Australias Co2 Reduction Targets By J Bremer

Australia’s CO2 Reduction Targets
Infrastructure, the ETS and its Alternatives
Presentation to Engineers Australia, Perth 2010

J. Bremer 24 February 2010

SUSTAINABILITY our people, our clients, our planet
SKM Sustainability Group

Outline
The role of engineering in “the battle for ideas”. CO2
emissions and climate science as an example.
> The Targets (s)
o Summary of CO2 emissions problem
o The science
o The “ideas” - Carbon trading – How it Works
> The Engineering Approach
o The engineering approach the problem.
– Sources of CO2 emissions
– Technology and Processes
> Consequences & Conclusions
o Changes to Infrastructure – Australia and Internationally

o Costs, and economic implications. The future.


Extra Carbon Flows from Burning Fossil Fuels

CO2 levels have increased sharply in the 20th
century. (From 280 ppm to 380 ppm)

Source : 4th IPCC Report 2007 Source : D.MacKay “Sustainability without The Hot Air”

Greenhouse Gas Levels
• Greenhouse gases exist in minute concentrations but have
an essential role supporting life.
• In the absence of approximately .02% to .03% (200 ppm to
300 ppm) concentration of CO2 in our atmosphere the
surface mean temperature of the globe would be -18 °C.
(Peixoto, J.P. and Oort, A.H., Physics of Climate Springer, 1992, p.
118.)

• If CO2 reached 1% the surface temperature would be > 100
deg C – our oceans would boil. (Explained by Arrhenius in
1896)


IPCC Estimates of Outcomes

Garnaut, Govt
target of 550 ppm
CO2-e

Recommended
safe level IPCC,
Garnaut, Govt.

Source : 4th IPCC Report 2007 SKM Sustainability Group

IPCC Estimates of Outcomes

Source : 4th IPCC Report 2007


Changing Economic Behaviour
There are perhaps six ways that governments
fix/intervene or influence economic behaviour
1. Government takes over the market entirely
• e.g. Communism / Socialism. “We are from the government and
know what is good for you” e.g. China!

2. Government Participation in markets
• E.g. Nationalisation or share holdings in major infrastructure industries

3. Criminal code
• E.g. Insider trading laws, to prevent distortion of share markets.

4. Behaviour Change – Moral/Social/ Religious incentives.
• E.g. “Be a good citizen”, Waterwise campaign, “Your litter is OUR
problem” etc.

5. Incentives – Government Grants
• E.g. R&D grants, Renewable energy grants

6. Incentives and Disincentives Through Taxation
• E.g. We tax income but not investment. R&D has larger tax
deductions.


The Concept Behind Carbon Trading
“The Failed Market”
The Carbon Trading seeks to address what economists call a “failed market” –
i.e. A market where individuals or entities take profit by forcing others to bear
the costs.
Example : Cyanide Leach Mining in Montana

Pegasus Gold Corp (1979 ~ 1998) Zortman /Ladusky Mine 1998

Total Gold : 2,529,644 ounces
Profits : US$ 300 million
• Pegasus declares bankruptcy 1997.

Cleanup Bond : US$ 33 million • Executives get US$10.4 million in
Actual Cost : US$ 63 million success bonuses! (1995 to 1997)
- US$ 30 million


Costs of Climate Change are
Intergenerational and Global

• Stern Report (UK Govt) and the Garnaut Report say the cost to the
Great Barrier Reef will be large and borne by future generations.

$8 billion to 2020 in
“do nothing” scenario

Coral Bleaching - Lone Reef near
Townsville Queensland, 1998

WWF & The Queensland Tourism Industry
Council Estimates of Losses to Qld up to 2020


“..20% ~ 50%
extinction of
species “”

“...large- scale
movement of
population. Such
“socially
contingent”
effects could be
catastrophic”
- Stern Report
2006


Economic Approaches to Altering CO2 Emissions

Taxation of carbon emissions can occur in three ways
1. Direct Taxation of emissions
2. Baseline and Credit Trading
• “Credits” for reducing emissions from a BAU
baseline
• e.g. NSW Govt Greenhouse Gas Abatement
Scheme (GGAS - 2003)
3. Cap and Trade System
• “Permits” to emit
• Fixed cap on total emissions (= total number of
permits)
• “e.g. The CPRS
Note : BAU = “Business as Usual”


