Regulation of climate change emissions in the Australian ......Regulation of climate change...
Transcript of Regulation of climate change emissions in the Australian ......Regulation of climate change...
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
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Trends in mean temperature, 1910-2002(Climate Action Group, 2004)
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(Climate Action Group, 2004)
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The climate change challenge (BCSE, 2003)
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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
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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)
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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)
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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)
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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)
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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
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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
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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”
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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
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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
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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
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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)
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The issue of abstraction: Australia’s Kyoto target
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1990
1992
1994
1996
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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?
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Australia’s GH Emissions 1990-03 (AGO, 2005)
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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
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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
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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
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Annual MRET targets for electricityfrom “additional” renewable energy
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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
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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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Wind Sugar Munwaste
Woodwaste
Hydro SHW Bio co-fire Ag bio Solar
9500 GWH 21400 GWH
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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
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MRET baseline: default is 1994-96 average output instead of LTA
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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
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Potential REC baseline error: example of Tasmanian hydro with long term storage & load growth
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GWH
Note: Estimates only; actual baseline is confidentialData: ESAA Annual Reports
Discretionin baseline:~1200GWH
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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
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RECs by year and type (BCSE, MRET Report, 2004)
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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
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Prediction of REC Prices (A$/MWH) (ORER, 2003)
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Year
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rice
average price
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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
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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
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NSW Retail Benchmark Scheme(www.greenhouse.nsw.gov.au/scheme/overview.htm)
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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?
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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
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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
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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
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Environmental effectiveness?– Example: A scenario of NSW GAS performance to 2025
(Nemtzow, NSW Power and Gas Conference, 2005)
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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
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Key features of the Queensland 13% Gas Scheme
From: Final Position PaperSept 2002available from:http://www.energy.qld.gov.au/gas/13percentgasscheme.htm
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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
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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
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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