Factoring in a climate-controlled carbon cost

In his first act as prime minister, Kevin Rudd moved to bring Australia back into the international fold by ratifying the Kyoto Protocol, almost a decade after it was agreed to in the Japanese city of the same name.

Labor has also committed to starting a national emissions trading scheme by 2010, a year earlier than the Howard government’s proposed start date.

But despite these broad commitments, many vital questions remain unanswered about future policies and their impact on business.

What will the emissions trading scheme look like? What influence, if any, will Kyoto have on its design? And most importantly, what will the price of carbon be?

Business leaders from the mining, petroleum and energy sectors who gathered at a recent WA Business News boardroom forum recognise that the game has changed; and now they want the policy makers to let them know what the rules of the game will be. 

Aspiring energy generator Aviva Corporation’s general manager, Richard Harris, told the forum industry needed a price signal so that it could make the right investment decisions.

He believes governments, both state and federal, will play a vital role in setting the framework for the future, locally and internationally.

“Like never before, business will be responding to how governments around the world, and locally, set the rules of the game,” Mr Harris told the forum.

“Kyoto was a start and my point of view is, yes, we should have been in it. It’s flawed, I know it’s flawed, but it’s a start and we should have been part of the game.”

Rio Tinto Iron Ore chief executive Sam Walsh said the need for regulatory certainty was important for the company in moving forward with its major projects.

“Our investments are very large, and having a moving feast of environment legislation or community views actually makes things quite difficult for us,” he said.

“We would rather much more clarity, because ultimately we believe technology and use of technology will be the solution to many of these issues.”

But in the absence of concrete legislation, quite a number of companies have already started preparing for the new economic paradigm, identifying the potential costs and opportunities of a carbon market.

Mineral sands miner Iluka Resources has been factoring in the price of carbon into its forward planning for new projects for a number of years.

Iluka’s group manager environment health and safety, Mark Edebone, said the company conducted sensitivity analysis for its new projects based on a carbon price of between $20 and $45 per tonne to quantify the potential impact of a carbon market.

“For new projects, like the Eucla basin, we put a dollar value on the carbon. We know how much carbon we’re going to produce with the new projects moving forward, and so we put a dollar amount on that,” Mr Edebone said.

One of the biggest problems was lack of regulatory direction regarding what the expectations would be for business.

“When you’re a company of our size you can’t afford to make mistakes, you don’t have a lot of spare cash laying around to be able to make mistakes. At $20 a tonne, $40 million is a lot of money in the Iluka scheme of things compared to the bigger companies,” Mr Edebone said.

“We need direction so that we can make informed decisions on a level playing field, if were going to move that way.”

Petroleum giant BP, which has been active in the development of biofuels and other renewable energy projects globally for more than a decade, has an established alternative energy division.

Among other things, it is investing $2 billion developing a carbon-capture power plant in Kwinana through a joint venture with Rio Tinto.

BP’s Kwinana refinery managing director, Thys Heyns, said it was in BP’s interest to be forward thinking.

“We may have a while to sort this out, but if we don’t sort it out in the time that we have, in the long run it’s going to be a massive issue for us and it’s going to cost more and have a more profound impact on our businesses,” he said.

“In short term, we need to continue to find more hydrocarbons because the world is fundamentally dependent on those right now.”

“We also need to continue to make better and cleaner products because we need to be responsible to our customers and the environment, and ultimately we need to be thinking about the end of a hydrocarbon world.”

Director of the Energy and Minerals Initiative at the University of Western Australia, Tim Shanahan, said with the state’s buoyant resources sector its key competitive advantage, the interaction between that industry and the environment was absolutely crucial.

He said that, in the absence of mandatory measures, mining companies had taken a leadership role in environmental management by investing in voluntary measures to increase energy efficiencies and reduce their emissions.

“I think the mining and energy sector in particular has got a good track record in thinking about these issues. And they recognise that for that industry to grow and prosper and have that licence to operate, particularly in WA, it needs to be seen to be meeting all the standards and doing the right thing,” Mr Shanahan told the forum.

“The mining industry has been in a leadership position. In some ways, the public’s perception of what the industry is doing hasn’t caught up with that.”

And while speculation mounts on the potential economic impact of policies aimed at combating climate change, such as emissions trading, WA Sustainable Energy Association chief executive Dr Ray Wills said the cost of change would not be as debilitating for industry as has been suggested.

“Australia emits 577 megatonnes of carbon emissions every year. If we put a price of $20 per tonne of carbon, its [going to cost] about $11 billion per year. At $40 a tonne it will be $22 billion a year. We’re really talking about a small change,” he said.

“If we set the price at $40 a tonne, much of industry has responded by saying that’s really going to be debilitating, I actually don’t agree.”