Baseline and Credit Carbon Trading

• Government must set hypothetical baselines for each
industry representing BAU emissions
• Execution at project or enterprise level is easy to
understand
Australian Power Pty Ltd Philippines Paper Pty Ltd

$60

Abatement
Cost of Abatement Certificate for Cost of Abatement
$120 / tonne CO2-e 1 tonne of CO2-e $40 / tonne CO2-e
Note : CO2-e is a quantity of greenhouse gas expressed as an equivalent mass of Co2


Cap and Trade – How it Works

Government Determines Total
Emissions Cap for Australia –
600 million tonnes of CO2 in 2011
Issues 600
million carbon
Certificates

Australian Emissions Target
Abatement
Certificate for
1 tonne of CO2-e

Companies Trade
in Certificates

Surrender Certificates


Carbon Credits
Baseline and Credit System Cap and Trade System

Garbage Compost Garbage Compost
CREDIT Emissions = Liability

WHY NOT A “CARBON TAX” OR “BASELINE AND TRADE”?
> With perfect information a direct tax can achieve the same outcome as
either of the trading systems & vice versa
> In practice outcomes from taxation & regulatory approaches may be
different:
o Cap & trade system
• Emissions outcome ‘certain’, but price is uncertain
• Pressure on govt in setting cap – but market determines price
• No carbon credit incentives for new technology
o Taxation
• Price is “certain”, but emissions outcome is not
• Pressure on government to alter tax / price.
• Uncertainty about progress towards targets
o Baseline and Credit
• price and emissions outcome are uncertain
• Pressure on govt to determine BAU case for every industry
• Uncertainty about progress towards targets.
A Carbon Sink • Focus on efficiency but not emissions
• Market determines price
• Carbon credit incentives for new technology


THE PROBLEMS OF LEAKAGE & POLITICAL INFLUENCE

> Carbon Trading Schemes apply an economic theory that
assumes that all business play to the same rules.
> When trading partners do not participate our Emissions
Intensive Trade Exposed (EITE) industries “leak” to
economies that do not have a tax on carbon.
> Heaviest Polluters EITE Industries and “Strongly Affected
Industries” (i.e. Coal burning power stations) receive
compensation to remain in Australia and/or stay in business.

o EITE Industries
• Unclear compensation under CPRS but last indicated
to be 95% assistance for up to 45% of permit value for
highest emitters.

o Heavily Affected Industries
• Last indicated to be $7.5 billion in direct
compensation


CARBON TRADING IMPACT ON ECONOMIC GROWTH

> Treasury forecast “an average annual growth rate of 1.2% to
1.3% compared to 1.4% for the reference case”.
Source: “Australia’s Low Pollution Future The Economics of Climate Change Mitigation “ – Australian Treasury 2008

CARBON TRADING IMPACT ON ELECTRICITY PRICE

Moderate Carbon Prices have moderate effects on electricity price (but hurt
marginal EITE industries)

Example – Impact on the Nickel Industry

LME Price June 2009 - $15,000 / tonne

• Nickel is a commodity market. Companies are price takers – not price makers.
• BHP process almost all Australian Nickel. Profits at US$10,000 /t .. Nill !!

Source: Graph courtesy of G. Fariss Mincorp Limited

An Example – The Australian Nickel Industry

Source: Graph courtesy of G. Fariss Mincorp Limited

An Example –BHP Billiton Nickel Operations 2008
( at $25 / tonne-CO2)

• Revenue from Nickel – Approximately $2.1 billion – Not captured by the CPRS?
• Impact of CPRS ~ 4.3% of revenue
• Nickel Laterites alone ~ 5.6%
• Nickel Sulphides alone ~ 1.6 %


Nickel Industry - Example
• The Nickel Industry is not eligible for special treatment (“EITE or
Strongly Affected Industries” ) from the CPRS
• While Prices remain low the industry is marginal and vulnerable to
carbon price regardless of whether trading partners are being taxed
or not.
• Nickel Laterite production is particularly vulnerable and some
operations will shut down
• Some parts of the community will be adversely affected.
(Redeployed in new industries? )

Source: Graph courtes of G. Fariss Mincorp Limited

An Engineering Approach
Where We are Now – Global CO2

• We are 30% more efficient but CO2 keeps rising!


