A large number of Australian companies are now taking action to reduce their greenhouse gas emissions, including through participation in the greenhouse challenge program. During June the Australian Greenhouse Office (AGO) is holding a series of seminars throughout Australia for members of its 'greenhouse challenge program' to acquaint them of new developments in the program, and to encourage new members. Freehills' environment partner and greenhouse expert, John Taberner, was invited by the AGO to participate in the seminar series to provide the latest information on legal developments in the greenhouse regulatory arena, both here and overseas.
Below is John's paper, 'The greenhouse challenge for business', which discusses the Australian Government's position, uncertainties regarding climate change, the implications of the policy impasse, local and international responses and the next steps for business.
The greenhouse challenge for business
My focus today is the challenge that the issue of climate change poses to business.
This challenge has two aspects:
- the effects on markets of climate change itself, and
- the effects on business of the responses by governments to climate change.
The Australian Government's position
Acceptance of climate change
There is no doubt that the Australian Government accepts both the reality of climate change and the need to implement measures to combat or mitigate it. Most recently, in April this year, the Minister for Environment and Heritage, Dr David Kemp, and the Minister for Industry, Tourism and Resources, Ian Macfarlane, said directly that '[the] Australian Government is serious about addressing climate change'.1
This commitment has a long pedigree. In his foreword to the December 2002 report, Living with Climate Change,2 Dr Kemp said: 'The question is not will the climate change but rather how it will change and what are the consequences for regions and sectors.' In an address at the annual Conference of the Parties under the UN Framework Convention on Climate Change in December 2003, Dr Kemp stated that Australia accepts the conclusions of the Intergovernmental Panel on Climate Change in relation to science as the most authoritative available.3 And in the recent Federal Budget, the government committed an additional $70.3 million to 'support a significant strengthening and refocusing of our actions to combat the effects of climate change'.4
An example of this commitment of the Australian Government is the Australian Greenhouse Office itself. Another is the government's reavowal of its aim to achieve the target for Australia under the Kyoto Protocol of 108 per cent of 1990 levels of greenhouse gas emissions in the period 2008–2012.
Targeted support measures
The Australian Government's actions to date in response to this commitment have taken the form of targeted rather than broad-based measures, and those targeted measures have been largely in the form of support and control measures rather than market measures. The support measures which the Australian government has put in place include the following:
- The Greenhouse Challenge seeks to encourage and assist industry to undertake voluntary GHG abatement programs.
- The Greenhouse Gas Abatement Program, managed by the AGO, distributes from a total of $400 million in government funding to assist large-scale projects for GHG emissions reductions or GHG sink enhancements.
- The Greenhouse Friendly Certification Program is a measure designed to mobilise consumer choice in favour of climate-change friendly products and services. It permits manufacturers and service providers to receive a 'Greenhouse Friendly' certification or logo for a product or service if the cradle-to-grave GHG emissions associated with that product or service have been offset by the purchase of emissions reductions from GHG abatement projects. The abatement achieved must be additional to an entity's normal or required investment in GHG abatement, must occur in Australia, must not be required abatement under Commonwealth or State legislation, and must not have been financed under another Commonwealth or State measure.
- The National Greenhouse Gas Inventory, the National Greenhouse Gas Projections and Emissions Analysis, and the National Carbon Accounting System, are informational in nature.
Targeted legislative measures
These supporting measures are supplemented by a a number of targeted control measures.
- The Mandatory Renewable Energy Target (MRET) requires the sourcing of an additional 9500 gigawatt hours per year of electricity from renewable sources by 2010. This requirement is backed up by a 'shortfall charge' of $40 per megawatt/hour below the target. Compliance is facilitated by a mechanism whereby wholesale purchasers of electricity can buy tradeable Renewable Energy Certificates which are earned by generators of electricity from renewable sources. Estimates from the Office of the Renewable Energy Regulator, which administers the program, show that more than $900 million worth of investment has taken place, with more than $1 billion in the pipeline. Approximately 190 power stations that run on renewable energy have been accredited, of which 84 have been commissioned since MRET came into operation. However, to date the program has made only a small contribution to GHG abatement. By the time of the Kyoto Compliance Period in 2008–2012, MRET is expected to contribute about 10 per cent of total current projected abatement. A report last year on the program's progress in its first two years of operation noted that the program had achieved its interim targets in that period and was well on the way to achieving its targets for the next two years.5 The report did note, however, that 'MRET is a relatively expensive abatement measure compared with a number of other Australian Government as well as some State and Territory government initiatives'.
- The government has also legislated to bring synthetic greenhouse gases which are used as replacements for ozone-depleting substances into its import, export and manufacturing licensing system.6 The legislation does not provide for any quotas or phase-outs, but it does give the government power to develop national end-use controls on the purchase, sale, handling and disposal of synthetic GHGs. When in effect, these end-use controls will replace current State and Territory requirements.7
- Another GHG-related control measure is the Mandatory Equipment Performance Standards (MEPS), which is administered in conjunction with the States. This program, which has been in place since 1999 and has a GHG abatement component (as well as broader goals), imposes minimum performance standards on a range of devices such as refrigerators, freezers, air-conditioners, fluorescent light ballasts and three-phase electric motors. The program includes offences and penalties for failing to meet the standards.
