National Economic Review
National Institute of Economic and Industry Research
No. 67 November 2012
The National Economic Review is published four times each year under the auspices of the Institute’s Academic Board.
The Review contains articles on economic and social issues relevant to Australia. While the Institute endeavours to provide reliable forecasts and believes material published in the Review is accurate it will not be liable for any claim by any party acting on such information.
Editor: Kylie Moreland
© National Institute of Economic and Industry Research
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Energy and environment
Graham Armstrong, Consultant, NIEIR
This paper first reviews the United Nations Framework Convention on Climate Change Conference of the Parties in Durban (COP-17) and discusses the global and Australian developments during the months leading up to COP-18 in Doha, Qatar in November–December 2012. The legislation progress and climate action developments of Brazil, South Africa, India, China, the USA, the European Union and Australia are reviewed. Although the Durban climate talks were able to maintain momentum in the global climate effort, it remains to be seen whether the Durban Agreement will in fact be a ‘historic breakthrough’ or a deferment of ambitious climate action into the future. Second, the paper reviews Australian climate change policy developments up to 12 September 2012.
Since the Durban Conference of the Parties of the United Nations Framework Convention on Climate Change Conference (COP-17) in December 2011, there has been little comment on global climate change policy. In Australia, comments and debate have focused almost exclusively on the Clean Energy Futures Act (CEFA), particularly the perceived negative effects of carbon pricing. Globally, more countries and regions have developed (e.g. British Columbia in Canada, some US states and China), or are developing, carbon pricing (e.g. through taxes or emission trading schemes (ETS)) (e.g. South Korea) and complementary initiatives (e.g. renewable energy, energy efficiency improvement (EEI), forestation and agriculture and transport fuel). A review of COP-17 Durban and events leading up to COP-18, Doha, Qatar are outlined in what follows.
Outcomes of Durban
Despite the disappointment that annual negotiations on a post-2012 regime have not resulted in an overall global climate agreement with quantified objectives for, at least, major greenhouse gas (GHG) emitters, there have been several positive developments. For instance, there are agreements on adaptation, the Green Climate Fund and the Technology Mechanism. With the Durban Platform, the division between developed and developing countries in terms of differentiated responsibilities has become less strict. Moreover, the focus seems to have shifted from quantified commitments (what) towards how pathways for low emission development can be realised.
Negotiating a climate policy package with quantified targets for countries (such as tried in Kyoto) is very complex. Countries negotiate within an intergovernmental setting without an overarching authority so that no country can be committed to sign a deal that it does not want. Consequently, negotiations become a game to form a coalition, the size of which is determined by the countries for which the benefits of joining the coalition are higher than the costs. As climate change is a global issue, the coalition needs to be global, so that for all countries the benefits are higher than the costs.
Negotiations have become so complex that an ambitious package with strict emission reduction commitments is likely to drive up costs. This is especially the case with many low emission technologies still being early on their learning curves with much R&D to be done, followed by deployment in the market and diffusion to commercial application. In this respect, the current financial market turbulence, with reduced availability of private and public financing, does not work in favour of new efficient technologies.
Moreover, as the Kyoto Protocol has shown, costs of quantified national commitments are difficult to predict and become an endogenous economic parameter.
Practice has shown that once a country realises that it cannot comply with the target, it can withdraw from the agreement (e.g. Canada stepped out of the Kyoto Protocol). This is especially the case if other countries are in a similar position and are willing to join the move.
On the benefit side, there is a challenge to make countries aware that ambitious climate actions could also support sustainable development objectives. There is always a risk that climate policy-making resembles the prisoner’s dilemma: if a country does not undertake actions but the others do, then it benefits from the others; if the country fears that it is the only one taking strong actions, then it will be reluctant to do so. In both cases, an individual country, in an uncoordinated setting, has an incentive not to act. The challenge, therefore, is to find ways to support countries in maximising climate and development benefits against given resources, irrespective of what other countries do.
How have the recent climate negotiations managed to address this challenge? After Durban, media headlines were not spectacular. There was a general feeling that there had been an agreement not to agree now. Durban did not provide hard figures. Canada avoided penalty by stepping out of the Kyoto Protocol. The week after Durban, this action was emphasised.
However, Copenhagen, Cancun and Durban have delivered important results, with the establishment of a framework for adaptation, through the Green Climate Fund and the Technology Mechanism, as well as provisions such as low carbon development strategies and the Technology Needs Assessments. Although not enough yet for the ‘Green Industrial Revolution’ that United Nations Framework Convention on Climate Change (UNFCCC) Executive Secretary Figueres desires, these mechanisms and provisions could considerably contribute to required system changes in countries for climate and development, backed by international capacity support, with financial, technology and knowledge transfer. All these steps are modest, but they do reflect progress.
