Australia: Rudd turns carbon policy on its head Down Under

Kevin Rudd, Australia’s new prime minister, is almost certainly the first leader of any nation to be elected at least partly on a climate change policy agenda.

Among Rudd’s first acts after his election in November was to fast-track the signing of the Kyoto Protocol, the climate treaty that the previous Conservative government had shunned for 11 years.

Australia’s 50-strong official delegation to the UN climate change conference in Bali included a broad section of executives from clean-tech to carbon-intensive industries, sweeping away any fears that Australia would establish itself as an international haven for carbon polluters.

Renewable effects

Rudd’s commitments on climate change improve on his predecessor, John Howard’s, in four fundamental ways – the signing of Kyoto, a 60 per cent CO₂ emissions reduction target by 2050, the earlier introduction of a CO₂ emissions trading scheme, and a commitment to 20 per cent renewable energy by 2020.

While the tangible effects of Kyoto are yet to be felt, and the details of the emissions trading scheme yet to be finalised, Rudd’s 20% renewable energy target is already having an immediate impact.

Renewable energy developments, particularly in wind farms, had slowed to nearly a stop in Australia (need stats really) under the Conservative government, which had previously abandoned a modest 3% renewables target.

Wind up

Since the recent election, the sector has been reignited, with several new wind farm developments announced and others planned, including Australia’s largest wind farm at Silverton near the inland mining town of Broken Hill. The joint venture between Europe’s Epuron and Australian investment bank Macquarie Group will deliver up to 1000Mw of electricity upon completion.

The Silverton project, according to J P Morgan utilities analyst Grace Chan, accounts for less than a fifth of planned developments. Leading utilities such as Origin, AGL and Babcock & Brown are each forging ahead with several projects of their own, as well as exploring other renewable energy options such as geothermal, solar thermal and wave energy.

Through the roof

Chan says the price of Renewable Energy Certificates (RECs), the currency generated by new renewable energy projects, has jumped from around $6/MW to more than $50.

The major REC buyers have been utilities, explains Craig McBurnie, the director of commodity derivatives at ABN Amro in Sydney. Australia’s utilities, he says, are keen to top up their stores of the certificates in anticipation of mandatory REC purchase targets set by the government.

The biggest boost has been to the wind industry, as this is the cheapest renewable energy at the moment and the easiest to install. There are no hydro options in Australia, and solar thermal, geothermal and other technologies are not yet practical on a large scale, though McBurnie predicts they will become increasingly popular over the coming decade.

The Federal renewables plan to achieve the 20% target is not expected to become law until next year. The Australian government has the added complication of having to incorporate all the state-based schemes into the plan first.

Ready to trade?

In the broader business community, there is strong evidence that Australian business is unprepared for other government initiatives, such as the introduction of carbon emissions trading, which the Labour government has promised to introduce by 2010.

Part of the problem lies in the fact that Rudd refuses to announce the policy details – such as the existence of any interim emission reduction targets, whether permits would be granted or auctioned, and whether some industries exempted. Work on the details of the emissions trading scheme has been delayed until a report on the economic impact of an emissions reduction scheme is released in September. The author of the report, economist Ross Garnaut (touted as Australia’s answer to Nicholas Stern) released an interim report in February indicating that Australia’s emissions cuts by 2050 should lie between 70 per cent and 90 per cent.

Lack of response

Andrew Peterson, the head of climate change practice at PricewaterhouseCoopers in Australia, said research conducted by PwC and East & Partners in November found that only three per cent of the 303 businesses surveyed had already implemented a strategic response to climate change.

“The main conclusion from the survey is that while Australian business leaders are aware of climate change as an issue and are keen to know more about how to respond, they are not ready for a carbon-constrained economy,” Peterson says.

Martin Wilder, the head of climate change strategy at legal firm Baker & McKenzie, says this includes Australian investment managers and superannuation funds – “many of whom for so long have been unable or unwilling to assess the climate risks and opportunities of their investments.”

Economic blackmail

One of the biggest fears has been the possibility that carbon intensive industries in Australia, such as aluminium smelters, would simply pack up their business and move to a more carbon-friendly jurisdiction

Fiona Wain, the head of Environment Business Australia, a lobby group supported by leading companies including banks, retailers and energy groups, says this is unlikely. She says decisions about locating new infrastructure will be predicated on issues such as taxation regimes and political stability, not on the marginal cost of carbon. “Such talk is economic blackmail,” she says.

Peterson agrees. “If [offshoring] were to occur, I don’t see how these businesses would have a social licence to operate.” His opinion, however, is based on the general expectation that a post-2012 global climate change treaty will include developing and developed countries.


Background: Carbon offshore concerns in the EU

Aluminum: Aluminium production as a sector is currently excluded from the ETS on account of its high exposure to international competition, although the EU energy package plans to include the industry post-2012.

Cement: The cost of energy has risen from 14 per cent to 25 per cent of the total cement production costs in Europe under the EU emissions trading scheme, according to a report by Dr Jean-Marie Chandelle, chief executive of Cembureau (European Cement Association) to the EU in May 2007. He blamed the cost of carbon passed on by the energy utilities under the first phase of the EU ETS (which notoriously earned European utility companies windfall profits).

According to Chandelle, cement imports to the EU are growing (6,800 millions tonnes from China alone in 2006) and there are signs, including the construction of large numbers of sea terminals for cement, that this is set to grow even further.