CO2 Emissions and The Energy Economy

> The Energy Economy is Approximately 70% of all CO2
emissions
Source: National Greenhouse Accounts 2006 & “Australian Energy National And State Projections to 2029-30” ABARE research report 07.24

THE ENERGY ECONOMY TODAY

AUSTRALIA WA
ABARE Data – CO2-e ABARE Data – CO2-e
Emissions (J. Bremer) Emissions (J.Bremer)

Source: National Greenhouse Accounts 2006 & “Australian Energy National And State Projections to 2029-30” ABARE research report 07.24

THE ENERGY ECONOMY –Growth to 2050

ABARE based forecast Treasury forecast

• Population will roughly double (35 million)
• BAU Emissions of CO2 will double (210%.)
• GDP will increase by 350%

Source:Australia’s physical infrastructure to 2050, http://www.atse.org.au/index.php?sectionid=898

THE ENERGY ECONOMY IN 2050

Traditional
Electricity
Sector
36%

Electrify
Transport
Electrify “Other 17%
Energy” Sector
17%

• Non-electric energy is mostly heating , efficiency saving
potential is 20% (at best)
• 100 % cuts in “other energy” and transport emissions
can (ONLY?!!) be achieved using clean electricity
• Electrifying the whole energy sector with low GHG
emitting equipment will achieve the 60% cut to Year
2000 emissions.
• In 2050 the Electric power infrastructure would be four
times larger than the infrastructure we have now.

Treasury Forecasts For Electricity
– How Does it Compare?

MacLennan
and Treasury
Forecast 23%
Forecast below BAU
Range for
Electrication
of the Energy
Sector

• Treasury forecasts
– a large drop in per capita electricity demand
– 10% penetration of electricity into transport sector
– Virtually 0% penetration of electricity into “Other Stationary Energy”

Capital Cost of Building the Electricity Infrastructure
Carbon Price According to the CPRS Forecast

TOTAL
(over 40
Year 2011 2012 2015 2020 2030 2040 2050 years)
Carbon price  ($/tonne) $10 $29 $42 $50 $75 $105 $155
Forecast Emissions (Mt) Estimated Cost of Low Carbon595
635 636 600 Electricity Generating Plant
590 500 410
Approx
Assume Takeup of Certificates 70% 70% 70% 70% 70% 70% 70% $3,200
billion
Revenue  Forecast ($million) $4,470 $12,990 $17,739 $20,942 $31,149 $36,957 $44,735
Carbon Price to Raise $20 billion per annum (Approximate Cost of  Expanding Electric Infrastructure)
Carbon price  ($/tonne) $10 $29 $47 $48 $48 $57 $69
Forecast Emissions (Mt) 635 636 600 595 590 500 410
Approx
Assume Take up of Certificates 70% 70% 70% 70% 70% 70% 70% $800
billion
Revenue  Forecast  ($million) $4,470 $12,990 $20,000 $20,000 $20,000 $20,000 $20,000

• The Electric Economy* ~ $800 ~ $1,050 billion over 40 Years
• The CPRS ~ $3,200 billion over 40 Years
• * The electric economy would cost only $400 ~ $525 billion
over 40 years if government funding is 50:50


Revenue Raising Alternatives
Pathways For Setting A Carbon Carbon Price

Direct Funding will give greater cuts With a Lower Carbon Price


Co-funding Model – Net Present Value for 200 MW Power Plant

Carbon at $10/tonne in 2011 rising to $100 / tonne in 2050


Increasing the price of Carbon from $100 / tonne to $150 in 2050 has little effect



Early increase in the carbon price has a much greater effect (From $10 to $20 in 2011)=



50% Capital Funding Required to Compete with Coal @$10 tonne


When Carbon Reaches $25 a tonne, 1/3 Govt Funding Make Solar Competitive with Coal


Co-funding Model – Levelised Cost of Electricity 200 MW Plant

• Cost of Solar Thermal Plants with Storage Will Be Competitive with Coal


How Much Would it Cost To Change
Our Electricity Infrastructure?