The Durban Agreement: A deal to negotiate a deal
‘We have made history’, said UN climate negotiation chair Maite Nkoana-Mashabane when gavelling the longest negotiation session in the history of the two decades of climate negotiations to a close. However, considerable uncertainty remains as to the effectiveness of the Durban Agreement to realise sufficient climate change mitigation. This review investigates the main elements of the Durban Agreement (these are briefly summarised in Box 1) and the perspectives of several negotiating Parties, analyses the Durban outcome, and looks forward to Qatar (COP-18).
After the failure of Copenhagen (2009) and the only modest success of Cancun (2010), expectations for Durban to realise a comprehensive, legally binding agreement were not high. As such, the negotiations were essentially preoccupied with two main objectives:
- to maintain momentum in the process to realise an agreement that incorporates all main emitting Parties (especially the USA and the BASIC countries, Brazil, South Africa, India and China); and
- to revitalise the Kyoto Protocol through the establishment of a second commitment period and, as such, prevent the creation of a commitment gap.
The Durban Agreement
The outcome of the Durban negotiation round, which ran from 28 November until 11 December (2 days longer than scheduled) is the Durban Agreement. One of the main components of the Durban Agreement is the establishment of a second commitment period of the Kyoto Protocol (UNFCCC, 2011a). Within this second commitment period (which is scheduled to start in 2013 and end in either 2017 or 2020 (to be decided upon at COP-18)), the aim is to ensure aggregated emissions by Parties included in Annex I are reduced by at least 25– 40 per cent below 1990 levels by 2020 (IISD, 2011). To realise this aim, it is the intention to convert the Cancun Agreement pledges for emission reductions into quantified emission limitation or reduction objectives (QELRO), information on which was to be submitted by the Parties to the Ad-hoc Working Group–Kyoto Protocol (AWG-KP) by 1 May 2012. An important unresolved issue in this regard is the implication of carry-over of assigned amount units (AAUs (abatement credits)) from the first to the second commitment period on the scale of emission reductions to be achieved (IISD, 2011). In addition, to eliminate the ‘ambition gap’ between the pledged reductions and the above emission reductions goals, the AWG-KP decision emphasizes the relevance of the 2013–2015 review of pledges.
Furthermore, the Durban Agreement outlines a negotiation process that is to result in a ‘protocol, or legal instrument, or agreed outcome with legal force’ that covers all negotiating Parties (UNFCCC, 2011b) and is to come into effect and be implemented from 2020. As such, the Ad Hoc Working Group on a Durban Platform for Enhanced Action (AWG-DP) is to complete its work no later than 2015. An important consideration in the process will be to raise the level of ambition in terms of emission reductions. This consideration will be informed by the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report, the 2013–2015 review and the work of the subsidiary bodies.
The Durban Agreement also allows for the completion of the design of the Green Climate Fund and designates the World Bank as the interim trustee. With these developments, the Fund should be operational in 2012 (UNFCCC, 2011c). The aim of the Fund will be ‘to promote the paradigm shift towards low-emission and climate-resilient development pathways’ by providing balanced support for developing countries between mitigation and adaptation efforts in the context of sustainable development. With the aim of making the Technology Mechanism fully operational in 2012, the negotiations also focused on the two components of the Mechanism: the Technology Executive Committee (TEC) and the Climate Technology Centre and Network. The Durban Agreement contains a decision on the modalities and procedures of the TEC policy-making body (UNFCCC, 2011d). The TEC has had its first meeting and has developed a rolling work-plan for 2012–2013. This is an important step towards the operationalisation of the Technology Mechanism with the objective of enhancing action on technology development and transfer to support action on mitigation and adaptation. Besides financial support, support for technological development is seen as a major component of an effective climate action strategy.
Perspectives and opinions
The Durban Agreement was heralded by most negotiating Parties as a positive development towards a global climate policy regime.
The process established under the AWG-DP mirrors the call for a ‘roadmap for climate action’ made by the European Union (EU) prior to Durban. The EU posited that, for it to be persuaded into a second commitment period of the Kyoto Protocol, a pathway to universal action was a prerequisite. Therefore, it is not surprising that the EU sees the Durban Agreement as a ‘historic breakthrough’ document capable of finally realizing a global and ambitious climate policy regime (Ebels, 2011).
