Regulation of climate change emissions in the Australian ......Regulation of climate change emissions in the Australian electricity industry. ... considerable and fall on future generations:

Masterclass for the Restructured Electricity Industry 24-26 August 2005 © CEEM, 2005

Regulation of climate change emissions in the Australian electricity industry

2Regulation of climate change impacts in the Australian electricity industry © CEEM 2005

Expected climate change impacts on Australia (Senate Environment Committee, 2000)

Australia probably “very negatively affected”:– Large size, long coastline, soil salinity, exposure to cyclones & El

Nino/La Nina cycle, economic dependence on agriculture & tourismLikely changes in next 50 years:– Higher temperatures, more frequent extreme weather events,

reduced available water resources, reduced area of arable land, reduced crop & livestock yield & quality, severe damage to coralreefs


Trends in mean temperature, 1910-2002(Climate Action Group, 2004)

4Regulation of climate change impacts in the Australian electricity industry © CEEM 2005(Climate Action Group, 2004)


(Climate Action Group, 2004)


The climate change challenge (BCSE, 2003)


Issues for Australia(Turton, Australia Institute DP66, June 04)

Drivers for high per-capita emissions:– Reliance on coal for electricity generation– Subsidised aluminium production– Reliance on cars instead of public transport

Comparison of country CO2 equivalent emissions:– Australia emits more than France & Italy and is only

20% lower than the UK


Australian electricity industry emissions scenarios to 2030 (Beyond Kyoto, PMSEIC Report, 2002)

Implications of these scenarios:• Essential to improve end-use efficiency• Avoid new coal power stations unless “zero emission”• CCGT only a transition technology unless “zero emission”

“Zero emissions” coal:carbon capture & storage (CCS)


CO2 capture technologies well established in oil and chemical industries:– Limitations with present solvent scrubbing, active research area for improvements

For power stations:– Post combustion capture from flue gases (14% CO2), or– IGCC with pre-combustion capture as shown below, This is the preferred method, in

which case turbines must be able to burn hydrogen-rich fuel

Capturing CO2 from power stations

IEA (2001)


Geosequestration options

Extensive experience with injecting CO2 to enhance recovery fromdepleting oil reservoirsLimited experience with injecting CO2 to extract coal bed methaneLimited experience with saline aquifers (one project in Norway)

IEA (2001)


CCS does not mean zero emissionsIGCC with geosequestration will still have CO2 emissions– Energy and cost tradeoff in CO2 capture from flue / gasifier stream;

also energy for transport and pumping underground

IEA (2001)

Coal IGCC with CO2 capture emits approx. 40% of standard CCGT (without capture)


Ethical considerations for CCSPrudent avoidance:– Choose lowest-risk option unless very expensive

Informed consent:– Consult those affected prior to implementation

Neither principle favours CCS:– Risks of human geosequestration are

considerable and fall on future generations:Proponents want government to carry this risk

– Fossil fuels are a safer form of geosequestration


A more balanced response…

Increased demand-side participation:– End-use efficiency, frugality, flexibility– Importance of information & decision making– Address problems of multiple decision makers

Low emission generation:– Renewables, “zero emission” coal, nuclear, …

No “magic bullet”– Importance of appropriate innovation


Approaches to environmental regulation

“Command & control”:– Direct regulation of environmental impacts

Eg, prohibition of the use of CFCs

Economic instruments (some examples):– Taxes on pollutants, e.g:

“Load-based licencing” by NSW EPA

– Tradeable permits, e.g :Hunter River salinity scheme

– Tradeable credits, e.g :MRET scheme “Renewable Energy Certificates”


Methods to internalise environmental impactsEnvironmental taxes:– Determine cost to pollute

Tradeable environmental permits:– Only permit-holders can pollute– Caps amount of pollution & should find its highest value– Grandfathering permits may reduce scheme effectiveness

Hybrid tax & tradeable permit:– Permit price cap limits the cost burden on the polluter

Pollution baseline & credit:– Polluter earns credit if pollution below agreed baseline– Baseline hard to set in objective manner


Hybrid industry development & climate change response schemes

Non-polluting technologies can be granted credits– For example, renewable energy technologies

Such schemes are hybrid schemes:– Pollution reduction

eg climate change emissions from electricity generation

– Industry development:Promotes the development of “clean” technologies

– Cost is likely to be higher than pollution reduction alone however, industry development adds additional value

Australia was an early adopter of a renewable energy credit scheme


Emission trading schemesCap & trade:– Regulated entity (RE) must surrender permits equal to

its emissions in each reporting period:Permits should be auctioned but are often “grandfathered”

– Constraining cap on total emission permits:Permit trading identifies cheapest way to comply

Baseline & credit:– RE credits = (assigned baseline) - (emissions)– Credits can be sold to non-complying RE’s

Penalty for non-compliance in either case:– Emission tax > the permit market-price


Key issues in regulating by tradeable environmental instruments

Relationship to the physical phenomenon:– Each instrument is an abstraction from reality

Design of trading arrangements:– Markets in the instruments & their derivatives

Effectiveness of the regulatory mechanism:– Measured by attributable changes in operation &

construction of assets– Some important issues:

