Australia’s GHG Emissions Performance According to Coal and Minerals Lobbyists | Update

The release of the Productivity Commission’s report on Carbon Emission Policies in Key Economies last week was (‘surprisingly’) not met with unanimous enthusiasm. Particularly the Minerals Council of Australia and the Australian Coal Association voiced everything between concerns and misgivings about the accuracy, comparibility, and validity of the report’s findings, stating ”Australia is walking the plank” and “ahead of the world” with the looming carbon tax. 

I refer to the following documents:

1. MCA Briefing Note: Action or talk - an analysis of emissions reduction performance of key nations since 1990.
2. The Proposed Carbon Pricing Scheme – MW 2011 - Presentation by Seamus French, Chief Executive of Anglo American Metallurgical Coal;l and
3. A New Carbon Price Scheme - 10 reasons why a CPRS-style carbon pricing scheme is the wrong approach.

I will now highlight some of the factual errors and misinterpretations of Australia’s GHG emissions performance in the arguments and claims brought forward by the Minerals Council of Australia. 

The Minerals Council claims that the

correct measure of emissions intensity is CO2 emissions per GDP $, not emissions per capita, that Australia shows a far superior performance to both the US and EU with a 44% reduction from 1990 to 2008, and that based on current targets a further 45% improvement will be achieved by 2020.

Large parts of the figures the Minerals Council “quotes” in regards to Australian emissions intensity are taken from or based on a discussion paper by McKibbin, Morris & Wilcoxen (2010), Comparing Climate Commitments: A Model-Based Analysis of the Copenhagen Accord, which is part of the Harvard Project on International Climate Agreements, Belfer Center for Science and International Affairs, Harvard Kennedy School.

It must be noted that in this paper

• McKibbin et al. assume the price signal and emissions targets in the policy scenario apply only to CO2 (only one of the six “Kyoto Protocol Greenhouse Gases”: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) from fossil fuel consumption from the energy sector, including combustion of coal, natural gas, and oil .
• Other GHGs and emissions sources, such as those from land-use change or industrial processes, are not considered.
• McKibbin et al. compare baseline intensity levels with a BAU and a Copenhagen Accord implementation level in 2020 based on converting all relevant Copenhagen Accord commitments to emissions intensity expressed in emissions per GDP $.
• The numbers of alleged emission intensity reduction for Australia that are referred to compare “Copenhagen Accord Emissions Commitments in Intensity Terms” (see below).
• The numbers for Europe and the United States are taken from a different source.
• The authors only reference their own work. A description or justification of their calculation approach and source of data is not provided.

According to McKibbin et al., in 2005, Australia’s CO2 emissions intensity level was a 0.56. Assuming a business-as-usual development, they project a CO2 emissions intensity level of 0.45, compared to 0.31 under the Copenhagen Accord. The reductions in emissions intensity are therefore not 44% from 1990 to 2008, with another potential 45% by 2020, but -20% (BAU), and -44% (Copenhagen Accord). It is also worthwhile comparing the intensity levels of the EU and United States to that of Australia – in either case is the emissions intensity level below that of Australia.

What needs to be understood, emissions intensity, at least with respect to energy and industrial emissions, is influenced primarily by shifts in energy intensity and the fuel mix used in electricity generation. The high emissions intensity of Australia’s primary energy supply is largely due to its reliance on coal for electricity generation. When non-CO2 gases are considered, additional factors beyond energy intensity and fuel mix affect emissions intensity and trends.

The recent Garnaut Review Update found that the improvement in Australia’s energy/emissions intensity is explained by a shift in energy generation away from coal and towards gas and renewables, largely driven by the legislated Renewable Energy Target, as well as improved energy efficiency. Black coal-fired generation declined by more than 7 per cent between 2008 and 2010, while renewable energy generation increased by half, albeit from a low base. In the year to August 2010, gas generation supplied more than 11 per cent of eastern states’ electricity demand, while black coal supplied 56 per cent and brown coal 24 per cent. Renewables, including hydroelectric and wind, supplied the remaining 9 per cent.

Emissions intensity is not directly correlated with changes in (economic) activity levels (e.g., GDP and population). Even in the event of major GDP changes, changes in intensity levels may be modest. Absolute emission levels, on the other hand, are most strongly influenced by GDP shifts. When GDP rises, emissions also tend to rise correspondingly. Such a trend was observed in the EU ETS following the recession which caused an exceptional 11.6% fall in emissions in 2009.  Emissions of GHGs from businesses participating in the  EU ETS increased by over 3% last year. However, this increase is likely to be substantially lower than the rebound in output from the installations concerned given that the average industrial production index in the EU 27 increased by 6.7% in 2010 compared to 2009.