An important development in the international negotiations was the alignment of the small island states and least developed countries with the position of the EU (Vidal and Harvey, 2011a). This coalition allowed for a stronger negotiation position to confront the other Parties. In addition, the African countries were determined to prevent the burial of the Kyoto Protocol on African soil (IISD, 2011).
Because the USA has consistently called for symmetry between developing countries (especially China and India) and the developed countries in terms of climate policy actions, it eventually supported the proposed roadmap of the EU (Vidal and Harvey, 2011b). As such, the USA is satisfied with the Durban Agreement as it ascribes to a legal document in 2020. The US climate envoy Todd Stern stated that the Agreement:
‘had all the elements that we were looking for’
(EurActiv, 2011a; U.S. Department of State, 2011).
With a large number of Parties backing the EU proposal, attention turned to India and China. Early on in the negotiation process, China signalled some flexibility to participate in a climate regime with legal force (Conway-Smith, 2011). In return for support for the roadmap process, the EU offered to commit to a second period of the Kyoto Protocol. The formulation of what form of legal status the 2020 agreement would entail, without any current clarity of what the specifics of the deal are going to be, encountered fierce resistance, especially by India (Vidal and Harvey, 2011c). As such, the realization that the BASIC countries have agreed to a commitment with legal force ‘applicable to all Parties’ is a substantial deviation from their original negotiation position and, therefore, a major concession.
Effectiveness of Durban
With the establishment of the AWG-DP and the agreement on a second commitment period for the Kyoto Protocol, the multilateral process seems to have been revitalised. However, several aspects of the Durban Agreement allow for critical analysis. Importantly, Canada, Russia and Japan will not participate in the second commitment period of the Kyoto Protocol (Euractiv, 2011b). This signals the dwindling political importance of the Kyoto Protocol. Furthermore, the second commitment period of the Kyoto Protocol is still to be inscribed with new QELRO and amendments, and the length of commitment is still to be decided. Therefore, ‘commitment’ is limited. As such, all the second commitment period appears to achieve for now is to realise continuity for climate action.
In addition, due to persistent pressure provided by the USA, India and China, the Durban Agreement specifically incorporates the year 2020 for implementation of a new climate regime (Lynas, 2011). As such, this formulation appears to exclude the option for earlier implementation even if political agreement has been achieved. The wording of the AWG-DP aim to realise a ‘protocol, or legal instrument, or agreed outcome with legal force’ is sufficiently ambiguous to allow for multiple interpretations. In fact, when one considers the considerable negotiation effort invested in this formulation, it is not at all clear whether the different Parties have a similar understanding of what is to come into effect in 2020.
These two aspects are significant because they separate mitigation ambition and the legal nature of targets until 2020 (Lynas 2011). The voluntary Copenhagen process, dubbed pledge-and-review, will be the only system in which all Parties participate until 2020. Critics point to the fact that the pledged emission reductions made so far are insufficient to limit temperature increase to 2°C (CAT 2011). Moreover, while the Durban Agreement notes that ‘the process shall raise the level of ambition’, it does not provide methods to actually do so. This limits the potential of the Agreement.
The participation by all Parties in a legal climate regime signals the end of the Kyoto Protocol dichotomy of Annex I Parties and non-Annex I Parties. As such, it appears Durban will allow for the reformulation of the meaning of the Convention principle of ‘common but differentiated responsibilities’ into a spectrum of climate action in light of country-specific development. This could turn out to be one of the main achievements of Durban as this dichotomy was one of the principal obstacles for global agreement on climate action throughout the history of the negotiations on climate change.
Durban Agreement: A historic breakthrough or a deferment of ambitious climate action?
The long timeline involved with the established process raises doubt as to the commitment of negotiating Parties to undertake climate action. This doubt is further substantiated by the history and dynamics of the climate negotiations, which clearly outline the trade-offs made between participation, compliance and stringency. The negotiation process as it is currently formulated postpones multilateral action outside of the Kyoto Protocol to 2020.
In the meantime, climate action will need to be initiated unilaterally through the voluntary pledge-and-review approach, which, in its current form, offers no effective approach to climate change. This realisation not only stems from the notion that current pledges and actions are insufficient to realise the emission trajectory required to limit climate change to 2°C, but also finds a basis in the notion that voluntary commitments have a historically inadequate performance record both inside and outside the climate change negotiations. Moreover, because the pledge-and-review approach does not provide incentives for ambitious action, the level of commitment is unlikely to become sufficient after Durban.