To date the government has shown no enthusiasm for more broad-based market measures such as a carbon levy or a national emissions trading system (ETS). The views of other stakeholders on a national ETS have been mixed. At least three views can be identified:
- A national ETS should not be instituted at this time. This is the view of the government itself and also of the report of the Cross-Sectoral Working Group of the Government-Business Climate Dialogue which took place in March and April 2003.8
- A national ETS should be instituted, and it should replace most or all existing Commonwealth and State-based GHG abatement measures. This is the view that was espoused by the COAG Energy Market Review (the 'Parer Report') in 2002.9
- A national ETS should be instituted, but it should be accompanied by a range of other policy mechanisms that can reach into those areas of the economy that emissions trading cannot. In particular, energy efficiency is likely to respond poorly to price-based measures alone, and needs to be the subject of direct regulation. This view is in line with the findings of the UK Energy White Paper and is strongly espoused by Hugh Outhred and his colleagues in a series of papers and submissions.11
Uncertainties regarding climate change
To a degree, these differences of opinion reflect the fact the question of climate change genuinely raises substantial contested issues. These include the following:
- whether global warming exists at all, and if it does, to what extent
- if global warming does exist, whether it is part of a natural cycle or caused, or exacerbated, by human activity
- whether global warming, if it occurs, will be a net benefit or detriment to particular sectors, regions, and nations.
Does climate change exist?
In Australia, there is still disagreement in prominent business circles about the threshold question of whether climate change, specifically global warming, exists. For example, the Business Council of Australia, representing Australia's 100 largest companies, has been unable to reach a common position on ratification of the Kyoto Protocol. In part this has been due to intractable differences of opinion regarding the impacts that ratification of Kyoto would have on the BCA's members.12 But recently the BCA's president, Hugh Morgan, has been reported as saying that there is not even a uniform view among BCA members that global warming exists.13
The prevalent view in industry, however, is that global warming is occurring. As an example, the Australian Chamber of Commerce and Industry, which is the peak industry association in Australia and represents more than 350,000 businesses, has said in a presentation in 2003 to the Australasian Emissions Trading Forum given by its Chief Executive Officer Peter Hendy, that 'there is no denying that carbon concentrations have risen since the industrial revolution … there is also no denying that global warming is taking place'.14 This is in line with trends overseas. For example, a report prepared for the Business Council of Australia by Jon Stanford of the Allen Consulting Group observes that in the United States, an earlier approach by a substantial part of the business community, which was to deny the reality of global warming, has given way to a broad consensus that accepts the weight of scientific evidence in favour of anthropogenic climate change.15
All Australian States and Territories also acknowledge the reality of climate change through, among other things, their participation in the National Greenhouse Strategy. Some States, notably New South Wales, Victoria and Queensland, have gone further and have put in place their own greenhouse abatement programs. New South Wales has also established its own Greenhouse Office, and has led moves towards the establishment of States-based emissions trading system.
Is climate change natural or anthropogenic?
Even assuming that global warming is occurring and that it is being accelerated by emissions of greenhouse gases, it has proven very difficult for economists to reach agreement on the methodology to be used to quantify those emissions in the future. This is a significant issue since the quality of government response must depend to a large degree on the predicted quantity of emissions to be generated over the coming decades.
The figures for future GHG emissions on which policy formulators most commonly rely are those from the Special Report on Emissions Scenarios by the Intergovernmental Panel on Climate Change,16 a body set up jointly by the World Meteorological Organisation and the United Nations Environment Programme. However, a recent study from the Lowy Institute for International Policy17 suggests that the methodology used in that report may estimate emissions projections by the year 2100 as 40 per cent greater than would be the case under an alternative, reasonable, methodology.
Is climate change beneficial?
Another factor in the uncertainty surrounding climate change is the question whether global warming would provide a net benefit to this or that sector, region or nation. It has been suggested, for instance, that one reason for Russia's reluctance to ratify the Kyoto Protocol has been a belief that global warming would provide net benefits for Russia, by leading to milder winters and high CO2 levels that would fertilise its crops.18
However, a recently published study prepared for the Pew Center in the United States considers the market consequences of global warming under various scenarios19 It concludes that even though, under some 'optimistic' scenarios, global warming would provide temporary net benefits for some sectors of the US economy such as agriculture, forestry and fishing, such benefits would be relatively small, and in the medium to longer term, all scenarios produce negative outcomes.
Despite emerging clarity on these contested issues, the Australian economy has presently a very limited understanding of what is likely to be contained in any effective and efficient climate-change policy framework.
In 1999, the AGO gave considerable thought to possible policy mechanisms in its series of four discussions papers and, most recently, it made a submission on the subject to a request from the 2002 COAG Energy Market Capital Review. In that submission, it was stated that '[in] addition to a national emissions trading system, there is likely to be a need for supplementary measures that address market impediments and aim to promote consistent incentives for abatement and innovation in those areas of the economy that an emissions trading system would have trouble reaching'. No further work of the sort undertaken by the AGO in 1999 and 2002 has since occurred.
There are critics of this policy impasse as regards its effects on the Australian economy. The criticism rests on two points. The first is that, as mentioned, the challenge posed to business by climate change has two aspects:
- the effects on markets of climate change itself, and
- the effects on business of the responses by governments to climate change.
While there persists the impasse to which I refer, little is occurring to address either challenge.
Attention to redressing the impasse has been diverted by debate over Australia's stance on the ratification of Kyoto. The Australian Government's position on ratification is well known, and has been sustained over a long period and is unlikely to change. But, essentially, it is irrelevant to the real question which remains, namely: if the Kyoto mechanisms are inappropriate for the Australian economy, what mechanisms are appropriate to address for Australia the effects of climate change on markets? This question arises irrespective of Australia's position on the ratification of Kyoto, and while it remains there is increasingly unacceptable uncertainty about the effects on business of the responses by the Australian Government to climate change.
