australias co2 reduction targets by j bremer

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SKM Sustainability Group Australia’s CO2 Reduction Targets Infrastructure, the ETS and its Alternatives SUSTAINABILITY our people, our clients, our planet J. Bremer 24 February 2010 Presentation to Engineers Australia, Perth 2010

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  • 1. Australias 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
  • 2. 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. SKM Sustainability Group
  • 3. 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 SKM Sustainability Group
  • 4. 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) SKM Sustainability Group
  • 5. 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
  • 6. IPCC Estimates of Outcomes Source : 4th IPCC Report 2007 SKM Sustainability Group
  • 7. 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. SKM Sustainability Group
  • 8. 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 SKM Sustainability Group
  • 9. 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 SKM Sustainability Group
  • 10. ..20% ~ 50% extinction of species ...large- scale movement of population. Such socially contingent effects could be catastrophic - Stern Report 2006 SKM Sustainability Group
  • 11. 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 SKM Sustainability Group
  • 12. 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 SKM Sustainability Group
  • 13. 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 SKM Sustainability Group
  • 14. Carbon Credits Baseline and Credit System Cap and Trade System Garbage Compost Garbage Compost CREDIT Emissions = Liability SKM Sustainability Group
  • 15. 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 SKM Sustainability Group
  • 16. 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 SKM Sustainability Group
  • 17. 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. SKM Sustainability Group Source: Australias Low Pollution Future The Economics of Climate Change Mitigation Australian Treasury 2008
  • 18. CARBON TRADING IMPACT ON ELECTRICITY PRICE Moderate Carbon Prices have moderate effects on electricity price (but hurt marginal EITE industries) SKM Sustainability Group Source: Australias Low Pollution Future The Economics of Climate Change Mitigation Australian Treasury 2008
  • 19. 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 !! SKM Sustainability Group Source: Graph courtesy of G. Fariss Mincorp Limited
  • 20. An Example The Australian Nickel Industry SKM Sustainability Group Source: Graph courtesy of G. Fariss Mincorp Limited
  • 21. 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 % SKM Sustainability Group
  • 22. 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? ) SKM Sustainability Group Source: Graph courtes of G. Fariss Mincorp Limited
  • 23. An Engineering Approach Where We are Now Global CO2 We are 30% more efficient but CO2 keeps rising! SKM Sustainability Group
  • 24. CO2 Emissions and The Energy Economy > The Energy Economy is Approximately 70% of all CO2 emissions SKM Sustainability Group Source: National Greenhouse Accounts 2006 & Australian Energy National And State Projections to 2029-30 ABARE research report 07.24
  • 25. THE ENERGY ECONOMY TODAY AUSTRALIA WA ABARE Data CO2-e ABARE Data CO2-e Emissions (J. Bremer) Emissions (J.Bremer) SKM Sustainability Group Source: National Greenhouse Accounts 2006 & Australian Energy National And State Projections to 2029-30 ABARE research report 07.24
  • 26. 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% SKM Sustainability Group Source:Australias physical infrastructure to 2050, http://www.atse.org.au/index.php?sectionid=898
  • 27. 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. SKM Sustainability Group
  • 28. Treasury Forecasts For Electricity How Does it Compare? MacLennan andTreasury Forecast23% Forecast belowBAU Rangefor Electrication oftheEnergy 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 SKM Sustainability Group Source: Australias Low Pollution Future The Economics of Climate Change Mitigation Australian Treasury 2008
  • 29. Capital Cost of Building the Electricity Infrastructure CarbonPriceAccordingtotheCPRSForecast TOTAL (over40 Year 2011 2012 2015 2020 2030 2040 2050 years) Carbonprice($/tonne) $10 $29 $42 $50 $75 $105 $155 ForecastEmissions(Mt) Estimated Cost of Low Carbon595 635 636 600 Electricity Generating Plant 590 500 410 Approx AssumeTakeupofCertificates 70% 70% 70% 70% 70% 70% 70% $3,200 billion RevenueForecast($million) $4,470 $12,990 $17,739 $20,942 $31,149 $36,957 $44,735 CarbonPricetoRaise$20billionperannum(ApproximateCostofExpandingElectricInfrastructure) Carbonprice($/tonne) $10 $29 $47 $48 $48 $57 $69 ForecastEmissions(Mt) 635 636 600 595 590 500 410 Approx AssumeTakeupofCertificates 70% 70% 70% 70% 70% 70% 70% $800 billion RevenueForecast($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 SKM Sustainability Group
  • 30. Revenue Raising Alternatives Pathways For Setting A Carbon Carbon Price Direct Funding will give greater cuts With a Lower Carbon Price SKM Sustainability Group
  • 31. Co-funding Model Net Present Value for 200 MW Power Plant Carbon at $10/tonne in 2011 rising to $100 / tonne in 2050 SKM Sustainability Group
  • 32. Co-funding Model Net Present Value for 200 MW Power Plant Increasing the price of Carbon from $100 / tonne to $150 in 2050 has little effect SKM Sustainability Group
  • 33. Co-funding Model Net Present Value for 200 MW Power Plant Early increase in the carbon price has a much greater effect (From $10 to $20 in 2011)= SKM Sustainability Group
  • 34. Co-funding Model Net Present Value for 200 MW Power Plant 50% Capital Funding Required to Compete with Coal @$10 tonne SKM Sustainability Group
  • 35. Co-funding Model Net Present Value for 200 MW Power Plant When Carbon Reaches $25 a tonne, 1/3 Govt Funding Make Solar Competitive with Coal SKM Sustainability Group
  • 36. Co-funding Model Levelised Cost of Electricity 200 MW Plant Cost of Solar Thermal Plants with Storage Will Be Competitive with Coal SKM Sustainability Group
  • 37. How Much Would it Cost To Change Our Electricity Infrastructure? Estimated Cost of Low Carbon Electricity Generating Plant* ElectrifiedEnergyEconomy CurrentForecastByTreasuryusedin theCPRS Installed Costper Installed Costto Costper Powerin Costto2050 annum Powerin 2050 annum 2050(GW) ($billion) ($billion) 2050(GW) ($billion) ($billion) MaxForecast 175 $1,050 $26 69 $414 $10 MinForecast 135 $810 $20 69 $414 $10 MaxForecastwith50% Cofunding 175 $525 $13 MinForecastwith50% Cofunding 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. SKM Sustainability Group
  • 38. Revenue Raising Alternatives Pathways For Setting A Carbon Carbon Price SKM Sustainability Group
  • 39. 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 Australias 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). SKM Sustainability Group
  • 40. 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. SKM Sustainability Group
  • 41. Solar Thermal - Other Countries Have Made the Grants Operational 670 MW Under Construction 2.1 GW Announced 1.1 GW SKM Sustainability Group * Quotation from Prof. Ross Garnaut, Garnaut Report 2008
  • 42. 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 Westerns worlds ETS model? SKM Sustainability Group
  • 43. China Overtook USAs 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 SKM Sustainability Group
  • 44. 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 of the costs contemplated in the ETS. SKM Sustainability Group * Quotation from Prof. Ross Garnaut, Garnaut Report 2008
  • 45. QUESTIONS SKM Sustainability Group