australias co2 reduction targets by j bremer
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SKM Sustainability Group
Australia’s CO2 Reduction TargetsInfrastructure, 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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OutlineThe role of engineering in “the battle for ideas”. CO2emissions 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.
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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”
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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)
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IPCC Estimates of Outcomes
Source : 4th IPCC Report 2007
Garnaut, Govt target of 550 ppmCO2-e
Recommended safe level IPCC, Garnaut, Govt.
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IPCC Estimates of Outcomes
Source : 4th IPCC Report 2007
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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.
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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.
The Concept Behind Carbon Trading “The Failed Market”
Pegasus Gold Corp (1979 ~ 1998)
Example : Cyanide Leach Mining in Montana
Zortman /Ladusky Mine 1998
Total Gold : 2,529,644 ouncesProfits : US$ 300 million
Cleanup Bond : US$ 33 millionActual Cost : US$ 63 million
- US$ 30 million
• Pegasus declares bankruptcy 1997.
• Executives get US$10.4 million in success bonuses! (1995 to 1997)
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• Stern Report (UK Govt) and the Garnaut Report say the cost to the Great Barrier Reef will be large and borne by future generations.
Costs of Climate Change are Intergenerational and Global
Coral Bleaching - Lone Reef near Townsville Queensland, 1998
WWF & The Queensland Tourism Industry Council Estimates of Losses to Qld up to 2020
$8 billion to 2020 in “do nothing” scenario
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“...large- scale movement of population. Such “socially contingent” effects could be catastrophic”
- Stern Report 2006
“..20% ~ 50% extinction of species “”
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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
Economic Approaches to Altering CO2 Emissions
Note : BAU = “Business as Usual”
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• Government must set hypothetical baselines for each industry representing BAU emissions
• Execution at project or enterprise level is easy to understand
Baseline and Credit Carbon Trading
Cost of Abatement$120 / tonne CO2-e
Australian Power Pty Ltd Philippines Paper Pty Ltd
Cost of Abatement $40 / tonne CO2-e
$60
AbatementCertificate for
1 tonne of CO2-e
Note : CO2-e is a quantity of greenhouse gas expressed as an equivalent mass of Co2
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Cap and Trade – How it Works
Australian Emissions Target
Government Determines Total Emissions Cap for Australia –600 million tonnes of CO2 in 2011
Issues 600 million carbon Certificates
AbatementCertificate for
1 tonne of CO2-e
Companies Trade in Certificates
Surrender Certificates
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Carbon CreditsBaseline and Credit System Cap and Trade System
Garbage Compost
CREDIT Emissions = LiabilityGarbage Compost
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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.• Focus on efficiency but not emissions• Market determines price • Carbon credit incentives for new technology
A Carbon Sink
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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
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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
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CARBON TRADING IMPACT ON ELECTRICITY PRICE
Source: “Australia’s Low Pollution Future The Economics of Climate Change Mitigation “ – Australian Treasury 2008
Moderate Carbon Prices have moderate effects on electricity price (but hurt marginal EITE industries)
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Example – Impact on the Nickel Industry
Source: Graph courtesy of G. Fariss Mincorp Limited
• 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 !!
LME Price June 2009 - $15,000 / tonne
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An Example – The Australian Nickel Industry
Source: Graph courtesy of G. Fariss Mincorp Limited
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An Example –BHP Billiton Nickel Operations 2008
• Revenue from Nickel – Approximately $2.1 billion
• Impact of CPRS ~ 4.3% of revenue
• Nickel Laterites alone ~ 5.6%
• Nickel Sulphides alone ~ 1.6 %
– Not captured by the CPRS?
( at $25 / tonne-CO2)
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Nickel Industry - Example
Source: Graph courtes of G. Fariss Mincorp Limited
• 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? )
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An Engineering ApproachWhere We are Now – Global CO2
• We are 30% more efficient but CO2 keeps rising!