Consequences of the impasse
The uncertainty is increasingly unacceptable because the policy challenge for governments, and the strategic challenge for business, posed by climate change is very substantial. Responding to climate change will be one of the great political and strategic challenges of our time. The reasons for this include the following:20
- The impacts of climate change are global, and the time-frames for developing and maintaining effective responses are very substantial. They are likely to extend over decades to a century or more.
- There are very many uncertainties as to the type and scale of the impacts entailed, and as to the most effective and appropriate responses to be untaken.
- The scale of the emission reductions required is very substantial. A global 50 per cent reduction is likely to be required over the next century, and developed countries are likely to be obliged to take greater cuts over a shorter time-frame.
- Most of these reductions will have to come from the curtailing of the use of fossil-fuels.
- Substantial societal transformations, not just in 'developed' societies, are likely to be required as regards the present dependence on fossil-fuel energy, particularly oil. Quite apart from considerations of the environmental impact of the use of this fuel, its security of supply over the next 50 years is a significant issue.
- Effecting these societal transformations will encounter various substantial economic and environmental factors. How will the development of possible future alternative systems be financed? Will financial resources be directed to this task and away from other pressing national and international societal tasks and, if so, to what extent?
- The transformations will also entail substantial geopolitical factors. The resource-security issues entailed in the transformation from fossil-fuel use to alternative energy systems are likely to be very substantial.
- While a wide range of options exist for reducing emissions by improving efficiency in the use of energy and the emission of greenhouse gases, and by improving the availability of renewable energy supply, the scale of existing capital investment decisions will continue to influence for decades the capacity of societies to finance these transformations.
- While technical innovation is essential, the scale of the innovation and implementation that is required (even assuming that it can be financed) will entail significant time lags.
- Carbon sequestration within the ecosystem offers only limited opportunities, and they are difficult to quantify and more risky than actual reduction in the use of fossil-fuels.
Adding to the business uncertainty surrounding the emergence of more broad-based regulatory measures in Australia is 'investor concern'. In the US, 2003 was a high-watermark in the number of GHG-related shareholder actions. Shareholders filed a record 31 global warming resolutions in the most recent round of general meetings of 28 North American companies. In general, the resolutions asked companies to disclose the financial risk of CO2 emissions and to assess the economic benefit of reducing the companies' emissions. In the case of a resolution filed at the American Electric Power Company, the largest single emitter of CO2 in the US, the resolution was supported by 26.9 per cent of shareholder votes and sought a report from the Directors on:
- the economic risks associated with the Company's past, present and future emissions of CO2, SOX, NOX and mercury and with the Company's public stance on its efforts to reduce these emissions, and
- on the economic benefits of committing to a substantial reduction of those emissions related to the Company's current business activities.
The significance of these developments for Australia cannot be underestimated: unlike in the US (where shareholder initiative is the principal driver), in Australia the proposed new section 299A of the Corporations Act, which is due to come into force on 1 July 2004,21 will require listed public companies to include in the annual report of directors to shareholders information that shareholders would reasonably require to make an informed assessment of, amongst other things, the financial position of the company and the company's business strategies and prospects for future financial years.
Clearly this must include matters of environmental (and social) significance that could impact a company's future financial prospects. These matters would include the direct effects of climate change on the company's activities and markets, and also the indirect effects of climate change through governments' actual and reasonably likely responses to it. This extra reporting requirement will affect a wide range of sectors directly because their operations are or are likely to be subject to climate-change related regulation or the opening up of climate-change related opportunities such as emissions trading markets. These sectors include energy generation and retail, transport, construction, waste management and agriculture.
Additionally, the changes will have a major impact on financiers and insurers, because of the altered risks affecting the enterprises which they fund or underwrite.
Financiers have also begun to take the initiative in recognising that they must factor the risks posed by climate change itself, and the possible government responses to it, in making major financing decisions. Already, 26 major institutions–including ABN Amro, the HSBC Group, the ING Group, and Westpac–have formally subscribed to the Equator Principles.22
The Equator Principles apply to project financing where the project is worth $US 50 million or more. Institutions that subscribe to the Principles commit themselves to providing loans directly to projects only where the Principles have been complied with. Compliance requires an initial screening process against stipulated environmental and social criteria. If, through this screening process, a project is found to come within the higher two of three categories of risk, financing may not proceed until an Environmental Assessment is carried out. The Environmental Assessment needs to take into account a range of concerns, including 'transboundary and global environmental aspects', which include climate change.
Carbon Disclosure Project
In November 2003, the Carbon Disclosure Project, which comprises 95 institutional investors representing assets in excess of $US 10 trillion, sent a survey regarding corporate responses to climate change to all of the FT500 Global Index companies, and received a response from 59 per cent of them.
One of the respondents, the ANZ Banking Group, indicated that it was reviewing its existing lending policies and criteria to take greater account of risks presented by climate change. The bank saw a risk of credit failings of corporate and institutional banking clients due to:
- physical asset loss due to extreme weather conditions
- failure to respond to climate change responsibilities
- loss of licence to operate due to inability to comply with newly introduced climate-change driven legislation
- poor performance of investments due to the commercial impacts just listed, and
- loss of reputation and market share.
The bank indicated that it was giving consideration to requesting and reviewing customer GHG emission management programs and performance.