Average annual growth in GDP, energy demand and CO2 emissions, 2007 to 2009

The Minerals Council also claims that

Australian emissions have grown by just 3 per cent since 1990 despite recording the strongest economic and population growth amongst developed nations over this period [see below]

are incorrect because the cited reference has been misinterpreted. The Department of Climate Change and Energy Efficiency’s National Greenhouse Gas Inventory – Accounting for the Kyoto Target, December Quarter 2010 (page 6) states that

Australia’s emissions, including from Article 3.3 Land Use, Land Use Change and Forestry activities, were 103 per cent of the 1990 base period.

This does not mean that emissions have just grown by 3%, but that in December 2010  preliminary estimated emissions were 103% of the 1990 baseline (including LULUCF). 

 

Minerals Council's Interpretation of Emissions Data

 

Another issue with the Council’s data is that it compares GHG data under the UNFCCC and the Kyoto Protocol. Why is this important?  UNFCCC and Kyoto Protocol accounting and reporting is not the same, there are a number of differences, particularly when it comes to the treatment of LULUCF. UNFCCC reports estimates at various times, it is more encompassing and it is land-based (i.e., the type of land not the type of activity that occurs on it), whereas Kyoto Protocol accounting is activity-based, only includes a sub-section of all possible land area activities, as well as includes rules on how or whether there is reference to 1990 baseline estimates.

 

Furthermore, the table provided by the Council lists India, China, and South Korea – none of which are Annex I countries with binding emission reduction targets (average of 5% against 1990 levels by 2012), and therefore do not report under the Kyoto Protocol (the US have not ratified the Kyoto Protocol, but submit National Inventory Reports). Hence comparing Australia’s Kyoto Protocol obligations/performance with a different data set is problematic. If China, India, and South Korea are to be included in a comparison, one should use the UNFCCC data. 

 

As of April 15, 2011, Australia’s total greenhouse gas emissions, including net emissions from the LULUCF sector, were 599.8 Mt CO2-e in 2009. Australia’s baseline is 592 Mt CO2-e. Overall, total emissions have increased by 138.3 Mt or 30% on net emissions recorded in 1990 (inlcuding LULUCF).

 

This compares to a 20.25% reduction in the EU27 and a 5.6% increase in the United States between 1990 and 2009 (including LULUCF).

Actual Emissions Data 1990 - 2009, Annex I Countries (Source: UNFCCC)

In summary:

• 20.25% reduction in the EU27,
• 5.6% increase in the United States, and
• 30% increase in Australia.

Therefore, the claim that “emissions reductions” in Australia are superior to those in the US and EU is incorrect.  Furthermore, latest emission projections for Australia suggest that while is Australia is likely to meet its 108% Kyoto Protocol target (an estimated average of 582 Mt CO2-e per year over the Kyoto Protocol compliance period, which is 106% of 1990 levels),  in the absence of further policy action (yes, that means carbon tax and/or emissions trading), strong growth in emissions is projected between now and 2020. This is primarily the result of strong demand for Australia’s energy exports, in particular, coal and liquefied natural gas. Emissions are projected to reach 690 Mt CO2-e in 2020, or 24% above 2000 levels.

Australia’s Emissions trends, 1990 to 2020

 

Political decisions on climate policy and in particular carbon pricing naturally creates intensive lobbying activity by all (perceived) liable participants in order to get the maximum share of free allocation or be exempt, and to make everyone else understand how ‘unfair’ a price on carbon is altogether. That also goes for the Minerals Council of Australia -  see their suggestion of a better way below:

In the absence of a binding international agreement on greenhouse gas emission reductions, there should be a full or 94.5 per cent allocation of permits to trade exposed firms.

Just to reiterate, 94.5% of permits for free, at no cost… alternatively, 100%! The problem is that when allowances are freely allocated to firms, some liable sectors will inevitably make profits because if companies are in business to maximise profits, then even with free allocation they pass on the opportunity costs of allowances to downstream prices. Whether affected sectors make a profit will depend on whether they receive enough allowances to cover any increase in their cost base and the constraints on cost pass-through placed by international competition.

If companies/industries want compensation for changes to legislation/ introduction of a price on carbon, this might warrant some free allocation of allowances during the transition period to compensate investment decisions prior there being any reasonable expectation of a price on carbon. However, as time passes, companies may find it difficult to make a valid claim because of the developments in the last 20 years alone: UNFCCC in 1992, Kyoto Protocol in 1995 (entering into force in 2005), the EU ETS commencing in 2005,  the various COPs. What have they done in the meantime?

Australia should follow other nations and adopt a phased approach to the introduction of auctioning of permits.

This is exactly what the proposed carbon tax is. At the end of the fixed price period, the clear intent would be that the scheme convert to a flexible price cap-and-trade emissions trading scheme. In relation to the transition to a flexible price, it would be important to design the arrangements so as to promote business certainty and a smooth transition from the fixed to flexible price.

