CarbonSignal

Economic modelling undertaken by the Treasury, in collaboration with some of Australia’s leading economists, has now been released.  This report contains the first official set of emission trajectories and possible permit prices from the Australian Government.

The modelling examines four scenarios ranging from a 5% reduction in greenhouse gas emissions by 2020, to a 25% reduction by 2020.

A key finding is that the variation in GNP and GDP impact across the scenarios is extremely small.   Under all scenarios, the impact on Gross National Product (GNP) will be a reduction of just 0.1%.  The -5% scenario would result in a Gross Domestic Product (GDP) reduction of 0.1% while the -25% scenario results in a 0.2% reduction.

The Treasury report is large and deserves a careful read, but an insight that can be drawn from this particular finding is that the leaders who actively participate in Australia’s emissions trading debate should not focus their efforts on the specific emissions trajectory target.  Perhaps there are other elements of the scheme design that can have a larger impact on whether Australia makes a smooth or a volatile transition to a carbon-constrained economy?

Many experts speculate that China’s greenhouse gas emissions have surpassed those of the United States.  These estimates are based on many assumptions.  Today the Chinese Government released a White Paper which included the first official acknowledgment that China’s greenhouse gas emissions have reached the same level as the US.

China may produce more greenhouse gas emissions than any other nation, but their emissions-per-capita is among the lowest in the world.  The quantity of greenhouse gases from China is expected to grow substantially as the country attempts to alleviate widespread poverty and pull up the average standard of living.

Yesterday a top Chinese official announced that,

“Developed countries’ funding to support developing countries response to climate change should reach 1 percent of the developed countries’ GDP.”

This can be interpreted as China’s opening position in preparation for crucial international Climate Change talks which are scheduled for 2009.

China is a key player in the negotiation of global emissions constraints.  The lack of carbon constraints for developing nations is one of the reasons the US did not ratify the Kyoto Protocol, which concludes in 2012. International climate change negotiators will attempt to agree on a successor to the Kyoto Protocol in 2009 at Copenhagen.

If the Copenhagen talks fail to deliver an international consensus, the market value of emissions permits that are currently traded under the Kyoto protocol could suffer a rapid decline, and a sense of futility could cause nations such as Australia to wind-back their emerging greenhouse gas abatement efforts.

Earlier this week Project Better Place announced a partnership with Macquarie Bank and AGL to develop an Electric Vehicle (EV) infrastructure in Australia, with intentions to raise $1 billion to help finance the project.

Video Animation:  The PBP Concept

Project Better Place is a US-based company that has secured venture capital funding of approximately $200 million USD, and is testing electric charging stations in Israel.

The centrepiece of the PBP business proposition is the concept of drivers paying for transport on a ‘per mile’ basis, using a network of charge points and battery exchange stations.  Rather than paying for fuel, drivers would instead pay a “subscription” fee for access to the electric recharge network.  Parked cars that are connected to the network are also intended to act as a distributed energy storage medium for intermittent renewables.

There are several barriers that PBP must overcome on the path to implementation.  The most significant, arguably, is access to debt finance to develop the infrastructure in the midst of the financial crisis.  PBP estimates that the cost to put the first 1 million EVs on Australia’s roads could be up to $2 billion.  In addition, the project will need to secure long-term supply contracts and performance guarantees from auto manufacturers and battery suppliers.

The Government’s plan to introduce emissions trading in 2010 has provoked considerable debate.  Climate Change Minister Penny Wong has reinforced the Government’s intentions despite demands from Woodside and BHP for a delay due to the financial crisis.

Professor Ross Garnaut recently told ABC News that the current economic situation is actually beneficial for the introduction of carbon constraints.

“Any large reform involving structural change, involving low emissions technologies and low emissions forms of transport and so on, requires investment.  That is easier to manage as you recover from a downturn. It’s perhaps counter-intuitive but that’s the reality.”

Shane Oliver, chief economist of AMP Capital, says that this is an ideal time to shift jobs into low-carbon sectors of the economy.

“Introducing an emissions scheme at a time when those resources are still unemployed … makes sense because those resources can then be reabsorbed into the cleaner parts of the economy.”

The September newsletter of the Australian Securities Exchange stated unequivocally that the ETS timeline should not be pushed back.  Investor certainty is necessary for accurate carbon price discovery.

“Irrefutably, the cost of investment uncertainty due to the lack of a market mechanism to manage exposure to the cost of carbon pollution outweighs the cost of climate change or mitigation efforts. It is therefore in Australia’s national interest to facilitate the smooth introduction of a market price for carbon pollution sooner rather than more abruptly at a later date.