The 2013–2015 review, the Fifth Assessment Report by the IPCC, and the work of the subsidiary bodies are to provide means to reduce this gap in ambition over the next couple of years. As such, while the Durban climate talks were able to maintain momentum in the global climate effort, it remains to be seen whether the Durban Agreement will, in fact, be a ‘historic breakthrough’ or a deferment of ambitious climate action into the future.
The US administration has proposed CO2e emission limits for new electricity generators at 454 kg CO2e/MWh. Unless carbon capture and storage (CCS) can be applied commercially, this effectively restricts new generators to combined cycle gas turbines (CCGT) or renewables. The rules do, however, allow new coal-fired plants to exceed the cap for 10 years provided they subsequently make up the difference by installing effective pollution controls: essentially declaring that CCS may be viable 10 years after a new coal generator is built.
Low gas prices and lower demands for electricity have favoured gas generation, kept electricity prices low and made coal generation less competitive. Continuation of these trends means that the proposed GHG inventory (GHGI) (tCO2e/MWh) rules would not have a significant impact.
Under the US Clean Air Act, with Supreme Court affirmation, the GHG emissions are a threat to ‘public health and welfare’ and GHGI rules will have to be developed for existing generators.
The European Union
European Union Allowance Unit (EUA) CO2 prices continued at low levels through the first half of 2012, at €6–9/t (A$7.5–11.25), well below the Australian CEFA prediction of A$29/t in 2015–2016 and the Australian floor price of A$15/t (see discussion below).
The UK Government has proposed a floor price of €30/t (A$38) in 2009 prices, well above the current EUA price. UK programs and regulations mean that, effectively, in the UK CO2e prices are in the A$25–30/t range. The EU is examining the possibility of reducing permit caps to provide a stimulus to attain higher EUA prices.
Current EU emissions are well below the current cap for the 11,000 liable companies, due mainly to economic conditions: hence, the EUA price drop from approximately €30 in 2008 to today’s levels of <€10/t.
Sales of permits to raise revenue for green energy projects and new EEI initiatives will add to EUA oversupply, which could reach 8.45 × 106 available permits in 2020 against a planned 2020 cap of 1.8 × 106 permits.
In December 2011, an EU committee proposed three possible strategies:
- withhold (set aside) a tranche of permits from the market;
- withhold 1.4 billion permits; or
- tighten the cap.
Tightening the cap, the most effective solution (although by how much is hard to determine), would be strongly resisted by heavy emitters, such as Poland, and would reduce EU investor confidence. Cap reduction would have to be spread among EU states, which might not be easy depending on the size and timing of the cap reduction. Improving economic conditions could ease the cap reduction problems. A gradual reduction could be monitored to gauge the economic impact, which could be quite modest as the market adjusted to emission reductions by developing lower than expected cost abatement actions.
On 1 July 2012, the start of the fixed carbon price period commenced. As it approached, support for the carbon package dropped to below 40 per cent. Negative comments from some industry groups and the Federal Opposition continue to dominate media coverage of the legislation. Positive aspects of the package, such as compensation, early mover advantages, transition to an ETS, grants for EEI in the industrial sector and movement by other countries and jurisdictions, do not receive nearly as much publicity. Surveillance of the international press on climate change policies reveals, overall, a quite different story: one that is much more positive.
A particular aspect of the debate is the A$23/t CO2 starting price on 1 July 2012: it is above other specific CO2e prices (except in British Columbia in Canada), while the EUA price continues to be <€10/t. However, in other jurisdictions, regulatory policies have a price impact, and while probably <A$20/t, are pushing the global economy towards a lower GHGI level compared with business as usual (BAU). In the UK, the EUA prices and regulatory policies and initiatives have pushed the effective CO2 price above A$25/t.
Clean Technology Investment Program
Further details of the Clean Technology Investment Program (CTIP) were released in April 2012. Under the program, A$800 million is allocated for general manufacturers and another A$200 million for food and beverage processors and metal foundry and forging firms. For firms with turnovers of <A$100 million, 1:1 grants will be available for funding of <A$500,000. For grants from A$500,000 to A$10 million, applicants will be required to contribute A$2 for every A$1 from government. For grants of +A$10 million, a contribution of A$3 for every A$1 from government will be required (co-investment).
The total expenditure (private plus government) for EEI is likely to be well below the potential for economic EEI investment over the next 20 years. However, the CTIP is an appropriate initiative that could stimulate further EEI investment.
The CTIP application process, based on previous requirements, may be overly administratively burdensome for small and medium sized enterprises (SMEs) where no employee is dedicated to the grant application process. This does, however, create an opportunity for firms, such as Energetics, that specialise in EEI to work with SMEs on CTIP applications (also VEET in Victoria).