In phase I of the EU ETS governments could auction up to 5% of allowances and up to 10% in phase II (the Kyoto Protocol commitment period, 2008 – 2012).  From 2013, at least half the total number of allowances is expected to be auctioned. No allowances will be allocated free of charge for electricity production, with only limited and temporary options to derogate from this rule. This means that the majority of allowances under the EU ETS will not anymore be allocated for free. For industry and heating sectors,allowances will be allocated for free based on ambitious benchmarks. Installations that meet the benchmarks will in principle receive all allowances they need. Installations that do not meet the benchmark will have a shortage of allowances and the option to either lower their emissions or to purchase additional allowances to cover their excess emissions.

This allocation of permits would cover both Scope 1 (direct) and Scope 2 (indirect electricity, heat or steam) emissions.

Only Scope 1 emissions would be captured under an any carbon price scheme. In regards to facing (substantially) higher electricity costs, the question is why the carbon price-affected sectors would pass on the costs if they received substantial allocations for free.

The auctioning of permits to trade exposed firms could be increased as trade competitor nations take on comparable commitments.

While it is generally assumed that free allocation helps to reduce negative impacts on competitiveness relative to countries without a similar climate policy, free allocation is essentially a one-off subsidy that helps business maintain a good balance sheet in the face of higher operating costs. Allocation or auctioning/acquiring permits on the market does not fundamentally change competitiveness.

What would be required is a comprehensive approach to considering distributional impacts – not by allocating free permits, but improving energy efficiency, commercialising low-carbon technologies, and thus enhancing long-term competitiveness by accelerating the use of advanced technology.

Edit June 15:

The Australian Department of Climate Change and Energy Efficiency has just released some fact sheets on international climate change action. Of particular interest should be the fact sheet Australia: Part of the Climate Problem – Part of the Climate Solution? Why? Well, because the Minerals Council states that Australia is responsible for “just 1.5%” of global emissions. Interestingly, the DCCEE used the same tool the Minerals Council used to come up with their numbers. Thus, it might be worthwhile comparing the Australian 1.5% to some other countries, such as Germany (2.6%), France (1.5%), or the United Kingdom (1.7%) – countries with a larger population, larger economy, and with an emissions trading scheme and/or a carbon tax in place.

Edit July 19:

The Australian Government has announced the implementation of a carbon tax. The key features of this tax are:

• The carbon pricing mechanism will commence on 1 July 2012 (three year fixed price period).
• The carbon price will start at $23.00 per tonne in 2012-13.
• The carbon pricing mechanism will transition to a flexible price cap-and-trade emissions trading scheme on 1 July 2015.
• The price ceiling will be set in regulations by 31 May 2014 at $20 above the expected internationalprice for 2015-16 and will rise by 5% in real terms each year.
• A price floor will apply for the first three years of the flexible price period, starting at $15 and rising at 4% in real terms each year.
• Unlimited banking of permits will be allowed in the flexible price period, limited borrowing of permits (up to 5%).
• Permits will be allocated by auctioning during the flexible price period.
• Broad coverage of emission sources encompassing: stationary energy; industrial processes; fugitive emissions (other than from decommissioned coal mines); and emissions from non-legacy waste. Agricultural and land sector emissions will not be covered.
• Only four of the six greenhouse gases counted under the Kyoto Protocol will be covered — carbon dioxide, methane, nitrous oxide and perfluorocarbons from aluminium smelting.
• A threshold of 25,000 tonnes of all scope 1 (direct) CO2-e emissions covered  will apply for determining whether a facility will be covered by the carbon tax.
• Australian carbon credit units (ACCUs) issued under the CFI will be eligible for compliance.
• The use of international units to meet carbon pricing mechanism liabilities will not be permitted in the fixed price period. Export of domestic permits will not be permitted in the fixed price period (with the exception of Kyoto ACCUs). Until 2020, liable parties must meet at least 50 per cent of their annual liability with domestic permits or credits.
• 94.5% of the industry average baseline for activities with an emissions intensity of at least 2,000t CO2-e/$m revenue or at least 6,000t CO2-e/$m value added. 66% of the industry average baseline for activities with an emissions intensity between 1,000t CO2-e/$m and 1,999t CO2-e/$m revenue or between 3,000t CO2-e/$m and 5,999t CO2-e/$mvalue added. Any changes to assistance arrangements that will have a negative effect on business will not occur before the sixth year of the carbon price.
• LNG projects will receive a supplementary allocation to ensure an effective assistance rate of 50% in relation to their LNG production each year.
• Administrative allocations of free carbon permits and cash payments will be provided to the value of $5.5 billion (nominal) in five separate instalments to generators with an emissions intensity of above 1.0 tCO2-e/MWh of electricity.
• More than 50% of the carbon pricing mechanism revenue will be used to assist households

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