Carbon Press Review

AFR
Quarterly 20 Aug 2008
(summary of some articles):

* Electricity Prices on the Rise
- Electricity prices have already risen due to drought. Cost of water has increased and hydroelectricity capacity has been reduced.
- Modelling by Electricity Supply Association suggests a 20% reduction in carbon emissions by 2020 requires real electricity prices to rise by around 30%.
- The 20% reduction in carbon requires a $20 per tonne carbon price in 2010 increasing rapidly to $55 per tonne
- To meet the target, power generating companies will have to replace about one third of existing power station capacity, including most of the power stations in Victoria and South Australia.

* Lessons to be learned from European Carbon Trading
- Over allocation of permits in Europe resulted in a collapse in carbon prices in 2006
- Australian scheme is focussing on primary auction market which will hopefully avoid problems seen in Europe
- However, secondary market for trading with good liquidity is important as it establishes the market price for carbon on a day-today basis and allows participants to provide biggest cuts in carbon with lowest cost to economy and community
- Barriers to a liquid market developing are:
o If Government decides to have fixed price for carbon with a variable emissions cap, there will be no need for secondary market as companies can simply wait for next auction.
o The introduction of a price cap in ETS suggests that when price of carbon gets too high, “Carbon Central Bank” (Government) will print more permits. This would limit the interest of speculators which is key source of liquidity..
o Some sectors like Trade Exposed Industries that receive free permits might be able to sell their permits in auctions.

* Data Capture key to precise reporting
- Businesses with significant emissions will need to report by August 2009
- Companies that emit more than 25,000 tonnes per annum will be required to report. This covers about 1000 installations and 5% of Australian businesses.

* Voluntary company efforts lack clear credit
- Whilst Carbon Pollution Reduction Scheme is proposed to commence in 2010, some companies are voluntarily reducing emissions. (e.g. HBOS in UK).
- Whilst Australian Government will ensure this scheme operates under a uniform set of standards, no such single standard exists for voluntary market.
- There are a number of sets of standards, some of which are being used for bith compliance and voluntary schemes. The more recognised are include
o Clean Development Mechanism (CDM)
o The Gold Standard
o Voluntary Carbon Standard (VCS)
o The Climate, Community and Biodiversity Standards (CCBS)
o Australian Government’s “Greenhouse Friendly Program” (with Verified Emission Reduction units or VER’s)

Australian companies participating in the voluntary market include Origin Energy, Qantas and Virgin Blue.

* Increasingly, consumers are choosing to pay more for green electricity to limit greenhouse emissions
- Origin Energy reports claims that 360,000 customers in Victoria are choosing to buy the higher priced electricity generated from green or renewable sources

* Big Australian companies are now showing their credentials for sustainability
- KPMG estimate that about one third of ASX top 500 companies have published or expect to publish a sustainability report for 2007-08 financial year
- Global Reporting Initiative is a group that tracks sustainability reporting. They claim that Australian level of reporting is low compared to countries where reporting is mandatory. For example, in UK and Japan, rates of reporting are over 70% in top 100 companies.
- Federal Government’s Energy Efficiency Opportunities Act 2006 will require companies using more than 0.5 PJ or 139,000 MW energy or producing more than 125,000 tonnes of CO2 in 2008-09 to register and report emissions before December 2008.

* Clean Coal a burning issue goal for all players
- 83% of Australia’s domestic energy comes from coal
- exports of coal are worth around $21 billion per annum
- Co-operative Research Centre for Coal in Sustainable Development (CCSD) is one of key bodies responsible for research into making clean coal technology a reality
- CCSD receives $8 million in funding (total Government and industry funding amounts to $2.5 billion)
- 60% of CCSD research is focussed on technology that allows carbon dioxide to be captured and stored underground. That includes gasification, “oxyfuel” and post combustion capture.
- A $200 million demonstration plant for Oxy Fuel is expected to be operational next year at Callide A power station in Central Queensland. This will involve burning coal with recycled waste gas which allows CO2 to be cost-effectively captured (as concentration of CO2 is much greater than with normal waste gas);
- Expectations are that this technology can be retro fitted to existing power stations
- Gasification is another technology being researched at Queensland’s Zerogen and Victoria’s HRL-Harbin projects; BP and Rio were working on a $2 billion project in WA but this was abandoned recently when it was found the reservoirs offshore Perth were not big enough to store the CO2.
- Clean coal needs a relatively high carbon price to make it viable.
- coal won’t disappear as China builds it infrastructure around coal burning