In response to the same survey, Westpac Banking Corporation indicated that it too has commenced analysing the GHG risk profile of customers in its debt portfolio, particularly those customers operating in countries where GHG emissions regulations are being promulgated.
It can reasonably be expected that more institutional lenders will be taking similar steps.
Despite the policy impasse in Australia on the issue of climate change, it is apparent that climate change will be a continuing and active challenge for governments and business in Australia and a continuing and active focus of technical innovation, policy formulation, and legal regulation in Australia.
It may be useful, therefore, to briefly survey some of the responses to the challenge of climate change in some comparable OECD jurisdictions.
Given the wide range of uncertainties and disagreements outlined above, it is not surprising that there has been a wide range of responses from governments. These responses differ from each other in everything from philosophical or ideological underpinnings to the perceived urgency and magnitude of the problem to be addressed.
The European Union and its member countries have ratified the Kyoto Protocol, under which member States of the European Union have a target of achieving CO2-equivalent emissions of eigh per cent less than 1990 levels in the period 2008–2012.
The European Union Emissions Trading Scheme
In Western Europe, the dominant approach has been regulation, coupled with the development of the European Union Emissions Trading Scheme (EU ETS) which is due to start on 1 January next year. The EU ETS is to be introduced in phases. The initial phase covers the period 2005–2007. Subsequent phases are expected to span a five-year period.
In the initial phase, the EU ETS will cover CO2 emissions only. However, it is expected that other GHGs may be included in subsequent phases.
The EU ETS will cover between 12,000 and 16,000 installations in 25 countries in the European Union (27 countries if links are made to Switzerland and Norway). These installations account for more than 40 per cent of GHG emissions in the European Union.
The EU ETS is sector-based, and in its first phase will cover the following sectors:
- 'energy activities'
- production and processing of ferrous metals
- the minerals industry, and
- pulp and paper production.
Other sectors including the chemicals, aluminium and transport sectors, may be considered for inclusion at a later date. Greenhouse gases other than CO2 will also be considered in subsequent phases.
The EU ETS is a cap-and-trade scheme. It sets absolute targets for emissions and imposes a penalty, in the initial phase, of €40 per tonne of CO2 emitted in excess of the cap. In subsequent phases, the penalty will rise to €100 per tonne of CO2 (or CO2-equivalent, if other GHGs are brought within the ambit of the system). Payment of the penalty will not relieve entities of the responsibility for 'making good' the shortfall that led to the penalty–they will still have to surrender sufficient allowances in the following year to make up for the shortfall, as well as meeting their obligations for that year.
Apart from the EU ETS, the European Union has been in the forefront of measures for GHG emissions abatement.
The European Commission issued its first strategy to limit CO2 emissions in 1991. In 2001 the Commission issued a Directive23 on the promotion of electricity produced from renewable sources, which sets up a framework of country-specific targets which, if met, will see 'green electricity' account for 22 per cent of gross electricity consumption in 2010. This was followed by a negotiated agreement with European, Japanese and Korean car manufacturers to reduce CO2 emissions by 25 per cent by 2008 (for the European car manufacturers) or 2009 (for the Japanese and Koreans).
In June 2000, the European Commission launched the European Climate Change Programme (ECCP),24 whose goal is to identify and develop all the necessary elements of a strategy to implement the Kyoto Protocol
In its first phase, the ECCP set up a number of working groups to identify to identify abatement measures on a sectoral basis as well as through broad-based measures. In June 2001, the European Commission published its ECCP Report based on the findings of the working groups, These findings identified 42 possible measures which could lead to some 664-765 megatonnes of CO2-equivalent emissions reductions at a cost lower than 20€/tonne of CO2-equivalent. This is about double the emissions reduction required for the European Union in the first commitment period of the Kyoto Protocol with respect to 1990.
The second phase of the ECCP, covering the period 2002 to 2003, was concerned with implementing the recommendations of the first phase. Two of its recommendations are already in effect. One recommendation was to ratify the Kyoto Protocol, which took place on 31 May 2002. Another recommendation was to set up an emissions trading scheme, which as already noted, is due to begin operating on 1 January 2005.l
Additionally, an immediate set of 'priority actions' was implemented which are expected to achieve 122–178 megatonnes of CO2-equivalent emissions reductions. The European Commission also mandated further studies which, particularly in the area of sequestration in agricultural soils and forests. Other proposals being investigated include the regulation of fluorinated gases and the promotion combined heat and power biofuels.
In addition, the Commission has called for a gradual reduction, and even ultimate abolition, of vehicle registration fees. These would be replaced by annual road and fuel taxes, with a revenue-neutral outcome but with the tax burden related to the use of vehicles rather than to their acquisition. The Commission also strongly recommended that new vehicles be taxed on the basis of their CO2 emissions. At present, these are recommendations to member governments to consider in reforming their own taxation systems. However, the Commission reserved the right to present proposals for Community legislation on this or a similar basis.
It can be seen, therefore, that the European Community is responding with a wide range of measures both targeted and broad-based, and in the form of support, control and market measures. Furthermore, the search for new initiatives is ongoing. Currently, the European Commission is looking at new ways, of potentially any of these types, to promote the use of renewables in heating applications.25
In the United States,26 there has been generally a wait-and-see approach at the federal level, with the Administration setting a voluntary GHG intensity target, and providing significant support for research and development of climate-friendly technologies. A recent address by the United States Energy Secretary, Spencer Abraham,27 suggests that the Bush Administration is placing a great deal of faith in the development of major technological advances which, it is hoped, will allow the United States to 'leapfrog today's energy challenges'.
