Archive for November, 2008
Australia’s Carbon Pollution Reduction Scheme (CPRS) is scheduled to commence on the 1st of July 2010. The goal of the scheme is to transform Australia’s economy and encourage investment in projects that reduce Australia’s carbon footprint.
In this new carbon-limited economy, all Australian households and businesses will be affected through higher energy costs. Carbon intensive businesses will be more directly impacted as liable businesses under the scheme.
The Government will create a limited and reducing number of carbon pollution permits each year that will reflect Australia’s overall cap on emissions. Liable businesses will be required to acquire permits for all of their emissions that aren’t otherwise abated or offset. These permits will be auctioned by the government and then will also be able to be bought and sold on an open market.
Liable businesses will need to respond by developing a new organisational capability: carbon cost optimisation. You can read more about these changes, and options for responding, in our carbon cost optimisation white paper.
Recent research by UK-based Ethical Investment Research Services (EIRIS) and their Australian affiliate, the Centre for Australian Ethical Research (CAER), suggests that Australian big business is lagging far behind it’s global counterparts when it comes to climate change response.
The research analysed the responses of 300 of the world’s largest companies against 24 key climate change criteria and compared them to the responses from S&P/ASX200 companies. Almost across the board S&P/ASX200 members trailed behind Global 300 companies in areas of climate change response that spanned governance, strategy, performance and disclosure.
Whilst the report is worth reading in it’s entirity, some of findings are worth particular mention because, in the our opinion, they suggest a clear lack of preparedness by many of Australia’s largest companies to address the business challenges of climate change and carbon pricing.
Many high risk companies still unprepared
The CAER survey found that almost half (48% compared with 35% for Global 300) of S&P/ASX200 companies — representing over AUD 545 billion market cap — were classified as being at high or very high risk of impact of climate change and of those companies over one third (24% for Global 300) had no (or only a limited) climate change strategy in place.
Reporting still limited and mostly unverified
Of the companies most likely to be affected by climate change only two fifths (73% for Global 300) were reporting emissions data and only about one in ten (11% compared with 36% for Global 300) had those reports externally verified.
Reporting is the first and most obvious step to be taken by any organisation hoping to understand and ulitmately reduce it’s GHG emissions footprint - afterall if you can’t measure it you can’t manage it.
Companies should be establishing data collection and reporting practices now that will guide their carbon management strategy. With the NGER Act now in force, large greenhouse-gas emitters are required by law to report annually, with significant penalties in place for non-compliance. The research suggest, at least anacdotally, that some large organisations in Australia may not be in a position to meet their legal obligations.
Lack of targets. Lack of long term strategy
Only 13% (48% for Global 300) of high risk companies disclose, either publicly or internally, short-term (defined in the survey as less than five years) GHG emission targets and a mere 9% (25% for Global 300) have set longer term reduction targets.
This is hardly a surprise given the low levels of reporting, but the lack of long term targets can presumably be taken as further evidence of lack of a carbon management strategy.
Our experiences
We’ve found a general perception that the ‘big end of town’ is in control of the risks and opportunities of climate change and that it’s an area they’re actively managing. This research certainly provides strong evidence to the contrary.
We’ve personally found that businesses subject to NGER, and previously EEO, are making relatively good progress on meeting compliance requirements. However we haven’t seen as much action on preparation for caps on emissions and the trading scheme, which could be implemented as soon as 2010. In very few cases have we seen a strategic or holistic response to climate change or one that seeks to find opportunities in the changes that are underway.
This research makes it clear that Australian business is responding too slowly to the challenges of climate change and that more action is required.
Greenmonk have posted a fascinating interview with Vint Cerf (best know as ‘the father of the Internet’).
Vint talks about Google’s interest in clean energy including their commitment to sustainable computing, their investments in geothermal energy, and the 1.6MW solar panel installation that provides 30% of the energy requirements of their corporate head quarters. He also mentions Google’s fleet of plug-in hybrid cars. One of the interests in this technology is the concept of Vehicle-to-Grid Transmission, where by energy is fed back into the grid from car batteries to improve energy management and cope with peak energy demands.
Google have also created a proposal — Clean Energy 2030 — to reduce the US’s dependence on fossil fuels. Eric Schmidt, the CEO of Google presented this proposal last month.
Carbon Capture and Storage (CCS) is very important to the government’s current plan for dealing with climate change. This is clear from the $100M investment the government is making in the Global Carbon Capture and Storage Institute (GCCSI) and the recent treasury modeling, which forecast that Australia’s costs will be 25% higher in 2050 if CCS technology isn’t viable.
GCCSI is envisioned as a global institute supporting international research and facilitating projects hosted in Australia. The United Kingdom and Norway have publicly backed the plan. While some people see CCS as a silver bullet, being the only way we can make deep cuts in emissions using fossil fuels, for others it is a pipe dream with many challenges to overcome to overcome.