* Scientists disagree over lack of sunspots
- We are at a cyclical low for sunspots
- Debate exists amongst scientists about the degree by which sunspot activity contributes to global warming. As we enter a cyclical low for sunspot activity, some scientists argue that the world will be going through a cooling phase.
- Whilst sunspot activity does influence global warming, most scientists believe industrial contribution of CO2 has a much greater influence

* Carbon Credits Market
- opportunities will open up for traders and funds willing to tap demand from investors concerned about carbon emissions
- ARKX first fund in Australia (about 70 overseas)
- ARKX invests in global listed equities (wind farms, geothermal, energy efficiency), official carbon credits and CDM projects (projects that generate Certified Emission reduction Certificates that can be traded in Europe).
-

Recent weeks has seen various commentators and industrial groups questioning the merits of the Renewable Energy Target.  I have always felt “20% renewable energy by 2020? was too aggressive. Firstly, it is unclear whether technology can meet the target. In the short term, there is a significant backlog in wind turbines. Secondly, the renewable energy target, which runs in parallel with the Carbon Pollution Reduction Scheme, favour more expensive wind power, solar or geothermal energy over gas.  Gas is the lower cost alternative in terms of abatement of CO2.  The Australian Industry Group comments are reported in the artcile below from BLOOMBERG:

 Australian Business Baulks at Energy Targets, Review Reports

By Gemma Daley

Aug. 18 (Bloomberg) — Australian businesses want national and state governments to dump mandatory targets for renewable energy, saying it will cost A$60 billion ($52.5 billion) and undermine exports, the Australian Financial Review reported.

Groups representing Australia’s biggest companies, including BHP Billiton Ltd., want governments to reconsider a plan that 20 percent of energy come from renewable sources and review state renewable energy options, the newspaper said, citing submissions to a government review.

The target would cost electricity suppliers an extra A$2.2 billion a year and alumina producers A$300 million, the newspaper said.

http://www.blakedawson.com/  

The Federal Opposition spokesman for Climate Change has written a rather useful and realistic opinion of how we should evaluate the soon-to-be-released Garnaut Report on Emissions Trading.

 In short, these principles are:

- China, India and USA must be part of any deal on emissions reduction

- Emissions reduction should be lasting.

- Any emissions trading regime should be revenue neutral (not just a new tax on carbon)

- The disadvantaged need to be protected (income tests etc)

- Emissions trading needs to be supported by investment in new technology

The article is reproduced below

THE AUSTRALIAN 

July 03, 2008

WE are facing a moment of big history as two conflicting trends gather pace: global development on an unprecedented scale and the need to protect the global environment against the effects of this growth.

The dream of bringing those in India, China, Indonesia and elsewhere out of poverty is the highest human ideal. Two billion people are reaching towards the basics of clean water, heating and refrigerated food supplies. The consequence of this ongoing world growth, however, is that while Australia’s carbon dioxide emissions have barely changed since 1990, global growth in greenhouse emissions between 1990 and 2012 will be almost 40 per cent.

We thus face a global climate challenge that is real and important but almost entirely not of our making, as Australia is the source of only 1.4 per cent of global emissions.

This brings us to the five key principles by which we will evaluate the Garnaut report on an emissions trading scheme and the subsequent government response. The starting point is that we believe the profound challenge of climate change should be approached with optimism rather than pessimism.

