Australia is rich in fossil fuels. Vast reserves of black and brown coal drove the development of coal-fired power stations which have supplied power for many years to Australian industry at comparatively low prices, creating a cost advantage that attracted energy-intensive industries and supported the growth of manufacturing. This story is similar to South Africa’s where the development of resource projects was often predicated on the availability of low-cost energy. The South African energy mix is also heavily dependent on fossil fuels.
Australia’s reliance on fossil fuels, for all its small population, makes it a significant emitter of greenhouse gas emissions (GHGs) in comparison to other countries. In 2010 it was the world’s ninth largest emitter. Climate change policy and carbon pricing as a mechanism to reduce emissions and bring about a structural adjustment in the economy away from its fossil fuel dependency has been the object of deep division and acrimonious debate in Australia’s national politics for more than a decade.
The uncertainty created by this volatile political environment has created a risk management issue for Australian business.
This article is the first in a series of three that considers Australia’s experience of carbon pricing and emission reduction policy settings and the lessons for South African businesses ahead of the planned introduction of a carbon tax on 1 January 2015.
The chequered history of Australia’s carbon response
Initial engagement between Australia’s national government and business began back in 1995 with Greenhouse Challenge, a joint voluntary initiative to encourage abatement, improve greenhouse gas management and measurement, and strengthen information sharing between government and industry. It ended on 1 July 2009 when reporting regulations were introduced. However, it was industry’s first attempt to demonstrate the proactive management of greenhouse emissions.
It wasn’t until 2007 that a mandatory scheme for emissions reduction was suggested with the Shergold Report which proposed a cap and trade scheme as its principal recommendation. This report was produced by the Prime Minister’s task group on emissions trading,1 under a conservative Liberal/National government led by John Howard.
On 3 December 2007, the national government changed with the election of the ALP (Australian Labour Party). Under the new Prime Minister, Kevin Rudd, the ALP developed the Carbon Pollution Reduction Scheme (CPRS) which featured an emissions trading scheme, also known as a cap and trade scheme. It was based on proposals made by the government’s chief climate change advisor, Professor Ross Garnaut, economic modelling by Treasury and extensive consultations with industry. However, the scheme required the approval of Senate before passing into law. Twice it was put before Senate, and rejected, with the Prime Minister deciding to defer the CPRS before it went before Senate again. The bitter political debate saw the Liberal/National opposition leader of the time, Malcolm Turnbull, lose his leadership largely over this issue to Tony Abbott who campaigned as a staunch opponent of the CPRS. The ALP went on to replace the CPRS with the Clean Energy Future (CEF) package of legislation featuring the Carbon Pricing Mechanism (CPM) which they announced 10 July 2011. The carbon price came into effect on 1 July 2012.
What impact did the carbon tax have?
The carbon price was introduced as a fixed price of $AUD23 per tonne of CO2-e.2 The price was planned to rise by 2,5% in real terms per annum: $AUD24,15 in Year 2 and $AUD25,40 in Year 3. By 1 July 2015 the fixed price scheme was to transition to an emissions trading scheme with a fully flexible price. Changes to national greenhouse gas emissions reduction targets were intended to flow through the economy via this market based mechanism. Under such a scheme, emissions are managed by a supply and demand equation driven by the overall cap. This provides a flexible approach to align emission targets with global agreements and climate science.
Carbon pricing incentivised large emitters to implement emissions reduction initiatives. Energetics has seen entities liable under the carbon pricing scheme install technologies to reduce emissions. Examples include flaring methane emissions from underground coal mines, rather than simply venting them to the atmosphere, and the installation of anaerobic biodigesters for wastewater management.
Since the introduction of the carbon price, Energetics has also seen many of Australia’s large emitters develop more accurate greenhouse gas inventories using more direct calculation methodologies rather than applying industry standard emission factors to determine their carbon liabilities. We also noted substantial reductions in reported emissions as a result of this change in reporting practices.