The CEFA programs (CTIP and the Clean Energy Finance Corporation (CEFC)) require statements on Australian participation in applications in an effort to ‘maximise’ Australian content of programs (not a mandatory percentage as in Ontario, Canada).
International permits and the floor price for permits
A floor permit price of A$15/t was proposed in the ETS phase of the CEFA. Up to 50 per cent of a firm’s liability under the CEFA was to be accessible from eligible international permits under the Clean Development Mechanism certified emission reductions (CERs) and joint implementation (JI) emission reduction units. Several politicians, industry groups and analysts proposed removing the floor price and letting the market (domestic and international) determine the price. Note that at a CO2e price below A$20/t CO2e, the impact on BAU emissions is likely to be negligible.
A ‘surrender tax’ on international permits was proposed if international permit prices continued to be below A$15/t. For example, if a permit were purchased at A$12/t, a A$3/t levy would be imposed to arrive at the A$15/t floor price.
In the ETS phase it seemed there would be two permit markets:
- The international permit market with prices set in those markets: up to 50 per cent of the ETS cap permits could come from this source.
- The domestic permit market for the balance of the ETS cap permits liability (which could be 100 per cent of the ETS cap if the international price were above the domestic price). Several politicians, industry groups and analysts called for a lower or no floor price, but this approach was rejected by the government. At CO2e prices below A$20/t, our analysis indicates that there will be price impacts but little impact on GHG abatement (GHGA).
Caps for the post-fixed carbon price will not be set until 2014. The caps set will depend on:
- the 2020 target (now 5 per cent below 2000 levels by 2020);
- progress towards the target by 2014; and
- the schedule decided on for annual progress towards the target.
To meet the current 2020 target, modelling in 2011 estimated that approximately 160 Mt CO2e/a would need to be removed from trend GHG emissions. By 2014, the carbon tax and associated programs might have reduced this GHGA to 140 Mt CO2e/a, but the 2012–2014 GHGA impact is quite uncertain and could be very low. Assuming 50 per cent of the 140 Mt came from international permits at A$15/t (price could be much higher by 2020), 20 Mt would need to come from domestic GHGA over 2014–2020. The first cap period would presumably be for 2015–2016, the first ETS year after the fixed price years of 2012–2013, 2013–2014 and 2014–2015. Over the 2015–2016 to 2019–2020 period, domestic GHGA could come from the following.
- Closure of 2,000 MW of GHGI coal capacity and replacement with CCGT capacity (but not likely to be viable at under A$40/t CO2e).
With a 90-per cent capacity factor (CF) brown coal closure (2,000 MW) and a GHGI of 1.5 t CO2e/MWh, annual saving would be:
2,000 × 8.76 × 0.9 × 1.5 × 103
t = 23,652,000 t.
Replaced by 2,000 MW of CCGT at 90 per cent CF and a GHGI of 0.4 t CO2e/MWh:
2,000 × 8.76 × 0.4 × 103 = 6,307,200 t.
There is a net saving of 17,344,000 t per annum.
To save 70 Mt/a would require approximately 10,000 MW of coal of higher (>1.2 t CO2e/MWh) coal capacity to be displaced by CCGT requiring a CO2e price of A$40–50/t depending on relative coal and gas prices. A total of 45 Mt CO2 from displacing approximately 6,000 MW of higher GHGI coal might be feasible at approximately A$50/t CO2e.
- The Carbon Farming Initiative (CFI) might deliver 10 Mt CO2e at <A$25/t CO2e but levels and prices are quite uncertain.
- Enhanced EEI might deliver 10 Mt CO2e at <A$0/t CO2e (value of discounted energy savings less investment cost).
- Renewables (above the renewable energy target (RET), which is included in BAU) at A$50– 150/t CO2e, approximately 5 Mt CO2e might be possible but unlikely given current trends and policies.
The above very preliminary estimates indicate that the target could be reached with international permits at an average cost of approximately (price × per cent contribution of GHGA required by 2021):
15 × 0.5 (international) + 50 × 0.32 (fossil generation) + 20 × 0.07 (CFI) + 0 × 0.07 (EEI) + 100 × 0.04 (renewables) = A$(7.5 + 16 + 1.4 + 0 + 4) = A$28.5/t CO2e (This is not the market permit price. It is the average GHGA price paid by liable parties.)
The above example indicates a potential path for achieving a 2020 target. Emissions would be reduced (50 per cent overseas and 50 per cent in Australia). However, how would the permit market evolve?