The first principle is that any response must simultaneously pursue global action. Any Australian action will be irrelevant unless we ensure that China, India and the US are part of a global regime. Although we must pursue a domestic emissions trading system, there must also be a simultaneous push for action from the great emitters: the objectives for our pathway can and should be informed by the willingness of these emitters to take concrete steps.

A global response also means recognising that eight billion tonnes, or 20 per cent, of the world’s emissions each year come from deforestation and destruction of the world’s great rainforests. The single greatest source of potential emissions savings during the next five years is a global rainforest recovery plan aimed at reducing net deforestation by half.

Second, the guiding principle for an Australian emissions trading scheme must be to create lasting decreases in emissions. This can happen in two ways. There can be changes in technology, such as cleaning up the power stations, or changes in behaviour, such as people switching to more energy-efficient lighting and heating.

We support such a system. Indeed, we proposed it. What we do not support is any new windfall tax that merely delivers a revenue bonanza to Kevin Rudd while failing to change behaviour. The classic example would be an additional petrol tax of 10c, 20c or 30c a litre, given the 40c rise in petrol prices in the past year and the likelihood of a similar rise in coming months or years.

We are willing to champion real emissions reductions but we do not support pain without gain.

In economic terms, petrol is largely inelastic, which means that as price rises there is only a small change in driving behaviour but a large effect on low-income families.

This leads to our third principle of revenue neutrality or no new net taxes. That is why, if petrol is to be included in emissions trading, we believe any new carbon tax should be offset by an equal decrease in the excise tax. We would be switching toa carbon-based regime, but on theprinciple of no new net taxes onpetrol.

On a broader basis, the Government should not be increasing the total tax take through stealth.

Revenue neutrality leads to the fourth principle of protection for the vulnerable. The first class of those who are vulnerable comprises pensioners and low-income families. There must be a compensation mechanism for pensioners and low-income families who experience higher electricity and other prices. Some would argue that this is self-defeating, but if we allow pensioners to bear the brunt of this policy, as Rudd would appear to endorse, then we will cause enormous social dislocation. The task is to provide a price signal on electricity, which is more amenable to changed behaviour than petrol, while ensuring that elsewhere there is a balancing payment.

The second vulnerable group is export exposed industries. The principle must be that we help those industries to prepare for a global trading regime but that we do not bring them to their knees by including them before their chief competitors adopt carbon-based pricing.

The fifth principle is that emissions trading alone is not enough and that there must be direct support for clean technology. Three technologies are fundamental. Cleaning up the existing coal and gas power stations through carbon capture and storage requires direct investment in research and, arguably, assistance for the once-in-a-century rewiring of our stations.

This is the single most important step to emissions-free electricity by 2050, if not sooner. What we do on clean coal could be the most important contribution Australia makes to the world in the next 20 years.

We also need to invest in renewable technology, such as solar energy. We have outlined a vision for a solar continent based on the uptake of domestic solar panels and the development of solar baseload, the great mirror fields seen in California and Nevada.

A starting point will be the reversal of Environment Minister Peter Garrett’s means test, which has brought the solar panel sector to its knees.

The last of the new technologies is the push for cleaner cars. The rest of the world is pursuing better vehicle emissions standards and cleaner fuels rather than additional petrol taxes. This brings the additional benefit of better air quality in our cities. We need to rethink the tax regime, which slugs a hybrid as much as a Hummer.

Ultimately, Australia can contribute to the great task of tackling climate change. But to do so we need proper action rather than merely a tax binge, as well as serious encouragement for the great technologies of the future such as clean energy, solar energy and clean cars.

Greg Hunt is Opposition spokesman for climate change, the environment and urban water.