For many companies (and the general public), the impact on their operations was mainly in their electricity bills, which increased by around 10–15%. Emissions-intensive companies, which have the largest energy bills and could have been adversely affected, had the impact substantially softened through the receipt of free permits issued by the government – covering 95% of the impact if very emissions-intensive or 65% for the next level of carbon emissions. The issuing of free permits was determined relative to the ‘trade exposure’ of the companies’ core activities. Some secondary costs were also experienced through the supply chain. On the other hand, Australian states to varying degrees over this time experienced 17–20% price increases in electricity largely caused by $43 billion in investment in electricity distribution infrastructure. Arguably the electorate did not distinguish between power bill increases caused by the carbon price and the component of the increase relating to the large expenditure on infrastructure which was passed on to consumers.
In the lead-up to the Australian federal election of 7 September 2013, the opposition Liberal/National Coalition used the carbon price as a lightning rod for a range of economic ills. The election was a decisive victory for the Coalition parties.
Australia’s carbon price – on its way out
The new government is determined to remove the price on carbon and, as part of its first order of business before Parliament, draft legislation was presented to begin the repeal of the 17 pieces of legislation that make up the Clean Energy Future policy. In its place will be the proposed Direct Action policy with a variety of initiatives to reduce Australia’s carbon emissions, including:
- An AUD$2,55 billion Emissions Reduction Fund (ERF) to support direct action by business to reduce emissions. The ERF is based on a reverse auction system in which companies, farmers and others can tender to implement emissions reduction projects.
- Boosting renewable energy, especially solar.
- Support for emerging technologies through the Renewable Energy Target (RET).3
Direct Action exists only as a set of principles and Australian business has been invited to consult on the terms of reference of the Direct Action plan. It is intended that the new scheme will take effect 1 July 2014. However, it is widely criticised as contradictory and unworkable.
Building a resilient business
The major lesson from the Australian experience for businesses in South Africa is the need to build resilience. Despite the political wrangling and the policy fluctuations of the last seven years, climate change remains a management issue. Carbon emissions must be managed and reduced to meet national emissions targets and to fulfil international obligations. With the release of the draft Summary Fifth Assessment Report (AR5) by the UN’s Intergovernmental Panel on Climate Change (IPCC) the scientific evidence for climate change is overwhelming and the pressure for meaningful action grows.
CFOs and other executives charged with the responsibility of managing climate change risk need to consider whether existing risk management and sustainability frameworks are sufficiently robust.
Risks can be classified into four categories:
Managing climate change risks in a stable policy environment for the first two categories is a relatively straight-forward exercise for business. Existing internal controls manage compliance risks and hedging strategies are used by major greenhouse emitters to manage market risks.
Where policy is controversial, the key climate change risks move to operations and reputation risks stemming from uncertainty and the potential for community pressure to impact on a business’ licence to operate. Ultimately the objective is to create a culture that supports a resilient business able to address emerging risks – an objective the financial and investment community clearly considers increasingly important. Of course, more perceptive businesses with a clear climate change / sustainability response will benefit through enhanced risk mitigation and competitive advantage.
In developing the theme of creating a resilient business, in our next article we will discuss the experience of Australian business in measuring, reporting and reducing greenhouse emissions. We will particularly look at the range of programmes that continue to enjoy the support of the new Australian government and Australian industry, their features and the experience of business. The programmes span mandatory energy efficiency assessment programmes, mandatory energy and greenhouse reporting programmes, as well as international voluntary programmes such as GRI and CDP. Australian businesses have developed systems and processes and the most sophisticated have integrated greenhouse data, financial data and other information into broader business planning decisions and have pursued new levels of efficiency and broader business productivity.
1 The Shergold Report made the statement, “Australia should commit to an emissions target for post 2012 ahead of any comprehensive global response.” The report’s author then went on to say Australians should know a carbon emissions target would come at a cost to economic growth, business and households. However, he added “What we are doing by seeking to prudently manage risk is bringing forward costs from the next generation, costs that we impose on ourselves.” The Australian, 5 December 2007.
2 Approximately ZAR230 per tonne of CO2-e.
3 The Renewable Energy Target (RET) has bipartisan political support. The target aims to achieve 20% of Australia’s energy supplied from renewable energy sources by 2020.
Author: Mary Stewart B.Ch.E, PhD is General Manager: Resources and Industrials at Energetics in Australia.