September 2012 update
As outlined above, the permit floor price of A$15/t CO2e in the ETS period was criticised as:
- being too high and unnecessary in some industry analysts; and
- being too low to bring about structural change toward low emission technologies by others.
In early August, it was reported in the media that changes were in the offing to limit further (from 50 per cent of liabilities) the proportion of international permits that could be acquired by liable parties. In the early years of the ETS (2015–2016) it has become more likely that international permits could be available at prices >A$5–10/t CO2, necessitating an administratively cumbersome surrender ‘tax’ top-up to A$15 from the price actually paid by liable parties.
On 28 August, the Federal Government announced major climate change policy changes. These changes are:
- removal of the floor price of A$15/t CO2e, which was to operate over 2015–2016 to 2018– 2019, the first 3 years of the ETS phase;
- linking of the ETS phase directly to the EU market (initially one-way, Australia buying 1 g EEAAs, but two-way by 2018), resulting in EU permit prices being the same as Australian prices; and
- limiting access to CDM CERs and JI emission reduction units (ERUs) to 12.5 per cent of a liable entity’s liabilities (previously 50 per cent).
The Treasury modelling estimate of a A$29/t price in 2015–2016 was retained.
- Price of EU permits post 2014–2015. Current estimates are approximately A$12 in 2015 and A$20 in 2020. However, these estimates depend on:
- EU growth with the current EU scheme; and
- any changes to the EU scheme (e.g. cap tightening and deferring permit auctions) that (several proposed) that would have the effect of increasing the EU permit price.
- Approach taken for the proposed auctioning of domestic permits to ensure that the 2020 target of a 5-per cent reduction on 2000 emissions by 2020 is achieved. This would not become evident until liable parties began buying ERUs and EU AAUs to cover their liabilities.
- At permit/CO2e prices below approximately A$20/t, there would be negligible domestic GHGA from price responses by consumers and generators, although GHGA from complementary policies would continue. Limited domestic GHGA over 2015–2020 is likely to result in higher GHGA action costs, if desired, post-2020.
September 2012 status of Australian climate change policies
The 2020 target remains at 5 per cent below 2000 levels, requiring 159 Mt CO2e of abatement by 2020 according to the Treasure 2011 modelling in the Strong Growth, Low Pollution (SGLP) report (Australian Government, Treasury). In 2009–2010, emissions were 578 Mt CO2e and in the Treasury modelling, the 2020 BAU (i.e. no CEF Act policies) was 679 Mt CO2e.
At a carbon price of A$29/t CO2e by 2020, domestic emissions were estimated in the SGLP report to be 621 Mt CO2e (i.e. 58 Mt CO2e below BAU without carbon pricing), but approximately 12 per cent above 2000 levels of 550 Mt CO2e. This gives a 2020 target of approximately 520 Mt CO2e, 159 Mt CO2e below 2020 BAU emissions of 679 Mt CO2e. With domestic emission reductions of 58 Mt CO2e, 101 Mt CO2e would come from international permits.
Now with CEF Act policies in place with lower projected electricity growth rates, 2020 emissions are likely to be much less, perhaps by around 60 Mt CO2e. This would reduce the abatement task to meet the 2020 target to approximately 100 Mt CO2e.
Given the policy change to restrict JI and CDM Kyoto credits to 12.5 per cent of liabilities, the linking with the EU and the availability of EU permits (EU assigned abatement units (EUAAs)) for acquitting liabilities, and the reduction in the abatement task, where will permits for the attainment of the 2020 target now come from?
2020 emissions, targets and greenhouse gas abatement sources
- 2020 emissions under BAU (i.e. without the CEFA) will now be approximately 620 Mt CO2e, as against 679 Mt CO2e in the Treasury 2011 SGLP, due to slower growth in emissions and responses to the carbon tax and CEF Act complementary measures.
- Attainment of the 2020 target (5 per cent below 2000 emissions by 2020) would then require abatement of approximately 100 Mt CO2e (620 – 520), compared with 159 Mt CO2e in 2011 SGLP. (Note: levels in the SGLP are not entirely consistent with respect to 2000 levels, projected 2020 levels and the abatement task required.)
- At 100 Mt CO2e abatement required 12.5 per cent (12.5 Mt CO2e ) could come from Kyoto (CDM and JI) credits at <$10/t Mt CO2e , perhaps <$5/t CO2e .