An article in today’s AFR refers to a paper delivered by CEO of Shell at a conference in Malaysia. Reminscent of the documentary “Crude Awakening” produced in 2006, (about the fact the world is running out of crude oil), Jeroen van der Veer reportedly referred to the days of “easy oil” and “easy gas” as being “over”. Mr Van der Veer also referred to energy forecasts predicting to journalists that  

“Energy demand will double between now and 2050, as the world’s population increases from 6 to 9 billion people”. The article also pointed out that  “…..coal consumption will more than double between 2000 and 2050, while oil will remain relatively flat and gas will increase by about 40 per cent.” 
 

Given the status of coal in shell’s projections, carbon capture and storage (“CCS”) is considered vital. Shell claims that  “….90 per cent of coal-fired power stations in the developed world and 50% in the developing worlds will have CCS by 2050. Shell also claim that CCS will be commercial by 2021.“  The article also claimed that Shell had already sold around 15 “capture-ready” coal fired power stations to China. These power stations can be upgraded to CCS when the  technology becomes commercially available.   

An editorial by Alan Mitchell in the Australian Financial Review includes the following comments:

-         Under an emissions trading scheme as contemplated by the Federal Government, a maximum emissions level is set and the market sets the price of carbon emissions

-         Under a Carbon Tax, the price of carbon is fixed and the level of emissions varies

-         As a consequence of the above facts, a carbon tax will provide less volatility in terms of electricity and fuel prices. Lower volatility would be more politically acceptable: As Mitchell points out

“The advocated of the FuelWatch price regulation say that consumers hate price volatility almost as much as they hate high average prices”

Mitchell claims that the solution to unacceptable price volatility is to “convert emissions trading scheme to something closer to a conventional carbon tax. This can be done by the simple expedient of adding a safety valve in which the Government offers to sell an unlimited number of emission permits at a fixed price. That in effect puts a limit on the price of emissions.  Once the market price reaches the level, the scheme becomes a tax”

The first trade in carbon emissions under the forthcoming ETS was transacted between AGL and Westpac. The Sydney Morning Herald (20 May) reports it as a “symbolic trade”:

“……. carbon emissions have been given an initial price of $19 a tonne before the Federal Government’s emissions trading scheme begins in 2010.

When it begins, power users could be liable for nearly $12 billion in extra electricity costs a year.

“Under emissions trading, we would expect that electricity prices will rise,” Elaine Prior, an analyst for Citigroup, said. But consumers - particularly those on low incomes - are unlikely to bear the full cost of the charge on pollution.

She said she expected the Government to recycle some of the money from auctioning carbon emission permits to compensate people for higher prices.

In a deal announced yesterday, AGL Energy sold Westpac 10,000 tonnes of emissions trading units in a transaction that will settle on February 1, 2012.

Australia is expected to emit 603 million tonnes of carbon in 2010, so the trade was nominal. But it sets an important benchmark for the price of carbon.

“The emissions trading scheme is obviously going to have a very significant impact on the pricing of electricity,” the managing director of AGL, Michael Fraser, said. “We’re very keen to try and get the market started.”

In Europe, where carbon is traded regularly, emissions are sold in batches of 10,000 tonnes, and Westpac traded 1 million tonnes in that market last year. From today, AGL will post prices for Australian carbon emissions on its website.

“Ultimately, this will be a several billion dollar-a-year market,” Mr Fraser said. “It is a whole new energy economy that is created here.”

He said the trade between AGL and Westpac was likely to be a precursor to a range of exchange-traded carbon products, which could involve the Australian Securities Exchange.

The Federal Government unveils its green paper on an emissions trading scheme in July and will unveil draft legislation in December. AGL is meanwhile offering its industrial customers the chance to lock in a price of carbon after 2010.

There is a risk the price will rise above $19 a tonne by 2010, so the decision to buy emission units at that price now could save companies money later.

“We think the initiative we’ve taken is going to help smooth that transition by creating transparency around pricing,” Mr Fraser said.

Ms Prior said she thought the carbon price would start at about $20 to $30 a tonne and rise to close to $50 a tonne by 2020, as more stringent caps are placed on emissions.