Initiatives cited by Mr Abraham include:
- efforts to speed the coming of the 'hydrogen economy', including an initial investment of $US 1.7 billion over five years to have hydrogen-cell fuelled vehicles on the roads by the end of the next decade, as well as an initial announcement of $350 million in grants and awards for the development of 'large-scale hydrogen demonstration projects'
- efforts to create the world's first zero-emissions fossil fuel plant, including $1 billion for the 10-year FutureGen project
- advanced work on geological carbon sequestration
- improvements in nuclear power generation, especially in the areas of safety, waste reduction and 'proliferation resistance', and
- development of the world's fastest supercomputer, to be 'open to all users', with the aim of achieving major research and technological breakthroughs, including in the field of energy generation in general and the development of a controlled nuclear fusion reactor in particular.
Although the Administration has shown relatively little interest in legal approaches to GHG abatement, there has been some interest shown by both Houses of Congress in enacting mandatory GHG abatement measures, but so far the Houses have been unable to agree on a text.
Meanwhile, State-based and private initiatives proceed apace.
Already, 28 States as well as Puerto Rico have developed or are developing action plans to reduce net GHG emissions. In many cases the commitment is to achieve 1990 levels or less by 2005 or 2006. Nine north-eastern States, responding to a suggestion by New York's Governor Pataki, have joined a Regional Greenhouse Gas Initiative with the aim of designing an inter-State CO2 trading scheme by April 2005.
Thirty-nine States and Puerto Rico have completed GHG inventories. New Jersey requires that facilities that must report any other air emissions must also report CO2 and methane (CH4) emissions. Wisconsin requires large emitters to report their CO2 emissions, and Maine is preparing to require reporting of GHG emissions.
Several States have initiated or are investigating carbon sequestration programs. Georgia, Nebraska, Wyoming, North Dakota, Oklahoma and Illinois are all investigating or adopting schemes that would promote the sequestration of CO2 in the soil–Georgia, for instance, through its No-Tillage Assistance Program, which leases 'no-till' equipment to farmers, allowing them to sow a crop without prior cultivation and with very little soil disturbance at seeding. Other States, such as Oregon, Minnesota and New Mexico, are concentrating on carbon sequestration in forests. West Virginia and Ohio are concentrating on sequestration in geological formations. The majority of these measures are support measures.
On the other hand, several States have instituted control measures, particularly for the promotion of the use of renewable energy sources by electricity utilities. Thirteen States have established renewable energy mandates that require energy utilities to generate a specific proportion of their electricity from renewable sources. Texas, with its Renewable Portfolio Standard, has established something in principle closer to Australia's Mandatory Renewable Energy Target scheme, in that its scheme requires a specific quantum of electricity to come from renewable sources by 2009.
There have also been important moves to control GHG emissions in the transportation sector. Although mainly in the form of support measures, a notable exception is the enactment by California of legislation which will require the adoption of GHG emissions standards for passenger cars and light trucks in model years 2009 and later. The measure is particularly significant because California is the only State with the authority to pass stronger air pollution standards than those set by the Federal Government, under a provision of the US Clean Air Act. However, that Act allows other States to elect to adopt California's standards, which opens the possibility that other States will adopt GHG emissions standards for light vehicles.
Dozens of major companies operating in the US have introduced their own voluntary programs. Their motivations for this include a belief that:
- as climate change is inevitable, their climate-friendly investments will pay off
- by taking the initiative, they can influence the form of future government regulation
- their emissions reduction efforts will drive innovation and improve their bottom line.
The principal private initiatives consist of a commitment to reduction of GHG emissions in general, or emissions of particular GHGs in particular, and the achievement of energy efficiencies.
A number of companies are also investing in emissions trading activities. Best known is the Chicago Climate Exchange (CCX), which provides for voluntary but legally binding arrangements for trading GHG emissions. Since the signing of a deal on 22 April 2004 between the CCX and the London-based International Petroleum Exchange, the 53 members of the CCX will be able to market their emissions to European Union countries. However, because the United States has no federal CO2 cap, European countries may only sell emissions to American companies and may not buy emissions from them.
Although the United States Administration appears to be relying largely on the hope of technological breakthroughs that will make it possible to continue to use fossil fuels at current rates, other jurisdictions in the United States, major private companies in the United States, and governments in Europe are adopting a wide range of voluntary and coercive measures based on the assumption that the response to climate change cannot be 'business as usual' in either the technical or the regulatory sense.
Government responses in Australia
The Commonwealth's stance
The core position of the current Commonwealth Government is that:
- the government is firmly committed to meeting Australia's target under the Kyoto Protocol of achieving GHG emissions at 108 per cent of 1990 levels in the period 2008–2012, but
- the government is equally firmly opposed to ratifying the Kyoto Protocol itself.
The reason for the commitment to achieve the Kyoto targets is evidently the government's belief that climate change is real and must be addressed, as explained earlier. It may also be influenced by the fact that government negotiators achieved a very good outcome for Australia compared to many other developed countries, in allowing for an actual increase in emissions relative to 1990 levels.
The reasons for the determination not to ratify the Kyoto Protocol have also been made clear by senior members of the government on several occasions. The fundamental reason is that the Kyoto Protocol does not impose targets on developing nations, and developing nations are, in several key sectors, direct competitors to Australia. Maintaining Australia's international competitiveness is a top priority for the government.