In any case it is a key part of the government’s strategy to deal with climate change and something we need to follow.
The Cooperative Research Centre for Greenhouse Gas Technologies (CO2CRC), is in many ways the forerunner of the GCCSI. CO2CRC is the epicenter of CCS research and application in Australia. They have recently published an interesting review of the CCS activity in Australia and publish a large number of other useful reports and fact sheets.
If you want to understand Carbon Capture and Storage, the CO2CRC is definitely the place to go.
Power and greed bank on fear and ignorance
Jorg Imberger is an eminent and influential Australian academic who heads the Centre for Water Research at UWA. In Monday’s West Australian he presented an argument against the proposed Carbon Pollution Reduction Scheme (CPRS).
The first half of his comments included some creative rhetoric suggesting that climate change was being used as a tool to maintain political power and that emissions trading was being adopted as a profit making mechanism.
He presented some interesting arguments in the second half of the article discussing the scope of the problem of climate change and his views on how we should respond.
Professor Imberger pointed out that Australia is only responsible for about 1.5% of the world’s carbon emissions and so the “amount of carbon that will be saved each year if the scheme is fully implemented is miniscule”.
He went on to point out that the warming we are already experiencing due to our use of fossil fuels (anthropogenic warming) is now triggering feedback mechanisms that are exacerbating the problem.
A good example of this is the recent study in Geophysical Research Letters which has been the first research to show arctic melting has caused an increased release of methane into the atmosphere, methane being a potent greenhouse gas.
Given that we are already committed to 2°C of warming and the potential effects of these feedback mechanisms, the implication of Professor Imberger’s comments is that the CPRS is a dangerous distraction and we should instead be facing up to the consequences of climate change.
Instead of an emissions trading scheme, Professor Imberger suggests two main alternative strategies to tackle climate change.
Firstly, he argues that we should stop exporting food and make agricultural production more efficient. Farmers could then be encouraged to grow native trees and plants on the 37% of our land mass that would be freed from this change. This would sequester a large amount of carbon and begin to return some of the biodiversity lost due to global warming
Secondly, he suggests that given the changing rainfall patterns in Australia — less rain in the South East and South West and more in the North West — people could be progressively encouraged to relocate.
While I’ve attempted to summarise the key points of the argument, I’d encourage you to read Professor Imberger’s comments for yourself.
A rational response to a diabolical problem
Professor Garnaut has called climate change a diabolical challenge for Australia. On the one hand Australia can’t afford to act alone, on the other we can’t afford not to act.
Is the CPRS the right response to climate change or is Professor Imberger correct, and is it “clearly irrelevant to the climate change problem”?
It is true that Australia’s overall emissions are dwarfed by those of the United States and China. It is also true that an emissions trading scheme will have an impact on Australia’s economy, although less than might be feared. However there are a number of other important points that need to be made.
Climate change is a global problem and requires a global solution. The mechanism we have as a society to enact global policies are international agreements between states. These agreements cover a wide range of topics from human rights to international trade. A particularly relevant example is the Montreal Protocol which addressed the threat to the Ozone layer by reducing the use of CFCs.
There is an important process in train to reach an international agreement on reducing emissions of greenhouse gasses. The process started in Rio in 1992, continued in Kyoto and then Bali last year, and will progress further in Copenhagen next year.
This long period of time has coincided with a gradual increase in awareness of the impacts of climate change by citizens, empowering governments to take action on their behalf.
The only way the world is going limit global warming to 2°C is to reach an international agreement to reduce emissions and stablise the levels of greenhouse gasses in the atmosphere. Despite only being responsible for 1.5% of the worlds emissions, Australia is an important player in this process, particularly in the Asia region, and it is critical we are working positively towards an agreement.
Australia needs to demonstrate leadership and maintain credibility through action on climate change; signing the Kyoto Protocol; being prepared to agree on a specific reduction target and implementing a mechanism — in our case the CPRS - to achieve that target.
The CPRS is an effective mechanism because it allows us to agree reduction targets at a national level and then set limits on the emissions of individual businesses to achieve those targets. By auctioning permits and then allowing them to be traded it provides an efficient mechanism for businesses to meet their reduction obligations.
Professor Imberger is rightly concerned about the potential economic impacts of the CPRS impeding our ability to adapt to climate change. However Australia won’t unilaterally adopt deep cuts and Penny Wong, the Minister for Climate Change, has made it clear that we will wait until the outcome of the Copenhagen discussion before making any specific commitments.
The key point is that Australia must be working towards a global agreement and must be ready to act when we have an agreement. Participating in this process is the only chance we have for limiting global warming to 2°C.
The second important point about an emissions trading scheme is that places a price on carbon. This enables the country and businesses to make rational economic decisions to reduce emissions. Placing a price on carbon is already having a positive impact by helping to fund abatement projects in developing countries under the Clean Development Mechanism.