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CO2 Emissions and The Energy Economy
Source: National Greenhouse Accounts 2006 & “Australian Energy National And State Projections to 2029-30” ABARE research report 07.24
> The Energy Economy is Approximately 70% of all CO2emissions
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THE ENERGY ECONOMY TODAY
Source: National Greenhouse Accounts 2006 & “Australian Energy National And State Projections to 2029-30” ABARE research report 07.24
ABARE Data – CO2-e Emissions (J. Bremer)
ABARE Data – CO2-e Emissions (J.Bremer)
AUSTRALIA WA
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THE ENERGY ECONOMY –Growth to 2050
Treasury forecastABARE based 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
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THE ENERGY ECONOMY IN 2050
• 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.
ElectrifyTransport 17%
Traditional Electricity Sector 36%
Electrify “Other Energy” Sector
17%
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Treasury Forecasts For Electricity – How Does it Compare?
Source: “Australia’s Low Pollution Future The Economics of Climate Change Mitigation “ – Australian Treasury 2008
• 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”
Forecast Range for Electricationof the Energy Sector
MacLennan and Treasury Forecast 23% below BAU
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Capital Cost of Building the Electricity Infrastructure
• 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 ~ $525 billion over 40 years if government funding is 50:50
Estimated Cost of Low Carbon Electricity Generating Plant
Carbon Price According to the CPRS Forecast
TOTAL(over 40 years)Year 2011 2012 2015 2020 2030 2040 2050
Carbon price ($/tonne) $10 $29 $42 $50 $75 $105 $155
Approx $3,200billion
Forecast Emissions (Mt) 635 636 600 595 590 500 410
Assume Takeup of Certificates 70% 70% 70% 70% 70% 70% 70%
Revenue Forecast ($million) $4,470 $12,990 $17,739 $20,942 $31,149 $36,957 $44,735Carbon Price to Raise $20 billion per annum (Approximate Cost of Expanding Electric Infrastructure)
Carbon price ($/tonne) $10 $29 $47 $48 $48 $57 $69
Approx $800billion
Forecast Emissions (Mt) 635 636 600 595 590 500 410
Assume Take up of Certificates 70% 70% 70% 70% 70% 70% 70%
Revenue Forecast ($million) $4,470 $12,990 $20,000 $20,000 $20,000 $20,000 $20,000
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Revenue Raising Alternatives
Pathways For Setting A Carbon Carbon Price
Direct Funding will give greater cuts With a Lower Carbon Price
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Co-funding Model – Net Present Value for 200 MW Power Plant
Carbon at $10/tonne in 2011 rising to $100 / tonne in 2050
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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
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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)=
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Co-funding Model – Net Present Value for 200 MW Power Plant
50% Capital Funding Required to Compete with Coal @$10 tonne
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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
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Co-funding Model – Levelised Cost of Electricity 200 MW Plant
• Cost of Solar Thermal Plants with Storage Will Be Competitive with Coal
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How Much Would it Cost To Change Our Electricity Infrastructure?
• 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.
Estimated Cost of Low Carbon Electricity Generating Plant*
* Priced at $6,000 / kW-installed
Electrified Energy Economy Current Forecast By Treasury used in the CPRS
Installed Power in 2050 (GW)
Cost to 2050($billion)
Cost per annum ($billion)
Installed Power in 2050 (GW)
Cost to 2050
($billion)
Cost per annum ($billion)
Max Forecast 175 $1,050 $26 69 $414 $10
Min Forecast 135 $810 $20 69 $414 $10Max Forecast with 50% Co‐funding 175 $525 $13 ‐ ‐ ‐Min Forecast with 50% Co‐funding 135 $405 $10 ‐ ‐ ‐
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Revenue Raising Alternatives
Pathways For Setting A Carbon Carbon Price
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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).
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“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.
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Solar Thermal - Other Countries Have Made the Grants
* Quotation from Prof. Ross Garnaut, Garnaut Report 2008
Operational 670 MW Under Construction 2.1 GW
Announced 1.1 GW
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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?
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China Overtook USA’s CO2 Emissions in 2006
China
USA
India
Rest of OECD
Rest of non-OECD
Historical Data Reference Case Forecast
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
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Copenhagen and The Future
* Quotation from Prof. Ross Garnaut, Garnaut Report 2008
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.
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QUESTIONS