As the Prime Minister said at the Pacific Islands Forum in July 2002, 'We are unwilling for national interest reasons to sign up to Kyoto at present because of the absence of the developing countries and the US, but we are committed to meeting our obligations under Kyoto.' The same message came from Environment Minister David Kemp at the Sustainable Development Conference in Johannesburg in September 2002: 'Until we find a pathway for the involvement of the developing countries in a way where they do accept some obligations, then Australia does not see it in its national interest to ratify.'
It may be also that uncertainties in the physical science and the economics of climate change are contributing to a reluctance to commit to Kyoto. As Environment Minister told a conference in Milan last December: 'The more certain the science and economics, the more readily will governments commit to the actions, and inevitably the costs, needed to manage climate change risks. The more certain the science and economics the less the risk that governments will commit to the wrong policy responses - with all the costs that those could entail.'28
Results of the government's stance
Whatever be the undoubted uncertainties regarding climate change, it has not failed to escape the attention of some critics of the government's stance that it places Australia in the position of having to comply with all the obligations imposed by the Kyoto Protocol without entitling Australia to any of the corresponding benefits. In particular, as long as Australia has not ratified the Protocol, it will not be able to take part in its two principal emissions trading mechanisms, the Joint Implementation (for the transfer of emissions reduction credits, or 'Kyoto Units', between 'developed' countries) and the Clean Development Mechanism (for the transfer of Kyoto Units between a 'developed' and a developing nation29). Australia will be able to deal in Kyoto Units for domestic purposes, but no investment within Australia, from internal or external sources, will be able to generate Kyoto Units, and no investment from Australia into any other country will be able to generate Kyoto Units within Australia. There is some force in this argument.
In any event, the Commonwealth's stance has caused the States to pursue their own initiatives.
To varying degrees, all the States have pursued initiatives aimed at abating, offsetting, or sequestering GHG emissions.
All States have already put into place a basic legal framework that makes it possible to trade in forest-based carbon sequestration rights.30 Usually this is through the statutory creation of a right in the nature of a profit ŕ prendre which gives its owner a proprietary interest in the legal, commercial or other benefit of carbon sequestration in a particular forest. The right, which may be accompanied by ancillary rights to enter the land, establish and maintain a crop of trees, and construct buildings and works for this purpose, is tradeable apart from the forest itself.
Carbon sequestration rights are a targeted market-based measure designed to complement GHG abatement strategies. They can provide a credit for the amount of CO2 sequestered that is equal to the credit earned by reducing CO2 emissions to the same extent.
New South Wales
New South Wales has undoubtedly led the field in GHG abatement or offset activities.
NSW Greenhouse Gas Abatement Scheme
New South Wales has enacted the Greenhouse Gas Abatement Scheme,31 a measure that puts in place mandatory GHG reduction targets for electricity retailers. A benchmark target of five per cent reduction in per capital GHG emissions from 1989–1990 levels by 2007 has been set. Electricity retailers will pay a penalty price per excess tonne of GHG emitted above the target. The government has indicated this penalty will be around $15.
The Scheme allows electricity retailers considerable flexibility in achieving their benchmark obligations. Apart from direct reductions in GHG emissions, electricity retailers can:
- purchase emissions reductions resulting from carbon sequestration by eligible forestry projects
- invest in eligible renewable energy projects, or
- reduce demand by promoting energy efficiency measures.
One potential problem with this scheme derives from the existence of, and its interaction with, the Federal Mandatory Renewable Energy Target scheme. The Renewable Energy Certificates (RECs) which may be created under the federal scheme can also be brought to account under the New South Wales scheme. They also have a higher value than New South Wales Greenhouse Gas Abatement Certificates (NGACs) under the New South Wales scheme. Accordingly the market in NGACs is in practice restricted to those areas where the two schemes do not overlap, that is, carbon sequestration by forestry projects, waste coal mine gas capture projects and certain energy efficiency projects.
Another initiative, in the nature of a control measure, is the Building Sustainability Index (BASIX).32 This scheme will require the achievement of substantial improvements in energy and water use efficiency in residential buildings in, initially, the metropolitan area, but by mid-2005 throughout New South Wales. The scheme relevantly requires new residential developments, and eventually alterations to residential developments, to exhibit savings in GHG emissions of 25 per cent, rising to 40 per cent in mid-2006.
States-based Emissions Trading Scheme
More controversially, New South Wales, through its Premier Bob Carr, has also called for a national, but States-based emissions trading scheme, and has geared up the New South Wales Greenhouse Office to coordinate such a scheme. Of the other States, to date only Victoria has made a positive response. Whatever the prospects of such a scheme, it can at least be said that it goes against the thrust of most private-sector submissions to government-sponsored dialogues and inquiries on the subject of the proper approach to climate change and related matters. Such submissions usually emphasise the need for a co-ordinated national approach. For example:
- AGL, in its submission to the Review of the Operation of the Renewable Energy (Electricity Act) 2000, warned of 'a proliferation of State and Federal greenhouse emissions schemes which may dilute the policy focus and result in unwarranted compliance costs on energy businesses and therefore consumers'.33
- The Report to Ministers by the Five Working Group Chairs of the Government-Business Climate Change Dialogue held last year called for 'a national approach to greenhouse policy in place of the existing costly, confusing and fragmented state-by-state approach'.34
- The 2004 submission by the Australian Chamber of Commerce and Industry to the Senate committee considering the Kyoto Protocol Ratification Bill 2003 'opposed fragmented state-based policies'.35
The major initiatives in relation to GHG emissions from States other than New South Wales come from Queensland and Victoria.