Estimated Cost of Low Carbon Electricity Generating Plant*

Electrified Energy Economy Current Forecast By Treasury used in
the CPRS
Installed Cost per Installed Cost to Cost per
Power in Cost to 2050 annum Power in 2050 annum
2050 (GW) ($billion) ($billion) 2050 (GW) ($billion) ($billion)
Max Forecast 175 $1,050 $26 69 $414 $10
Min Forecast 135 $810 $20 69 $414 $10
Max Forecast with 50%
Co‐funding 175 $525 $13 ‐ ‐ ‐
Min Forecast with 50%
Co‐funding 135 $405 $10 ‐ ‐ ‐

* Priced at $6,000 / kW-installed

• The Electric Economy ~ $800 ~ $1,050 billion (135
GW ~180 GW)
• The “CPRS” Economy ~ $440 billion for a 40~50 GW
electricity sector and $3,200 billion “taxes” in carbon
certificates.

Revenue Raising Alternatives

Pathways For Setting A Carbon Carbon Price


CO2 Emissions Engineering - Conclusions
• Fossil fuels are 70% of all GHG Emissions.
• A 60% cut in Year 2000 levels of CO2 can be achieved by
electrification using low GHG technology (renewable and/or
nuclear )
• Electric power infrastructure would be 3 to 4 times larger than it is
today at a cost of $400 ~ $525 billion over 40 years. (The CPRS
predicts an electric sector only 1.5 times larger)
• Carbon Trading has underlying theory which assumes a free and
fair market. Its underlying assumptions are violated leading to the
largest polluters being compensated to continue “business as
usual”
• Australia’s CPRS scheme currently relies heavily on demand-side
management and will cost $3.3 trillion over 40 years in carbon
taxes.
• “Tax and Grant” is a lower cost way of reducing emissions. It
will decouple the economy from fossil fuels, and produce a much
more robust electric sector (135 ~ 180 GW compared to c.a. 70
GW).


“Carbon Trading” vs “Tax and Grant” Conclusions
• If the market was “free and fair” renewable energy could compete
at $25 / tonne-CO2 with govt funding on $1 for every $2 spent
basis.
• At $10 / tonne-CO2 , renewable energy could compete with coal
with a 50:50 funding, provide the tax is in a “free and fair “ market.


Solar Thermal - Other Countries Have
Made the Grants

Operational 670 MW Under Construction 2.1 GW
Announced 1.1 GW

* Quotation from Prof. Ross Garnaut, Garnaut Report 2008

International Carbon Trading – and Emissions Reduction

• Is the world in a Mexican stand off on CO2 mitigation?
• Who will make the first move? And why was the developing world
reluctant to follow the Western’s world’s ETS model?


China Overtook USA’s CO2 Emissions in 2006
Historical Data Reference Case Forecast

Rest of non-OECD

Rest of OECD

USA

China

India

Per Capita Emissions of CO2
USA - 19 tonnes per annum per capita
CHINA - 4.8 tonnes per annum per capita
INDIA - 1.3 tonnes per annum per capita


Copenhagen and The Future
o Australia and Western Nations went to Copenhagen with
“Demand side” solutions.....Cutting consumption ONLY WORKS
WHEN ALL INDIVIDUALS ARE ALREADY WEALTHY!!
o Carbon Trading and “Demand Side” solutions do not work in the
developing world. (Consider 600~800 million Chinese and Indian
people aspiring to a middle class lifestyle!)
o “Tax and Grant” is a “Supply Side” approach to emissions
reduction. It seeks to INCREASE supply of energy to match
future demand while lowering CO2.
o The “very large” cost of “Tax and Grant” is in the order of 1/8th to
¼ of the costs contemplated in the ETS.

* Quotation from Prof. Ross Garnaut, Garnaut Report 2008

QUESTIONS


Australias Co2 Reduction Targets By J Bremer

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