I stand corrected. Last year I described the Direct Action replacement of the previous government’s carbon pricing mechanism as offering transport companies nothing, yet in the first Emission Reduction Fund (ERF) auction in April, transport group AHG was awarded a $2 million contract to reduce its emissions.
For the $1.89 billion (75%) of ERF funding remaining, Reputex predicts almost $100 million could go to transport projects.
Can you benefit from the ERF or will your competitors?
Opportunity for Transporters:
The Emission Reduction Fund uses approved ‘methodologies’ for calculating emission reductions that get compensated by contracted ERF cash payments over an agreed term. Two methods apply for the Transport sector – an Aviation method and a Land and Sea Transport method, which provides for crediting emissions reductions from road, rail and sea transport, and mobile equipment such as mining and agricultural vehicles.
The Land and Sea Transport method allows for one or more of the following activities in an emissions reduction project: replace or modify existing vehicles for better fuel efficiency; use cleaner fuels; swap freight to lower-emitting transport modes; and changing operational practices to reduce the intensity of vehicle emissions.
The ERF also allows for aggregation of projects under one umbrella, so that multiple sources of carbon abatement can be brought together under one contract to introduce economies of scale, reduce transaction costs and help manage performance risk. Aggregating may be particularly useful in the Transport sector to help thousands of small and medium size operators be part of the ERF action.
The next auction date is not yet set but you can be sure that AHG-inspired Transport bids are likely to come from industry giants such as Toll, Linfox, Asciano and Qantas. In July so far the number of new project registrations across all sectors has surged with more and more companies getting ready to bid.
There are however some challenging aspects of the ERF program to be met. Projects must deliver new abatement that has not begun to be implemented. So if you’ve just signed that purchase order for new vehicles, it’s too late to access ERF funds. If you are considering buying some new fleet your timing could be right. You need to show how ERF funds help get that decision over the line.
For example, the smallest allowable bid size is removing 2,000 tonnes of carbon per annum, which in transport fuel efficiency terms means saving 740,000 litres of diesel. When you consider this week’s national average retail diesel price of $1.35 cents per litre, the efficiency gain will be worth $1 million in reduced fuel costs. Using the average carbon price paid in the first auction of $13.95 per tonne, a successful ERF bid would provide an additional $27,900 to assist the project.
Measurement of vehicle fuel use is key to supporting any bid. Three years of good data on your existing vehicles’ fuel use and service history is needed to provide a baseline used to assess future emission reductions and contract payments.
Competition from other sectors may provide the greatest challenge for Transport companies interested in the ERF. More methodologies are being developed all the time to expand the scope beyond existing carbon farming projects that made up 98% of the successful first auction bids, as the government aims to increase competition from high emitting industrial sectors that may supply lower cost abatement at reduced prices per tonne. This goes back to my premise last year: most ‘low hanging fruit’ emission reduction projects in Transport are gone and remaining opportunities have long financial paybacks. The sector’s early action on emissions reduction over the past two decades and consequent current high marginal cost of abatement puts it at a competitive disadvantage against large players in high emitting sectors.
What to do now?
If you want to secure funding in the next auction:
- Consider any capital expenditure or continuous improvement projects that reduce emissions which may fit the Transport method criteria
- Talk to a specialist carbon advisor, especially an auditor and potentially an aggregator
- Decide strategy for your structuring your projects and how to bid at auction
- Apply to register your project
Applications take up to 90 days to be approved by the regulator, and only approved applications can bid at auction. There’s likely to be one more auction in 2015, with as little as 6 weeks’ notice from announcement.
So if you want some government funds to improve your carbon footprint, which can bring cost savings and green marketing opportunities as well, the time to act is now.