- Some of the other 87.5 Mt CO2e (100 – 12.5) could possibly come from purchase of EU permits (EUAAUs) and from Australian CFI permits if the prices were below domestic auctioned permit prices. EUAAUs are permits to emit CO2. Currently, a surplus of EUAAUs are available due to issuance being greater than requirements, mainly due to low economic growth causing emissions to be lower than anticipated. Available permits do not result in emissions abatement unless their price is high enough to induce a switch from a higher GHGI source to a lower GHGI source. Thus, purchase of EUAs may or may not result in GHGA. Given the foreseeable surplus amount of EU permits, GHGA from purchase of these permits is likely to be negligible. Abatement to attain a given target must be sought elsewhere.
- Other abatement could come from additional carbon price response and complementary measures (e.g. CTIP, CEFC and CFI).
However, note that under the CEF Act, closure of 2,000 MW of high GHG intensive generators was proposed, entailing negotiation of closure with the generator owners. Prime targets for closure were Hazelwood, Yallourn and Morwell brown coal operators in Victoria, Playford B (low grade black coal) in South Australia and Collinsville (black coal) in Queensland. However, on 3 September the government announced the failure of negotiations due to unacceptably high closure dollar demands (>A$2 billion expected cost) by the generation companies. With lower than previously expected permit prices in the ETS phase, the economics of operating high GHGI plants have improved, hence their asset values.
The closure would have saved up to 23 Mt CO2e per year out of the required reduction to meet the 2020 target of a now estimated 100 to 120 Mt CO2e (lower than the previously estimated 160 Mt CO2e due to lower electricity and gas demands and impacts of complementary policies). The government claims that the closure abandonment will not affect target attainment. Why? Because of lower target attainment requirements or lower costs of other GHGA opportunities?
This failure to close the 2,000 MW of highest GHFI generators, together with compensation for carbon pricing to high GHGI generators and lower CO2e prices, makes it much less likely that significant gas generation will replace coal generation.
- On 1 September, the government announced that 40 million permits would be auctioned in 2013– 2014 at a projected price of $15/t CO2e. If the EU AAU price is <$15/t CO2e, why would liable parties bid $15/t CO2e at the auction for up to 40 million permits unless EU AAU access was restricted (not apparent)?
- How then will the target be attained? Presumably, by monitoring and frequently announcing progress towards the 2020 target and, if necessary, taking further GHGA action (e.g. by subsidising the new gas base load) to attain the target.
- Liable parties will continue to buy permits from CDM, JI and the EU to meet their liabilities unless domestic permit auctioning results in prices for domestic permits <EU AAU prices. If prices are less than the EU AAU prices, domestic permits can be sold into the EU market when two-way linking is established.
- In conclusion, to attain the 2020 target under the new permit availability arrangements, target GHGA must be continuously estimated and announced, and progress toward the target continuously monitored and announced. This is necessary to limit 2020 emissions to approximately 520 Mt CO2e. With the current (September 2012) polices, it seems very unlikely that the 2020 target will be attained.
Fossil generators would have to purchase permits to cover their liable emissions from accredited suppliers (see below).
Other liable parties
Other liable parties would attempt to reduce their emissions at a cost below the expected permit price by changing production characteristics and improving energy efficiency (assisted by CEFA programs). The resulting (balance of) liable emissions would be purchased in the permit market(s).
Carbon Farming Initiative
Accredited CFI units (Australian carbon units (ACUs)) can be sold directly to liable parties. If non-liable party EEI ‘suppliers’ could reduce their emissions impact through EEI and the use of renewables, they could become, for example, accredited suppliers of permits.
Permits will be auctioned on the basis of the cap for each year. Liable parties will bid for these auctioned permits on the basis of requirements and marginal costs of internally reducing their emissions and purchasing international permits (depending on price and CFI AEUs).
Potential evolution of greenhouse gas emissions, greenhouse gas abatement and carbon prices over 2012–2013 to 2020–2021
In regards to estimated target emissions, does the target refer to total emissions or to liable emissions (liable emissions are approximately 65 per cent of total emissions)? Some emission reductions will come from non-liable sectors, such as agriculture.
In 2012–2013 to 2015–2016 there will be some impact of the fixed CO2e price, with the impact depending on the elasticity of demand for covered fuels, particularly electricity. Complementary measures and economic conditions (e.g. closures and household formation) will also have an impact. Note that the now expected carbon price impact will be less than the total of other price increasing impacts (e.g. fuel prices, network costs and green program costs) and not enough to significantly shift generation merit order. CEFA complementary measures are unlikely to have a significant impact until around 2015. These impacts will depend on the 2013 election results.
