Come on Aussies, come on

From a standing position some distance behind the start line, Australia has made remarkable progress in the “race” to implement a price for CO2 within the economy, driven by emissions trading as the principal policy instrument. Australia may well come in a creditable 2nd, given that New Zealand has seemingly slipped on the last obstacle and the US is just powering out of the blocks.

In the space of 18 months, we have seen the Garnaut Report, a Green paper, a White paper and now the Exposure Draft of the proposed legislation. But now the going is getting tough. The Australian Senate, in which the government does not command a majority, is holding an inquiry into the legislation and reviewing the very concepts on which it is built. What should Australia commit to? Should it use emissions trading? . . . . and so on.

No climate change legislation will ever be perfect, but what has been proposed in Australia looks pretty good. Like the EU-ETS it is bound to need revision at some point, but what is on the table today will set the ball rolling and most importantly will institutionalise carbon management across the economy. That is the first and most important step and it will never happen through voluntary action or mandatory reporting alone.  Rather, a real target that creates a scarcity (of allowances versus emissions) must come into play, such that market forces and competition begin to do their job.

The Senate Committee has called for submissions from the public and Shell has responded, as it has at each stage of the process when given the opportunity. I have been working with colleagues in Shell Australia on drafting our response, which you can access here (shell-australia-april-2009-senate-submission).

The submission covers three main areas;

  1. The benefits and advantages of an emissions trading approach
  2. The need for a comprehensive policy framework which goes beyond emissions trading.
  3. The need to protect emissions intensive trade exposed industries until such time as CO2 management has become a more global undertaking.

If you have followed this blog over recent months you may even recognise some of my text that now appears in the submission – particularly with regards the advantages of an emissions trading approach.

For business, the last point is an important one and inevitably is key to the political trade-offs that help build support for carbon management legislation. That has certainly been the case in the EU. From the perspective of an oil and gas company operating in Australia, two key areas are of concern;

  1. Australia has a number of relatively small refineries that compete with world-scale refineries in Singapore. When Australia was in the happy position of having all these refineries tied to pipelines with indigenous crude, the status quo was relatively easy to defend. Without the refineries crude would be exported and product would be imported, so costs all around.  But crude production near the refineries has fallen, so an alternative route forward could be to just import more product and shut some refining capacity, rather than importing the crude.  The refining industry in Australia doesn’t want that, so maintaining current capacity means watching the local costs against those in Singapore. The need to purchase CO2 allowances could tip that balance if implemented in one location but not the other.
  2. In the LNG business, Australia will be the only exporter in the region with the prospect of an economy wide CO2 price requiring additional cost to be added to each tonne of LNG against the purchase of allowances. But this cost is largely unrecoverable in the Pacific market as the principal competitors (Brunei, Qatar, Oman, Indonesia) don’t incur it. Whilst this won’t put Australian LNG out of business or anything dire like that, it does tip the playing field in the other direction, at least until CO2 management becomes more widespread in the region.

Unfortunately criticism of the Australian system is coming from all sides. Many say it lacks ambition, with the government target through to 2020 somewhere in the range 5 to 15% relative to 2000. So we are back to the tricky issue of targets and baselines, which I have written much on in recent weeks. If we assume Australia settles on 10%, at least from an energy CO2 perspective, this is about the same as a 20% reduction from recent (2006 IEA) levels. So that puts it on a par with the USA and the EU, but that issue is far from settled with the EU still on its 1990 high horse.

Could Australia reduce emissions by 20% in just 11 years? If we assume that the rest of the economy can keep emissions in check over that period (i.e. no rises, so not hugely ambitious), then within the energy sector this could be achieved by fitting out 10 big coal fired power stations with carbon capture and storage. This means converting most of the coal fired power stations in New South Wales, or alternatively all of the stations in Victoria and South Australia and still coming up a bit short. This would be a very big undertaking, but perhaps not impossible as many of these stations power Melbourne or Sydney and operate in clusters – so there is a potential economy of scale in terms of CO2 transport, storage and monitoring.

On the other hand, 10 big CCS projects in just a few years is about the same as the entire EU CCS Demonstration Programme – and that has an economy of nearly 500 million people to pay for it. So once again we are left with a hugely challenging undertaking coupled with a dose of realism in terms of what might come to pass.