As soon as the Government provides legislative certainty, robust price discovery and meaningful levels of market liquidity (risk transfer) within the forward markets for pollution permits, it will facilitate better informed investment.”

In addition, the Australian reports that “many Australian business leaders have been urging the Government to press ahead with its 2010 start date.”  The Business Council of Australia, the Minerals Council of Australia, and the Australian Industry Group, all believe that the financial crisis provides the “the best chance to lock in a low early carbon price and gentle emission reduction trajectories.”

From 2010, Australian businesses and consumers will probably be paying for their carbon emissions. Some industry groups have declared that the Government’s Carbon Pollution Reduction Scheme (CPRS) will see international demand for Australian resources and products shift to their overseas competitors. These businesses claim that they are ‘energy intensive and trade exposed’, and are calling for compensation in the form of free carbon permits or financial subsidies.

Their ‘stick’ is the potential job and revenue losses if this overseas shift occurs. Their ‘carrot’ is that concessions make sense, given that their overseas competitors may in fact create more emissions per-unit-sold. There’s even been a term coined to describe this, namely ‘Carbon Leakage’.

So the question being hotly debated is WHO is vulnerable and HOW MUCH support are they likely to need. The Government’s CPRS Greenpaper canvases this topic and proposes a potentially complex, costly and controversial solution.

But let’s take a step back. Just how ‘exposed’ are the industries we’re talking about? For a number of them, there is a strong physical link with Australia, in that the ore, gas, liquid or mineral is physically located here. Even if demand for these resources shifted overseas, the price for these commodities would probably rise as new (expensive) capital was accessed by our competitors to develop the capacity to meet the demand that was previously serviced by Australia.

Also remember that these resources are finite. As the competition depletes their resources to meet the new demand, the price for their product will rise (scarcity), making Australia’s carbon-inclusive prices competitive once again. So at worst we are talking about a temporary price differential created by the CPRS and carbon pricing.

Yet purchasers take into account a range of other powerful factors when deciding who to buy from; cheapest is not always best. Who’s got the best infrastructure capacity? Who offers the best contract/payment terms? Who can meet our ordinary and extra-ordinary supply requirements? Where are the favourable currency exchange rates? How stable is the Government? How skilled are the workforce? Is there industrial unrest that might compromise supply? Some might argue that Australia’s positive performance in these areas will be more than enough to ensure customer loyalty overcomes small price increases.

The table presented above shows how carbon prices will affect selling prices in the 21 most-affected industries, as identified by the Australian Government. We have added a column showing the effect of a mid-range $40 per tonne carbon price. There are a few heavily impacted industries at the top of the list, but for the vast majority, 16 of the ‘top-21′, the carbon price will increase selling prices by less than 10%. This price rise is relatively small in comparison with recent volatility in the prices of oil, commodities and currencies. Will a marginal carbon cost be the incremental straw that breaks the camel’s back? Or will the carbon cost simply be swamped and absorbed along with all the other costs of doing business?

Glen Head from HAC Consulting recently briefed Curtin Corner attendees on the scope for exchanging information for energy. “There are already significant opportunities where investment in better information, measurement, control and communications infrastructure can reduce the amount of energy we use and emissions we produce. New technologies are increasing the scope every day” says Mr Head.

HAC Consulting’s findings have been reinforced in a recent McKinsey article, which describes how IT can cut greenhouse gas emissions. Despite the ever-growing energy demands of corporate IT infrastructure and new data centres across the globe, the authors claim IT can ‘unlock’ significant energy saving opportunities across all sectors of the economy. Glen believes they are correct.

“The old adage that ‘you can’t manage what you don’t measure’ has never been more true. Our clients are finding that information systems and new procedures can help them quickly develop strategic responses to energy price increases and energy supply interruptions, underpinning the flexibility they will require to deal with carbon pricing and financial sector instability. Understanding their full exposure and vulnerability (information) is the first vital step” says Glen.

The increased attention on exchanging information for energy is driving an upsurge in the number of service providers who are developing capabilities in this field.  It is hoped that this will facilitate the uptake of low cost energy efficiency and greenhouse gas abatement opportunities across the economy.  McKinsey’s research confirms that there is significant global scope for savings.

“Information and communications technologies can help abate far more emissions in the general economy than their own production and use generates. We estimated this abatement potential by studying all known opportunities to optimize energy productivity in four sectors—buildings, power, transport, and manufacturing. […] we identified annual reductions of 7.8 metric gigatons of carbon emissions by 2020.”

The more progressive climate change and energy specialists in town are already developing strategic alliances and working relationships with innovative IT systems specialists to provide better value for customers, enabling them to take full advantage of emerging opportunities.