Macquarie University Applied Finance Centre Emissions Trading The Basics for Finance Professionals

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Macquarie University Applied Finance
CentreEmissions Trading The Basics for
Finance Professionals
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Latest IPCC Report
Limiting global temperature increase to 2C is
next to impossible. However, stabilisation at
3C is possible if global emissions peak in next
decade or so
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Achieving global greenhouse reductions bottom up
rather than top down
Source Prime Ministerial Task Group on Emissions
Trading
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Where is Australia headed?
100 MT
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Cap-and-trade emissions trading

• Identify emissions to be covered
• Determine cap
• Socially-determined level of abatement
• Issue permits up to that cap
• Allocate or auction
• Require emitters to hold a permit for each unit
  of emissions
• Determine non-compliance regime, and monitor
  compliance
• Allow permits to trade market determines the
  price

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The PMs Task Group Conclusion is that Australia
should

• not wait for the development of a global
  agreement
• set its own long term aspirational goal to reduce
  emissions
• embrace the least cost way to achieve that goal
• design an emissions trading scheme, specific to
  Australia, which would drive carbon reduction at
  least cost
• accompanied by an active international strategy
  to achieve a workable global scheme
• phase out other policy measures unless they are
  specifically directed at addressing residual
  market failures

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Emissions Trajectory
Source Prime Ministerial Task Group on Emissions
Trading
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EU ETS Prices
Source UK DEFRA
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Permit Allocation
Coverage 80 of emissions, 900 emitters
Source Prime Ministerial Task Group on Emissions
Trading
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There are a range of new and existing
technologies available to meet the challenge
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What carbon prices could we see?
50
Source Australian Business Roundtable on Climate
Change
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What will this do to electricity price
33/t
27/t
0/t
Source MMA modelling for the Emissions Trading
Taskforce
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Australian Government policy is for existing
state-based schemes to be wound up

• There are a range of existing policy measures
• MRET (Cwth)
• NSW NGACs
• Qld GECs
• And new measures have been proposed
• Qld LET
• NSW RET
• They can co-exist with a NETS question is
  whether they should
• Most measures run through to 2020

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Establishing the carbon market

• Markets are generally reliant on the development
  of
• defined mechanisms for creating and trading the
  property right
• a mechanism for recording trades and tracking the
  transfer in ownership
• a mechanism for clearing and settling trades
• rules setting out aspects such as
• admission to, and exit from, the market
• criteria on how the markets rules might be
  changed in the future
• how the markets rules are enforced and disputes
  are resolved
• how the property right is traded and the price
  discovered
• general administration of the market.

• Government to provide a strong and unambiguous
  commitment to an emissions trading scheme,
  including
• the period for which the emissions trading scheme
  would be legislated
• the likely coverage of the emissions trading
  scheme across economic sectors
• likely overall scheme caps and expected emissions
  trajectories
• the likely form of permit allocation
• the sectors and types of projects that would be
  eligible to generate offsets under any scheme.

Source Baker McKenzie Report to Task Group
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How do you assess a companys exposure to a price
on carbon?

• What is the companys full exposure to greenhouse
  gas emissions, including those linked to energy
  use, transport, logistics and supply chain?
• What is the companys exposure to emissions
  regulation cost?
• What other climate change impacts may affect the
  company?
• Are there supply side risks, either with
  electricity costs or high-carbon raw materials?
• Are there significant competitiveness
  implications?
• What would be the cost of reducing emissions by
  5, 10 or 20 ?
• Does climate change open up new market
  opportunities?

Source The Carbon Trust
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Understanding the supply chain. Case Study
Origin Total supply Chain Emissions 32.8Mt
Origins Equity Emissions 3.6Mt
Production Purchase Natural gas, LPG and other
products
Transportation
Customerconsumption
Natural Gas and LPG 10.3 Mt
Purchases 1.5 Mt
Gas purchasedfor Origingeneration
Electricity
Origin electricity steam generated 1.2
Mt Electricity purchased 16.5 Mt
0 Mt
Emissions accounted for at generation
Origins Australian Operations 2005/06
Represents 12 of Australias stationary energy
emissions
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Overview of CDP

• Investor survey representing US41 trillion
• 4th and 5th surveys included Australia and NZ
• Carbon becoming a mainstream business issue

CDP4 Survey Response
Source www.cdproject.net
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Climate Change and the ASX100

• There will be winners and at risk companies
• Depends to large extent on ability to pass on
  costs
• This doesnt take into account permit allocation,
  which can change the equation dramatically
• Permit allocation does not impact investment
  decisions
• Free permit allocation flows to shareholder equity

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Timetable for implementation
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Any questions?
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Up to 97 loss of corals
We need to stabilise at about 450ppm CO2 to have
a 5050 chance of staying below a reasonable rise
of 2oC
Up to 70 species loss
Greenland ice sheet commences irreversible
melting over some centuries
Proportion of loss ()
Greenland ice melt()
If we stabilise at 575ppm CO2
If we stabilise at 550ppm CO2
Ref CSIRO 2006