Climate Change –a framework for action

1. Climate Change –a framework for action National Business Leaders Forum on Sustainable Development 21 May 2007, Brisbane Tony Wood

2. Introduction • What action is required? • What is the economic imperative? • A necessary, and possibly sufficient, policy mix?

3. EFF scenarios The emission paths were based around the well known A1T path from the IPCC’s Special Report on Emission Scenarios Gt Carbon

4. “Business As Usual (BAU)” “With Measures” reduces emissions by 105 MtCO2e beyond BAU To maintain a 108% target a 200 MtCO2e reduction from BAU is needed Australia’s 2020 greenhouse emission forecast shows significant growth - of which 90% comes from the stationary energy sector. Australian emission projections (AGO, Sept 2003) 108% target likely with Qld land clearing legislation delivering a further 25MT pa 80% To achieve an 80% target an additional 150Mt is required from 108% target – a total of 355Mt from BAU in 2020 “Current Measures” will deliver a reduction of~105 MtCO2e beyond BAU by 2020, but a further 100MtCO2e required to meet 108% target

5. Economic modelling results Economy wide impacts: Time path of projected Gross domestic Product (GDP) Australian GDP World GDP Source: The heat is on, Energy Futures Forum

6. Economic modelling results Electricity affordability: Share of household electricity costs in real average full time wages in 2050 Source: The heat is on, Energy Futures Forum

7. Economic modelling results Industry impacts: Changes in output in 2050 across mitigation scenarios Source: The heat is on, Energy Futures Forum

8. Current estimates of the abatement costs for existing technology show the magnitude of the task Early retirement of existing capital stock may be required to deliver deep cuts 8.5-9GW - $20B 10-11GW - $10B Gas provides an interim solution, but zero emission technologies and renewables are required … and the problem is still not solved

9. The global challenge – major shifts in the energy technology mix will be required Data source: ABARE, economic impact of climate change policy: the role of technology and economic instruments (2006)

10. The Australian challenge is even more acute – CCS is likely to be critical Data source: ABARE, economic impact of climate change policy: the role of technology and economic instruments (2006) But, always look for the assumptions ……………..

11. Need for Investment Certainty • The market is demonstrating the need for new generation investment • Lead times for base load investment are 4-6 years and assets have long lives. • In the absence of carbon risk, investment decisions would be driven by well-known factors. • Whilst carbon costs are already influential, current policy represents a major sovereign risk for new investment.

12. The Investment Conundrum • Current policy will not, of itself, deliver new investment in generation • Recent policy initiatives are not consistent with achieving greenhouse abatement at lowest cost • Mandated Renewable Energy Targets • Bluescope • HRL • Current policy initiatives have mixed objectives • MRET • GEC • The greatest concerns relate to sovereign risk and stranded asset risk • Government as a generator of last resort • Carbon Holidays

13. Role for National Emissions Trading • The political commitment to emission cuts is the driver of outcomes, both in emission profiles achieved and in consequential costs. • Emissions trading provides a least-cost pathway • Cap-and-trade emissions trading provides certainty of greenhouse outcome • Deploys existing technology as well as future technology • Mobilises capital into R&D activities, to lessen the reliance on government • The permit allocation methodology will impact existing and new investments

14. A Core Climate Change Policy package • A national long-term aspirational target in line with desired global action • Interim firm targets and reviews • No carbon holiday for new generation investment • A market-based carbon pricing scheme • Cap and trade emissions trading • Introduced from 2010 • Permits to be auctioned with exceptions for allocation for restructuring/compensation and trade exposed sectors in the absence of an international scheme • Funding for low and zero emission technology research, development and demonstration, eg LETDF, AP6 • Focused support for renewable energy (eg MRET) should be viewed as industry development Will immediately and fundamentally change investment decisions across the carbon economy

15. A Framework for Action Questions

17. Energy Futures Forum - findings • On the basis of risk assessment, it is likely that the global benefits of avoiding climate change will outweigh the global costs of mitigation. However, Australia’s energy intensive and trade exposed industries and the regions they are based in may be disproportionately impacted. • The Australian and World economies will continue to grow when carrying out greenhouse gas mitigation. Furthermore, electricity can be expected to remain affordable for households. • The cost of addressing climate change is lowest for Australia when global participation is high and Australia can choose from all available low emission technologies, in partnership with energy efficiency improvements and demand management. • Uncertainty regarding climate change policy in Australia increases investment risk, particularly in electricity generation. If the risks remain too high for too long then it could lead to higher electricity costs. • There are a wide variety of emission reduction policies which could be brought to bear in Australia at different times.