Overall, it is now expected that there will only be a small departure from BAU trends over this period.
The impacts of the CEFA over 2015–2016 to 2020– 2021 will depend on:
- the CO2e permit prices over this period and the expected prices beyond this period;
- economic conditions; and
- the impacts of complementary measures.
Changes to the CEFA (likely under the Opposition and global pressure) would change the emission path and policy impacts.
Preliminary analysis suggests that under the CEFA, as it stands, the target (2020) could be reached if actual and expected average permit prices exceed approximately A$30/t; that is, until a combination of complementary measures and CO2e prices induce a significant (6,000–8,000 MW) shift from coal to CCGT generation. No other domestic actions appear likely to fill the target gap if this change does not eventuate.
In April 2012, the Clean Energy Regulator released a list of 280 liable parties: more will be added later. This is preliminary and well below the estimated 500 liable parties estimated in the CEFA analysis. A particular liable party issue is the liability of landfill sites operated mainly by municipalities. Although the minimum liable party emissions limit is 25,000 tCO2e, because landfills emit methane (×21 global warming potential) many sites, seemingly small, could become liable parties. Reduction of emissions is possible through collection of methane (from anaerobic digestion of organic wastes) and combustion to produce electricity (eligible under RET) and heat. This is practiced widely overseas (some with Australian technology) and at some landfill sites in Australia.
Accordingly, the ‘problem’ could be resolved with best practice waste management, such as at Nanaimo in British Columbia, Canada.
In June 2012, BHPB said it would not be in favour of rescinding carbon pricing but would attempt to make it ‘more optimal’ (not explained). Over 2006–2017, BHPB has a target of holding emissions constant despite a large increase in production from the company’s range of operations.
Lowy Institute Poll, 2012
The Lowy Institute’s 2012 Poll, an opinion survey of 1,005 Australian adults in March–April 2012 on a range of issues reported the following on climate change:
- 63 per cent are against the Clean Energy Futures Act (carbon pricing elements);
- 45 per cent are strongly against the Act (53 per cent of men and 36 per cent women);
- 35 per cent are in favour of carbon pricing;
- 52 per cent oppose the legislation as it will result in job losses;
- 38 per cent say it is not necessary to act on climate change before other countries (were they told some countries were acting?);
- 57 per cent are in favour of the Coalition removing the ETS (39 per cent with a degree) but 39 per cent against this action;
- 36 per cent support more aggressive action on climate change (in 2006, 68 per cent were in favour);
- 45 per cent support global warming being addressed but in a gradual and low cost way (increase of 5 per cent from 2011); support for this option is 56 per cent for the 18–29 year age group;
- 7 per cent say they are less concerned since the climate change debate began in Australia; and
- 18 per cent are not sure global warming is a problem and reject any steps that would have an economic cost.
The poll is not good news for the government and its partners (e.g. the Greens) but will opinions change once carbon pricing is introduced on 1 July? We await the next 6–12 months with great interest.
Polls: 1 July 2012 on
A Fairfax poll on 1 and 2 July indicated that 62 per cent of those surveyed opposed the carbon tax (up from 57 per cent in April/May) and 33 per cent were in favour. Fifty-three per cent said they would be worse off under carbon pricing despite substantial compensation. The message on the advantages of carbon pricing and the compensation was, at that time, not getting through.
In the same week, a poll by ANU’s Crawford School of Public Policy found that 40 per cent of liable companies, carbon financiers and carbon analysts (53 per cent of emitters) believed the carbon pricing would be repealed by 2016. However, only 21 per cent of those surveyed thought there would not be a scheme in 2020. Seventy per cent believed that the 5 per cent below 2000 emissions by 2020 would still be in place in 2015. Twenty-five per cent thought that the target would become more ambitious. Seventy per cent of emitters surveyed had already cut emissions; 84 per cent said they expected to make cuts over the next 3 years.
A report by The Economist found that 75 per cent of senior executives polled expected the scheme to survive, but only 33 per cent believed carbon pricing advantages would outweigh the longer-term risks of the scheme. Hence, a significant proportion of business does not believe Abbott!
A Fairfax/Nielsen poll in late July 2012 indicated that the percentage of those who thought they would be worse off under a carbon taxed dropped to 38 per cent from 51 per cent in late June 2012, with 52 per cent believing they were no worse off (37 per cent in late June and 54 per cent in late August). However, in August–September 2012 electricity and gas bills will be arriving to ‘remind’ people of the carbon tax impact, even though this will be responsible for only part of the price increase incorporated into the bills
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