Queensland has its 13 Percent Gas Scheme which aims to ensure that at least 13 per cent of electricity supply comes from gas-fired generation in 2005.36 Scheme, in combination with the Townsville Power Station and Gas Delivery Project, is expected to result is savings in GHG emissions of 24 million tonnes of CO2-equivalent over its 15-year life. The Queensland Government also announced, on 4 May 2004, the Queensland Greenhouse Strategy, which supplements the 13 Percent Gas Scheme with a range of other support and regulatory measures.37
Victoria also has its Victorian Greenhouse Strategy,38 whose centrepoint is a list of 59 'actions' that are predicted to deliver savings of 5 to 8.3 megatonnes of CO2-equivalent emissions by 2010. Apart from a commitment to GHG abatement from the government's own activities, the 'actions' are mostly in the nature of support measures. However, they include a number of control measures such as a requirement for all new residential buildings in Victoria to achieve a five-star energy efficiency rating.
The risks from uncertainty
The future of GHG policy in Australia is presently very uncertain. A comprehensive statement from the Australian Government is still awaited. A federal election is likely before November. The New South Wales Government's proposals for a state based emissions trading scheme is important but a work in progress, and it is widely acknowledged as a 'second best' option whose future may, in any event, be determined by the upcoming federal election.
Australia is in summary without direction on GHG policy.
The risks entailed in this are high:
- Australia is presently close to meeting its Kyoto target as a consequence of the fact that reductions in the rates of land clearing are presently offsetting emissions from increasing carbon based energy use. But this offset is unlikely to continue beyond 2012.
- Ninety per cent of Australia's exports go to Kyoto Protocol parties, and Australia has potential to be a significant net exporter of emissions credits and emission efficient technology but Australia has not ratified the Kyoto Protocol and is not presently part of any international emission trading market development.
- The international situation is evolving very rapidly, to the point indeed where Russian ratification of the Kyoto Protocol, and its coming into effect consequently, is a real and imminent possibility.
- Unlikely the United Kingdom (UK), Denmark and the Netherlands, Australia has taken no, certainly no active, pursuit of positioning in relation to Kyoto flexibility mechanisms in anticipation of the Kyoto Protocol's entering into force. It can be anticipated that there will be very substantial market growth in the CO2e in the remaining quarters of 2003 and beyond but Australia is very inadequately positioned to participate in this trade.
- The Australian economy will feel the impacts of the international regulation of greenhouse gases, whether or not Australia ratifies Kyoto. Delay in implementing the protocol has led to a proliferation of other initiatives. Denmark (in 2001) and the UK (in April 2002) both introduced limited trading schemes. As mentioned, in January 2005, the EU emissions trading scheme, which is comparable with but independent of the Kyoto protocol, will come into operation and will be the world's largest carbon trade emissions trading scheme. It will cover over 5,000 facilities and, it is anticipated, it will entail by 2008 an emissions trading market worth over €7.4 billion. States in the United States (Origan, Washington and Massachusetts and New Hampton) have individually or collectively (under for example the NESCCAP of 2001 between Connecticut, Maine, Massachusetts, New Hampton, New Jersey, New York, Rhode Island and Vermont) implemented or proposed emissions trading or regulatory schemes of various types addressed to regulating greenhouse gas emissions. At the federal level in the United States, over 40 Bills, resolutions or amendments addressing climate change has been introduced into the current Congress. Private initiatives, such the Chicago Climate Exchange, have also emerged in the United States. Canada and Japan are also actively exploring emissions trading options.
The real risk for Australia is the risk of being left behind by these developments. A comprehensive policy framework for greenhouse gases is needed now in Australia.
Steps for business
Meanwhile, businesses can place themselves to better deal with the emerging climate change regulatory landscape.
Businesses need to take immediate positive steps to anticipate the effect of the proposed new section 229A of the Corporations Act, which is due to come into force on 1 July 2004. As already noted at 1.4(d)(1) above, section 229A will have the effect of requiring public companies to disclose in their annual reports information as to environmental matters that shareholders would reasonably require to make an informed assessment of the financial position of the company and the company's business strategies and prospects for future financial years. Clearly this will be significant for any due diligence undertaken in the context of a sale, refinancing, or merger.
Other activities that businesses can undertake immediately, in consultation with not only their technical experts but also their lawyers, include the following:
- They can baseline their emissions in anticipation of future baseline-based emissions restrictions.
- They can establish internal emissions trading systems.
- They can establish emissions trading arrangements with other businesses.
- They can develop their own climate change strategies, and promote these to government.
- They can investigate opportunities under the Joint Implementation and the Clean Development Mechanism of the Kyoto Protocol, based on both scenarios where Australia does and does not ultimately ratify the Protocol.
More generally, with good technical and legal advice, businesses need not be passive recipients of government-initiated climate change measures. Businesses can become important participants in shaping the future regulatory environment in which they will have to operate.
1. Australia still on Kyoto target – greenhouse intensity down 31%' (Media Release, 13 April 2004).
2. Living with Climate Change: An Overview of Potential Climate Change Impacts on Australia (Australian Greenhouse Office, 2002).
3David Kemp, 'Australia's Domestic Climate Change Approach' (Address to the Renewable and Sustainable Energy Roundtable Side-Event, COP 9, Milan, 9 December 2003).
4. Minister's Foreword, A Sustainability Strategy for the Australian Continent: Environment Budget Statement 2004–2005 (Australian Government, 11 May 2004).
5. Renewable Opportunities: A Review of the Operation of the Renewable Energy (Electricity) Act 2000 (Australian Greenhouse Office, September 2003).
6. Ozone Protection and Synthetic Greenhouse Gas Management Act 2003 (Cth).
7. The government issued a call for submissions regarding the end-use regulations on 13 January 2004. It was expected to issue regulations by the end of May 2004.
8. Government-Business Climate Change Dialogue: Report to Ministers by the Five Working Groups: Overview' (Australian Greenhouse Office, April 2003).
9. Council of Australian Governments, Towards a truly national and efficient energy market, Energy Market Review Final Report, 2002.
10. UK Energy White Paper (UK Department of Trade and Industry, 2003).
11. For example, H Outhred, I McGill and M Watt, 'Response to the COAG Energy Market Review Draft Report: Towards a Truly National and Efficient Energy Market' (AEPG submission, available atwww.ergo.ee.unsw.edu.au); I McGill, H Outhred and K Nolles, 'National Emissions Trading for Australia: Key Design Issues and Complementary Policies for Promoting Energy Efficiency, Infrastructure Investment and Innovation' (2003-2004) 11(1) Australasian Journal of Environmental Management 78–87 at 81, 86.
12. 'Kyoto Position' (Business Council of Australia, 28 February 2003).
13. 'Impasse on global warming deepens', John Garnaut, Sydney Morning Herald, 17 May 2004, p 7.
14. 'A Business Perspective on National Emissions Trading Scheme' (Presentation to the Australasian Emissions Trading Forum, 12 March 2003, Peter Hendy, CEO).
15. 'The Cost of Kyoto for Australia', Jon Stanford, The Allen Consulting Group, p 32.
16. Intergovernmental Panel on Climate Change, Special Report on Emission Scenarios (Nakicenovic et al., 2000).
17. 'Long Run Projections for Climate Change Scenarios', Working Papers in International Economics No. 1.04, Warwick J. MacKibbin et al., May 2004.
18. Dennis Avery, 'Why is Russia's Putin Refusing to Sign the Global Warming Treaty?' (Center for Global Food Issues, 2 October 2003,www.cgfi.org/materials/articles/2003/oct_2_03.htm viewed 19 May 2004).
19. 'U.S. market consequences of global climate change: Prepared for the Pew Center on Global Climate Change', Dale W. Jorgensen et al., April 2004.
20 Iain McGill, Hugh Oughtred and Karel Nolles, 'National Emissions Trading for Australia: Key Design Issues and Complementary Policies for Promoting Energy Efficiency, Infrastructure Investment and Innovation' (2003-2004) 11(1) Australasian Journal of environmental Management 78–87 at 78–79.
21. Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) (CLERP 9 Bill).
22. See list at www.equator-principles.com, viewed 2 June 2004.
23. Directive 2001/77/EC of 27 September 2001.
24. 'European Climate Change Programme',europa.eu.int/comm/environment/climat/eccp.htm, viewed 31 May 2004.
25. 'Heat from Renewable Energy Sources: The RES-H initiative and related Directives',europa.eu.int/comm/environment/climat/pdf/renewable_energy_srcs_heat.pdf, viewed 31 May 2004.
26. For this section, I express my gratitude to the authors of 'Climate Change Activities in the United States: 2004 Update' (Pew Center for Global Climate Change).
27. Spencer Abraham, Remarks to the Royal Institute of International Affairs, Chatham House, London, 20 May 2004.,www.energy.gov/engine/content.do?PUBLIC_ID=15930&BT_CODE=PR_SPEECHES&TT_CODE=PRESSRELEASE, viewed 24 May 2004.
28. David Kemp, 'Australia's Domestic Climate Change Approach' (Address to the Renewable and Sustainable Energy Roundtable Side-Event, COP 9, Milan, 9 December 2003).
29. Technically, the relevant distinction is between 'Annex I' countries, namely those who where members of the OECD in 1992, along with the Russian Federation and several Central and Eastern European States, and 'non-Annex I' countries, which comprise the remainder.
30. New South Wales: Carbon Rights Legislation Amendment Act 1998; Queensland: Forestry and Land Title Amendment Act 2001; South Australia: Forest Property Act 2000; Tasmania: Forestry Rights Registration Act 1990; Victoria: Forestry Rights Act 1996; Western Australia: Carbon Rights Act 2003.
31. Electricity Supply Amendment (Greenhouse Gas Emission Reduction) Act 2002 (NSW); Electricity Supply (General) Amendment (Greenhouse Gas Emission Reduction) Regulation 2002 (NSW); Greenhouse Gas Benchmark Rules 2003 (NSW).
32. Department of Infrastructure, Planning and Natural Resources atwww.iplan.nsw.gov.au/basix/, viewed 2 June 2004.
33. AGL submission to the Review of the Operation of the Renewable Energy (Electricity Act) 2000, 19 May 2003, p 3.
34. Report to Ministers by the Five Working Group Chairs of the Government-Business Climate Change Dialogue, April 2003, p 10.
35. ACCI Submission to the Senate Environment, Communications, Information Technology and the Arts Committee on the Kyoto Protocol Ratification Bill 2003, February 2004, p 2.
36. Queensland Energy Policy: A Cleaner Energy Strategy (Queensland Government, May 2000).
37. Queensland Greenhouse Strategy (Queensland Government, Environment Protection Agency, May 2004).
38. Victorian Greenhouse Strategy (State of Victoria, Department of Natural Resources and Environment, 2002).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.