EUA’s support federal government’s emission reduction green paper

Recently, the Australian federal government released the Emissions Reduction Fund (ERF) Green Paper. The fund will purchase carbon reduction units from the private sector that undertake actions to reduce emissions and then surrender these under Australia’s international obligations to meet a 5% reduction by 2020.

Sustainable Melbourne Fund (SMF) provided a submission stating that the Environmental Upgrade Agreement (EUA) model presents a significant opportunity to reduce emissions in the built environment. EUAs are a statutory secured finance product providing capital to energy efficiency projects within commercial buildings.

The thinking behind these proposals is that a well-functioning EUA market has the potential to deliver $4.5 billion of economic development, create 18,000 jobs and abate 2.42MtCO2-e per year in Victoria alone.

While energy efficiency presents significant abatement opportunities, SMF’s modelling indicates that ERF is only likely to provide a 3% capital incentive which is likely to be eroded in transactions costs – further supporting the wider application of EUA finance structure.

At the individual business level, modelling has indicated that EUAs when partnered with the ERF can offer cash flow benefits of up to 61% for the building owner. Despite these compelling reasons, as discussed in the last blog, there remains limited uptake of EUAs.

SMF suggests that the adoption of EUAs would overcome the challenge of bankability for energy efficiency projects and increase commercial viability. SMF proposes five steps to be included in the design of the ERF that would accelerate the uptake of energy efficiency actions. The five key steps are:

1. the automatic inclusion of energy efficiency projects financed by an EUA to participate in the ERF,
2. the development of an ERF method based upon EUA legislation,
3. the disclosure of a benchmark price to enable price discovery and incentivise businesses to participate,
4. provide “deeming” of emission reductions – like state based schemes, to further support the business case of energy efficiency, and
5. SMF supports the inclusion of a “make good” provision which will allow participants to use Australian Carbon Credit Unit (ACCUs) to address under-delivery of agreed emission reductions.

Energy efficiency actions in buildings are a large source of abatement; however the makeup of the building market makes this challenging. 80% of buildings in the City Of Melbourne, making up 47% of net letable area, are owned by small property companies. The challenge is the participation and aggregation of building energy efficiency projects in this fragmented market. SMF is well positioned to act as an aggregator on behalf of these building owners, not only with the City Of Melbourne, but also nation-wide.

Please read our full submission.