1. PRME Seminar “Responsible Management of GHG Emissions” Fri 14 October 2011 Gujji Muthuswamy Department of Management Faculty of Business and Economics

2. The context for the presentation View Climate Change in three parts: –Climate Science (What is it, Why, How etc.) –Mitigation of Emissions (How shall we reduce it? Carbon pricing mechanism is just one way of reducing Greenhouse gases (GHG) –Adaptation (How will we adapt to a more hostile climate?) Each part requires input from many disciplines: –Science / Engineering, –Economics / Finance / Accounting, –Law –Medicine, etc. The University has three major functions: –Research (building new knowledge) –Teaching (Disseminating knowledge and building new researchers) –Outreach ( contribution to public policy, consultancy, communication). Thus we have a 3-D matrix comprising 3 aspects, ‘n’ disciplines, and 3 functions.

3. The focus of this presentation It is a very broad canvass but provides a structure for our thinking both at the macro level (e.g. University’s overall strategy) and at Faculty / Department level ( e.g. what should XYZ Department do?). My presentation looks at a small part of this canvass: –A brief outline of the carbon pricing mechanism –Perspective of one Faculty, i.e. Business and Economics. A structure to look at the issue.

4. Pricing the carbon - Basics GHG emitted by many economic activities e.g. Power generation, transport, cement, steel, aluminium, chemical, refineries, agriculture, and households. –(e.g. burning coal in power station results in CO 2 emissions from the chimney). CO 2 is now at zero cost  So no economic incentive to reduce emissions  Impact on Climate change. Australia burns coal for about 80% of its electricity needs. Electricity generation accounts for about 37% of our total GHG emissions. This presentation is based on “Securing a clean energy future – The Australian Government’s Climate Change Plan”, July 2011

5. Pricing the carbon – (contd) If carbon is priced into the economic process : Cost of power generation will go up; and hence Cost of electricity to the consumer overall will go up Also, cost of coal-fired electricity, now low, will go up more because they emit more CO 2 (compared to gas fired ), and Renewable technologies will become even more competitive, because they emit almost no CO 2 So, how do you create a price for carbon? –Direct mechanisms: Carbon Tax, Emissions Trading Scheme (ETS) –Indirect mechanisms: Regulations (e.g. Building and appliance efficiency), Renewable Energy Target Scheme, Energy Efficiency Certificate scheme, Subsidies and incentives labelled “Direct Action” schemes.

6. Projections ( Ref: Fig 2.4 “Securing a clean energy future”)

7. Top 500 emitting businesses Australian total emissions = 542 Mil Tonnes Tax / ETS affects only the Top 500 emitters in: Electricity, waste, rail, domestic aviation and shipping, industrial processes, fugitive emissions, GHG

8. Customers & Householders Top 500 emitting businesses GHG emissions Demand for Products & services Customer demand, e.g. for electricity, drives the supply side and hence the GHG emissions.

9. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Customers & Householders Top 500 emitting businesses Permits $ GHG emissions Demand for Products & services All other businesses Need 1 permit to emit 1 Tonne of GHG July 12: Issue about 337 Mil permits at $ 23/Tonne (set by Govt) Collect $ 7.740 Bil.in 2012/13 Collect $ 24.5 Bil in 3 years to 2015. ETS from 2015. Price determined by market forces.

10. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Customers & Householders Energy intensive trade exposed Sector (EITE) Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Demand for Products & services GHG emissions Example of EITEs: Aluminium, Steel, Cement, Pulp & paper etc. $ 9,2 Bil worth of free permits in 2012/15 period.

11. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Energy intensive trade exposed Sector (EITE) Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Demand for Products & services GHG emissions Free permits to EITEs to minimise ‘carbon leakage’ 94% for high intensity and 66% for moderate emission intensity activities.

12. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Pay $ to close some Demand for Products & services GHG emissions $ 5.5 Billion worth of free permits over 6 years to generators emitting more than 1 Tonne/MWh. Aust average is 0.88 Tonnes/ MWh

13. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Pay $ to close some Prices go up Demand for Products & services GHG emissions Affected businesses will pass on costs to customers and householders.

14. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Financial Compensation $$ Pay $ to close some Prices go up Demand for Products & services GHG emissions About $14.9 Bil of assistance to householders out of $24.5 Bil permit revenue in 2012-15. Tax reduction and cash assistance. ASSISTANCE NOT LINKED TO PERMIT PRICES.

15. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Investment in Renewable Technologies ---------- Investment in R&D Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Uses permit revenue $$ Financial Compensation $$ Pay $ to close some Prices go up Demand for Products & services GHG emissions Invest $ 10 Bil over 5 years plus other assistance

16. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Investment in Renewable Technologies ---------- Investment in R&D Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Uses permit revenue $$ Financial Compensation $$ Pay $ to close some Prices go up Incentive to reduce permit costs by reducing GHG emissions. Demand for Products & services GHG emissions Expect investment by industries in low emissions technologies

17. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Investment in Renewable Technologies ---------- Investment in R&D Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Uses permit revenue $$ Financial Compensation $$ Pay $ to close some Prices go up Incentive to reduce permit costs by reducing GHG emissions. Demand for Products & services GHG emissions Investment in Energy efficiency Promotes energy efficiency # 23 Mil over 5 years

18. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Investment in Renewable Technologies ---------- Investment in R&D Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Uses permit revenue $$ Financial Compensation $$ Pay $ to close some Prices go up Incentive to reduce permit costs by reducing GHG emissions. Demand for Products & services GHG emissions Investment in Energy efficiency Promotes energy efficiency $ $

19. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Investment in Renewable Technologies ---------- Investment in R&D Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Uses permit revenue $$ Financial Compensation $$ Pay $ to close some Prices go up Incentive to reduce permit costs by reducing GHG emissions. Demand for Products & services GHG emissions Investment in Energy efficiency Promotes energy efficiency $ $ Carbon Farming Initiative (creates ACCU) Promote carbon sinks $ 1.2 Bil in 5 yrs

20. Government issues permits. Fixed price: “Carbon tax” Variable price via ETS. Gets $ Global Competitors to Aust EITEs Overseas customer Customers & Householders Investment in Renewable Technologies ---------- Investment in R&D Energy intensive trade exposed Sector (EITE) High emissions power stations Top 500 emitting businesses All other businesses Permits $ GHG emissions Mostly Free Permits No $ Maintain Exports $ Uses permit revenue $$ Financial Compensation $$ Pay $ to close some Prices go up Incentive to reduce permit costs by reducing GHG emissions. Demand for Products & services GHG emissions Investment in Energy efficiency Promotes energy efficiency $ $ Carbon Farming Initiative Promote carbon sinks

21. Forward Estimates: Total for 2012-15 ($ Bil) Ref: Appendix C “Securing a clean energy future” Permit + other revenue27.3 Household assistance15.4 Support for jobs (EITEs) 10.3 Clean Energy Finance Corporation 0.9 Energy security (assistance to generators) 3.1 Land & bio diversity1.2 Governance0.431.2 Net Impact(3.9)

22. Governance New regulatory agencies –The Climate Change Authority –Clean Energy Regulator –Productivity Commission Reviews –Energy Security Council –Australian Renewable Energy Agency Other agencies –Clean Energy Finance Corporation New programs –Carbon Farming Initiative (aimed at the farming sector) –Energy Savings Initiative (applies to energy retailers only) Existing major program –Renewable Energy Target Scheme (applies to energy retailers only) –Energy Efficiency Opportunities program (applies to all big energy users).

23. Implications for Academia Major topic: GHG mitigation via Carbon pricing Department : XYZ Sub topicsResearchTeachingOutreach GHG measurement & reporting Investment in mitigation projects Carbon and energy markets operation Accounting, auditing Compliance with regulations Pricing and Risk Management Cash flow management