Abstraction errors (including overlap), trading efficiency, compliance


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Australia Canada EU Japan NZ USA

% change1990-2008/12

Kyoto Protocol emission targets for selected ‘Annex B’ countries(-5.2% overall for Annex B countries, Dobe (ed), 1998)(-60% needed by 2050 to stabilise climate change, UK Govt Cttee, 2000)


The issue of abstraction: Australia’s Kyoto target

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100

200

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600

700

1990

1992

1994

1996

1998

2000

2002

2004

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2008

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2012

Mt C

02e

All other sectors (excluding land use change and

forestry)

Land use change and forestry

Projection

108%

108%ExceptLUCF

Which target has more relevance to climate change?


Australia’s GH Emissions 1990-03 (AGO, 2005)


The Renewable Energy (Electricity) Act 2000 (www.aph.gov.au)

Objects of the Act:– To encourage additional generation of electricity from

renewable energy resources– To reduce emissions of greenhouse gases– To ensure that renewable energy resources are

ecologically sustainableKey features:– A hybrid scheme for climate change response &

renewable energy industry development– Baseline & credit with tradeable certificates


The Renewable Energy (Electricity) Act 2000 (www.aph.gov.au)

Renewable Energy Certificate properties:– Each REC traceable to a specific MWh from an accredited

facility (nominal MWh for solar water heaters):Hence potentially a unique price

– Transferable & valid until surrenderedLiable entities (grids > 100 MW “capacity”):– Retailers or direct wholesale buyers:

Must surrender certificates equal to obligation:– By 14 February for prior calendar year– 10% leeway in accumulated obligation (bankable)

Self-generators exempt from liability


Mandatory Renewable Energy Target –a ‘designer’ market

non-zero baseline if pre-1997

9.5 millionRECS/yr2010-20

One REC for each 1 MWH of “new

renewable energy”

REC trading

REC Providers

create one REC for each

qualifying MWH

Liable Parties

surrenderRECs

Accordingto target &

market share

Scheme administratorcertifies REC creation

monitors liable party compliancemaintains REC register


Annual MRET targets for electricityfrom “additional” renewable energy

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5000

10000

15000

20000

25000

1 2 3 4 5 6 7 8 8 10 11 12 13 14 15 16 17 18 19 20Year (2000+X)

Existing Recommended

Some other MRET review recommendations (2004):•New projects to get 15 years of RECs•Shortfall charge to be indexed after 2010•Baselines to be published

The government didn’t accept the MRET review committee recommendations


A prediction of renewable energy to meet MRET target of 9500 GWH pa & a larger target of 21400 GWH pa(Australian Ecogeneration Association, “Ecogeneration”, Oct/Nov 2001)

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5000

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15000

Wind Sugar Munwaste

Woodwaste

Hydro SHW Bio co-fire Ag bio Solar

9500 GWH 21400 GWH


Risks of abstraction: Renewable Energy Certificates

MRET scheme REC properties:– Traceable to a specific MWh from an accredited facility

(nominal MWh for solar water heaters):Hence potentially a unique price

– Transferable & valid until surrendered– Awarded above a baseline but not “clawed back” below

it (“rectifier” error):Baseline setting subject to errorRectifier & correlated baseline errors lead to a systemic “drifterror” that may reduce the delivery of physical outcomes


MRET baseline: default is 1994-96 average output instead of LTA

020406080

100120140160

GWH per year

Year1 Year 2 Year 3 Year 4

Baseline GWHActual GWHRECs awarded

Rewards those generators with above-zero baseline & high annual variability(here 80,000 RECs over 4 years although ave. output = baseline)

RECs are awarded above baseline but not “clawed back” below it


Potential REC baseline error: example of Tasmanian hydro with long term storage & load growth

7500

8000

8500

9000

9500

10000

10500

1994 1995 1996 1997 1998 1999 2000 LTA

GWH

Note: Estimates only; actual baseline is confidentialData: ESAA Annual Reports

Discretionin baseline:~1200GWH


MRET performance to dateNow operating for three yearsRamping target easily met to dateChallenges:– Public opposition to some activities deemed to be eligible– Inadequate target, in terms of reducing emissions & developing a

viable renewable energy industry– Market information poor:

Can register RECs any time => information asymmetryAnnual acquittal too infrequent => poor price discovery

Non-zero baselines for pre-existing generators:– No single correct value for a non-zero baseline– Large hydro particularly problematic:

Annual output of some hydro scheme is set by demand not inflowHydro with multi-year storage can vary annual output to create RECs


RECs by year and type (BCSE, MRET Report, 2004)


REC requirement to 2020 is almost metThe Federal Govt. has rejected key review finding of a higher target to 2020BCSE estimates only approx. 700-800MW of new (post Jan04) projects required to meet existing target, and……project commitments > 500MW in 2004 leaves < 300MW new projects reqd


Prediction of REC Prices (A$/MWH) (ORER, 2003)