With a price on carbon, businesses are enabled to make decisions that might include the strategies suggested by Professor Imberger. If the cost of water and of transportation means it is no longer economic for Australia to export food, then we will stop. If the abatement benefits of reclaiming agricultural land and replanting bush provides sufficient economic incentive, then it will happen.
What is the alternative way to implement these strategies?
I do think Professor Imberger is absolutely right in one particular respect: it is important that we also plan for the consequences of climate change. The world is already committed to some level of climate change and so it is true that reduction is not enough and adaptation is critical.
As an aside, some businesses are already acting in this respect. For example Woodside Energy has conducted a large study in conjunction with Oklahoma University to help them prepare for climate change. The study will, amongst other things, guide them in the design of future offshore production platforms to cope with changes in tropical cyclone wind speeds and wave heights.
Right now the CPRS is the government’s principal response to climate change and it is an important one, but perhaps we should now ask the government for a Climate Change Adaptation Scheme as well.
Day 2 of the Carbon Expo began with the same energy, enthusiasm and focus of Day 1. It started with a panel of Australian ex-pats who are working within the climate change industry across the globe. It brought insight into the success and learnings of the European ETS, the rollout and challenges of Clean Development Mechanism (CDM) and the challenges that exist at a global level in shifting Asia towards a carbon centric economy.
Hearing from Australians about the perception of Australia by the rest of the world, it became clear that while Australia used to be on the forefront of trading emission scheme design, we have become a bench warmer for the last few years. With the Rudd government’s attention on the CPRS we will once again move to become a leader – certainly within the Asian market where we punch above our weight. While our carbon output is small, on a global scale our potential to influence world policy debates and channel investments into clean technology development in emerging nations is great, but only if we have a story to tell of how we are succeeding back home.
With a focus back on home of current policy debate, the treasury model and CPRS design, the discussion moved to what industry will be like once implementation begins, considering issues of the role the regulator will play, auditing standards of carbon accounting, impacts of capping the carbon price, how the industry will develop the necessary skills shortage and supply chain impact among other things.
The conference had a great range of workshops focusing on specific challenges and topics of debate and an exhibition of over 100 business representing the emerging industry, showing positive signs that private business was positioning itself to help tackle the problem – all supplementing the main plenary sessions.
As the inaugural Carbon Markets Expo, Greensense would rate it as a success and as the conference closed there was a clear, overwhelming need that it return next year.
The image below shows the exhibition hall at the conference.
Not an economic disaster
The long-awaited treasury modeling on the economic impacts of the proposed emissions trading scheme have been released. While some people are concerned about the implications of the global financial crisis, the broad consensus is that the scheme won’t cripple the economy or household budgets.
As an aside, I was interested to see the Australian newspaper responding positively that the scheme would only cost households $1 per day. The West Australian newspaper on the other was very concerned that it would cost households $365 per year.
Uncertainty over Australia’s trajectory
Treasury modeled the trajectories proposed by Garnaut and the Greenpaper. As we’ve mentioned before, the proposals by both Garnaut and the Greenpaper are for relatively conservative cuts for 2020 of between 5% to 25%.
However, as we know, stabilising concentrations of greenhouse gasses in the atmosphere to “acceptable” levels will require more substantial cuts in the future. These will come from further economic adaption, increasing carbon prices, new technology developments, and significant behavioral changes to reduce energy use.
While we do know the general range of possible cuts Australia will adopt, we won’t know what specific trajectory Australia will follow until after the Climate Change Conference in Copenhagen in late 2009.
New technology to the rescue
Technology developments are particularly important to reducing the economic impacts of proposed cuts. For example, the government is placing a lot of importance on the successful development of carbon capture and storage technology (CCS). The treasury modeling suggests that Australia’s costs will be 25% higher in 2050 if this technology isn’t viable.
However as we’ve discussed before, even without CCS Australia should be a country of relatively low energy costs. Interestingly, while the treasury modeling does make reference to our renewable resources it doesn’t make reference to nuclear power.
What it means for your business
While the modeling shows that the proposed cuts are affordable, some industries will be affected more than others and it is important to consider the impacts for your industry sector and your business.
If your business may be subject to caps under the Carbon Pollution Reduction Scheme it is very important that you are now doing your own modeling of your internal abatement costs versus the likely cost of carbon emissions under the trading scheme.
The treasury modeling has given us a very good indication of the likely initial price of carbon, which is $23 per tonne (CO2e). This will allow you to begin to properly analyse the value of your abatement projects and to develop offsetting and trading strategies.
Greensense can help you plan, analyse and prioritise your abatement project portfolio; develop market scenarios and model alternative internal reduction trajectories; and optimise your investments between internal reduction options and offsetting and trading.