AGL and Westpac said they chose 2012 for the timing of the first settlement in case the Government’s ambitious scheme is delayed slightly.”

“The [2010] timeline has been set, but whether that is adhered to is uncertain,” Westpac’s global head of commodities, Geoff Rousel, said. “By [2012] the scheme should be fully liquid and under way.”

An article on May 17th in Sydney Morning Herald reports on lobbying by Forestry Industry for changes to tax legisltaion affecting forestry companies and MIS (’managed investment schemes); Any changes to legislation that would increase scope for carbon sinks will help listed forestry companies like Timbercorp, Willmott Forests and Gunns.

“AUSTRALIA’S forest industries are bidding for a major role in the country’s climate change future, claiming forest “sinks” could absorb 20 per cent of the anticipated 60 per cent cut in emissions by 2050 and supporting the development of new pulp mills.

A confidential document from the National Association of Forest Industries now circulating the Prime Minister’s Office proposes a joint industry-government strategy for forests and plantations in a carbon constrained future.

It proposes that forestry not only help meet emissions and renewable energy targets but also become involved in biofuel production and indigenous economic development.

The association calls for the premiers conference to reaffirm a commitment to the 1992 National Forest Policy Statement, which opened the door to regional forests agreements and access to logging as well as forestry-managed investment schemes that created the plantation industry.

Recommitment by state and territory leaders would help industry attract new investment in plantations, possibly leading to new pulp mills in south-western Victoria and Western Australia.

The association document names climate change pressure as the new ingredient that could soften previous emotional responses to plantation growth, logging, wood chipping and pulp mills. It says forest-based carbon credits allowable under the Kyoto framework could meet up to 20 per cent of Australia’s greenhouse gas emissions target of a 60 per cent reduction by 2020.

Australia by 2009, it says, should be marketing an Australian plantation industry information memorandum in the northern hemisphere that encourages investment in local carbon “sinks” permitted under Kyoto.

The association urges tweaks to taxation rules that apply to forestry-managed investment schemes to attract investment in longer, 30-year plantations. It also wants federal and state restrictions on the use of forest waste for biomass electricity production removed, claiming that waste could provide at least 5 per cent of Australia’s higher renewable energy targets by 2020.”

An article in AFR today refers to Ross Garnaut, the Government’s adviser on emission trading, making the claim that any trading scheme should allow the market to determine how to get to final cuts rather than have so-called interim targets that define the emissions reduction “trajectory”.   The article claims that Garnaut has suggested that total emissions over say 40 years should be defined and industry should work how best to get to that target.   Whilst permits would be allocated based on interim targets, companies could bank permits for the future or use permits from the future to mitigate current emissions.  The Government is aiming to introduce an emissions trading scheme by 2010, an ambitious goal to some commentators.

The AGE reports on how EU plans to cut greenhouse gas emissions.

THE European Union will today release a detailed plan for sharp cuts to greenhouse gas emissions by 2020, almost certainly provoking disputes among member nations about the roles of nuclear power and renewable energy in achieving Europe’s emissions targets.

The EU plan will also set a binding target for renewable energy — wind, wave and solar power — to comprise 20% of Europe’s energy use by 2020, slightly more than double the proportion it is today.

The AGE reports that arguments will emerge between the 27 member countries about the extent of cuts.

 In other press, Reuters reports that refineries and airlines will need to buy permits via auctions.

The European Union, responding to industry pressure, will phase in auctions for greenhouse gas emissions permits for refineries and airlines from 2013 as part of a plan to combat climate change, an EU source said on Monday.

Speaking after senior European Commission officials put finishing touches to proposals to be adopted on Wednesday, the source said the power generation sector would have to buy 100 percent of emissions permits in auctions from 2013.

But in response to lobbying from governments and key industries, officials had agreed that refineries and airlines would start at a level of 20 percent of permits auctioned in 2013, with the rest issued for free, rising by 10 percent a year to reach 100 percent in 2020.

[Read more…]