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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rice

average price


NSW Greenhouse Benchmark SchemePolicy intent– “to reduce greenhouse gas emissions associated with

the production and use of electricity and to encourage participation in activities to offset the production of greenhouse gas emissions.”(Overview to the NSW Electricity Supply Amendment Bill, 2002)

Implementation– Imputed greenhouse gas emissions targets for

Benchmark Participants (retailers & large end-users)– Baseline+credit imputed emission reduction activities

State-wide & activity baselinesImputed reduction credit for each eligible activity


NSW Scheme – Design‘NSW greenhouse gas abatement certificates’ or NGACS (each one imputed tonne CO2)Accredited providers create NGACs via– ‘New’ low-emission generation within the NEM– Demand Side Abatement (DSA) activities in NSW– Carbon-sequestration projects in NSW

BPs surrender NGACs equivalent to ‘their’ contribution to ‘excess’ state emissions above annual target (10.50 $/NGAC penalty)Trading between BPs and providers


NSW Retail Benchmark Scheme(www.greenhouse.nsw.gov.au/scheme/overview.htm)


NSW Scheme: some concerns‘Imputed’ rather than physical emissions:– Actual emissions could rise while imputed emissions fall:

Credibility of baselines, DSA & sequestration? Methane multiplier?

Many activities have non-zero baselines:– Difficult to set in a credible way

Fungibility of different categories activities: – “Market for lemons”: are trees equivalent to wind farms?– Rebound effects for DSA in the absence of price signals

Jurisdiction: new low-emission generation anywhere in the NEM can contribute to NSW targetPotential double counting with other policies:– MRET, GGAP, MEPS? Similar schemes in other states?


Environmental performance - abstraction

Schemes can physical caps targets (similar to ‘cap and trade’ with grandfathering)…or more abstracted ones (eg. NSW GAS)

Imputed linkage

Green-house policy intent

Imputed linkage

NGAS Legislated objectives Imputed

linkage

Liable party

require-ments

Imputed linkage

‘Baseline and

Credit’ rules

Actual

abatement activities


Environmental performance – fungibility?

Greenhouse tonnes ain’t greenhouse tonnes

Physical, measurable emissions from fossil-fuel consumption

≠ ≠Estimated net CO2 fluxes from select ecosystems

Hypothetical estimates of emission reductions from counter-factual BAU baselines


Example: Hazelwood Power Station

Hazelwood is spewing out an astonishing 1.58 Mega tonnes of carbon per TWh (over 17 Mt/a) and is the most polluting of the major coal-fired power stations WWF has come across in the OECD, and possibly the world!Not only is it the most polluting power station we've been able to find, but it's actually getting worse. A recent study found that between 1998-2004 Hazelwood's emissions intensity trend increased 2.7%...

Hazelwood is an accredited abatement certificate provider under NSW GAS + earned 250,000 NGACs in 2003– Through actions under Generator Efficiency Standards


Environmental effectiveness?– Example: A scenario of NSW GAS performance to 2025

(Nemtzow, NSW Power and Gas Conference, 2005)


Qld Gas SchemeBased on ‘gas electricity certificates’ or GECSAccredited providers create GECs for electricity produced above a baseline from eligble fuel:– Natural gas, coal seam gas & waste gas from coal

mining & petroleum processing– Baseline- production in year 2000– GEC quantity subject to “Queensland Utilisation

Factor” & network loss factorLiable parties surrender GECs equivalent to 13% of their electricity sales (or use) in QldTrading between liable parties and providersStart date: 1 January 2005


Key features of the Queensland 13% Gas Scheme

From: Final Position PaperSept 2002available from:http://www.energy.qld.gov.au/gas/13percentgasscheme.htm


Emission trading - issues in implementation of an Australian scheme

Emission trading options:– Cap & trade or baseline & credit– At point of emission or downstream– Sector-specific or economy-wide

Best choice for electricity appears to be:– Stationary energy sector cap & trade at point of emission– Permit auctions rather than “grandfathering”, with

recycling of revenue into facilitating transition– Possible addition of price ceiling and/or floor

Relationship with other schemes: – Compatible with MRET & carefully designed national

energy efficiency certificate (EEC) scheme


Other Design Issues for emission trading(F. Muller, 2003)

Target and Timeframe:– Should look beyond initial Kyoto timescale

Competitiveness of traded goods:– Border adjustments preferred to exemption

International integration (Kyoto, USA):– Should be possible to evolve to international scale

with cap & tradeBroader economy:– Compatible with economy-wide emission tax


Climate change policy recommendationsCoherent innovation strategy involving many options– Coal electricity + Geosequestration:

An important area of R&D but not ready for deployment– Early in demonstration phase (eg. US Clean Coal)– IEA: best applications may not be in electricity

– Renewable energy: Ready now but needs deployment support plus R&D

– eg. expanded MRET, PVRP– Energy efficiency:

Ready now but needs deployment support plus R&D:– eg. support for end-user decision-making

Emission tax or cap & trade with permit auctions

Documents

Regulation of climate change emissions in the Australian ......Regulation of climate change emissions in the Australian electricity industry. ... considerable and fall on future generations: