and concluding with an assessment of the recently announced national energy guarantee. This assessment will be done not only by reference to measures of ‘economic 1 Conference of the Parties, United Nations Framework Convention on Climate Change, Adoption of the Paris Agreement, 21st sess, UN Doc FCCC/CP/2015/L.9 (12 December 2015) (‘Paris Decision’) Annex (‘Paris Agreement’). Collectively, the Paris Agreement and the Paris Decision are referred to as the ‘Paris Outcome’. Australia ratified the Paris Agreement on 9 November 2016. 2 Australian Government, Department of Environment and Energy, Australia’s 2030 Climate Change Target (2015) < http://www.environment.gov.au/climate-change/publications/factsheet-australias-2030-climate-change- target>. 3 Frank Jotzo, ‘Australia’s 2030 Climate Target Puts us in the Race, but at the Back’ The Conversation, (online) 12 August 2015 <http://theconversation.com/australias-2030-climate-target-puts-us-in-the-race-but-at-the-back- 45931>. 4 Alan Finkel et al, Independent Review into the Future Security of the National Electricity Market – Preliminary Report (December 2016) 57 (Appendix B), outlining the terms of reference set by the Energy Council of the COAG. Other key reviews commissioned by the government are considered in detail in Part V below. 2 efficiency’ but, more importantly, how these issues are ‘framed’ in a manner that resonates with both the public and the investor community. In Part VI, the ‘soft’ levers of the private sector will be reviewed given the important role that non-state actors play under decentralised, multi-faceted governance models. In particular, developments in the areas of directors’ duties in assessing climate change risks and advancements in the areas of reporting, disclosure and risk management models will be examined. Finally, this thesis concludes that a polycentric approach to climate change – including both the ‘hard’ levers of governments and the ‘soft’ levers of the private sector – is required to achieve Australia’s climate change objectives and to facilitate new clean energy investment. II THE PARIS AGREEMENT – A NEW FORM OF GOVERNANCE? A Paris Agreement – Overview The Paris Agreement was a substantial achievement for the international community and it presented an alternative approach to climate change mitigation under international law (‘Paris Agreement’).5 The Agreement builds on the 1992 United Nations Framework Convention on Climate Change (‘UNFCCC’), the foundation treaty with the ultimate objective of stabilising ‘greenhouse gas concentrations in the atmosphere at a level which would prevent dangerous anthropogenic interference with the climate system’.6 The Agreement represents the evolution of the climate change framework which substantially departs from the approach taken under its predecessor, the Kyoto Protocol.7 Based on the UNFCCC distinction between developing and developed countries, the Kyoto Protocol adopted a ‘top down’ approach with a focus on binding targets on developed countries and an emphasis on compliance.8 Although the Kyoto Protocol can be considered a success in Europe, the failure of nations such as the United States to ratify it, and many developed countries to accept its second commitment period under the Doha Amendment,9 highlight the problematic nature of a centralised ‘top down’ approach to climate change mitigation. In contrast, the Paris Agreement embraces a ‘bottom up’ model that relies on all countries, both developed and developing, to submit their own nationally determined contributions (‘NDCs’), with greater emphasis placed on reporting and transparency.10 The objective under the Paris Agreement is to hold the ‘increase in the global average temperature to well below 2°C above pre-industrial levels’ and the more ambitious goal of ‘pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels’.11 Although the NDCs are not legally binding targets under the Paris Agreement, parties aim to ‘reach global peaking of 5 For a detailed consideration of the legal form of the Paris Agreement, see generally, Sebastian Oberthür and Ralph Bodle, ‘Legal Form and Nature of the Paris Outcome’ (2016) 6 Climate Law 40. 6 United Nations Framework Convention on Climate Change, opened for signature 9 May 1992, 1771 UNTS 107 (entered into force 21 March 1994) art 2 (‘UNFCCC’). 7 Kyoto Protocol to the United Nations Framework Convention on Climate Change, open for signature 16 March 1998, 2303 UNTS A-30822 (entered into force 16 February 2005) (‘Kyoto Protocol’). 8 Note that developed and developing countries are referred to as Annex I and non-Annex I parties, respectively. See Meinhard Doelle, ‘The Paris Agreement: Historic Breakthrough or High Stakes Experiment?’ (2016) 6 Climate Law 1-20 for a comparative assessment of the approach under the Paris Agreement and the Kyoto Protocol; see also Jacqueline

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