With the newly elected Australian Government and Prime Minister Rudd promising a domestic emissions trading scheme by 2010 and an expansion of the renewable energy target to 20 per cent (or 45,000 gigawatt hours (GWh) by 2020, the future for carbon markets in Australia looks promising. However, the work is just beginning. Ultimately the success of these schemes will depend on their design and on how much we have learned from previous and existing schemes both in Australia and overseas. The Clean Energy Council’s publication, Carbon Markets Report 2007, provides a comprehensive analysis of the performance of Australia’s carbon markets to date, and the outlook for and opportunities in each of these markets. This year the report also looks more comprehensively at the carbon markets of Europe and the United States.

Carbon or environmental markets are a government policy instrument aimed at dealing with the public policy problem of growing concentrations of greenhouse gases in the atmosphere resulting from human activities. They do this through an emphasis on price signals, which are achieved through creating a market – by mandating a certain target and allowing this target to be met through the use of tradeable certificates.

Each certificate symbolises a set unit of exchange that is a fraction of the market’s requirement or liability – such as a tonne of carbon dioxide (CO2) or a megawatt-hour (MWh) of renewable electricity or electricity saved through energy efficiency.

Market based measures may be focused on addressing the cause of the problem (pollution-based markets) or focused on driving the solution (solution-based markets). Pollution-based markets, such as the NSW and ACT Greenhouse Gas Abatement Scheme and the proposed Australian emissions cap-and-trade scheme, have their unit of exchange measured in tonnes of pollution (CO2 equivalent). Solution-based markets prescribe targets in terms of units of production from a prescribed sub-section of abatement technologies such as MWh of electricity from renewable energy (i.e. MRET) or from gas-fired generation (i.e. Queensland’s 13 per cent Gas scheme). Solution-based markets can be cleverly deployed to drive deployment of a specific abatement technology (or group of technologies) deemed to have strategic value, at a tightly contained cost that does not drive up the market clearing price of an entire product market (i.e. the electricity market).

Markets for deployment of renewable energy

Carbon Markets Report 2007 reports on MRET six years after it started. It is forecast that during 2006 the scheme was responsible for the generation of just over 5,000 GWh of new renewable electricity across the nation. When MRET was initiated in 2001, an export report concluded that bagasse cogeneration (using sugar cane waste) would likely be the primary beneficiary. In fact, as Figure 1 over the page shows, MRET has delivered a diverse portfolio of renewable energies, with hydro comprising 33 per cent of MRET’s market share, wind energy 21 per cent, solar water heating 20 per cent, bagasse cogeneration 10 per cent, landfill gas 9 per cent, wood waste 3 per cent, black liquor 3 per cent and sewage gas 1 per cent, along with other fuels with a smaller market share.

In Carbon Markets Report 2006, it was reported that the industry had stalled and there was no further incentive for any large-scale grid-connected project development and in addition the market would build to a surplus of 11 million Renewable Energy Certificates (RECs). However, since the publishing of this report many states and territories of Australia have announced or legislated their own renewable energy targets. At the time of printing the 2007 report, the Howard Government had announced their Clean Energy Target (CET) of 30,000 GWh by 2020 of low emissions energy (energy with emissions of less than 200 kg CO2/MWh), which was to essentially to roll all these state schemes together. (The Labor Opposition had yet to announce their commitment to extend the renewable energy target.) Consequently, the 2007 report models the demand and supply outlook for renewable and low-emissions energy certificates based on this 30,000 GWh CET. The outlook concludes that if there were no further renewable energy projects committed from now on, the surplus of RECs will become a deficit by 2011.

To meet the new demand forecast, nearly 4,500 MW of new low-emissions energy projects will be required – beginning with around 100 MW in 2007, followed by approximately 600 MW per annum over the four years to 2011 and then 400 MW per annum over the five years to 2016. The Clean Energy Council maintains a database of projects which are under development and evaluation and at present more than 5,400 MW of renewable energy projects are under development with 4,400 MW under evaluation. There is thus no shortage of project opportunities to meet the demand created by this expanded target or indeed the demand created by the new Government’s 45,000 GWh renewable energy target.

Queensland’s 18 per cent Gas Scheme

The Queensland Government announced in June 2007 that their 13 per cent Gas Scheme would be extended to 18 per cent, requiring electricity retailers in Queensland to source 18 per cent of their electricity from Queensland gas-fired generators by 2020 and operates through the creation and trade of certificates, where each certificate represents one MWh of eligible gas-fired electricity. The scheme has stimulated 8,083 GWh of new gas generation from eleven generators over 2005 and 2006. This scheme has been very successful in encouraging the development of the coal seam methane resource in Queensland. Based on the projected demand created by this scheme and the projected supply of certificates from currently operating and financially committed gas-generation plant, by 2011 the scheme will be in surplus and it continues to be well in surplus until the end of the scheme in 2020.

NSW and ACT: Greenhouse Gas Abatement Scheme

The report assesses the operation of the Greenhouse Gas Abatement Scheme (GGAS) to date (2003-2006). The GGAS scheme aims to reduce the greenhouse gas intensity of electricity consumed in NSW and the ACT based on a per-capita emissions target. GGAS has been responsible for 44.2 million tonnes of CO2 abatement over the years 2003-06. Projects which can be accredited to create NSW Greenhouse Abatement Certificates (NGACs) include generation projects - through activities such as methane destruction or improving generator efficiency, as well as generating electricity at an emissions-intensity lower than the NSW average. Carbon sequestration through tree planting and demand side abatement activities such as energy efficiency projects, fuel-switching and cogeneration also qualify. Large electricity users also have the option to manage their own emissions reduction. Each certificate is equal to one tonne of CO2 26 per cent of GGAS abatement so far has come from demand side abatement activities (which includes residential energy efficiency at 22 per cent), 55 per cent from methane destruction for power generation projects, 12 per cent from coal-fired generators for energy efficiency improvements or lower-emissions coal-fired generation and 10 per cent from natural gas-fired generation projects. NGAC creation for power generation can be seen in Figure 2.

With a national emissions trading scheme expected by 2010, it seems certain that GGAS will be phased out. The demand-supply balance for NGACs was modeled utilising three different perspectives of NGAC supply based on existing and committed projects and scenarios of DSA and coal efficiency NGACs supply. The projection indicates that even with a substantial drop-off in the supply of DSA NGACs the market will still have a plentiful supply of certificates in excess of demand for the rest of the scheme or at least until very close to its end in 2012.

International carbon markets

Across Europe and the United States there are a number of market-based scheme schemes in place or prospect that will either price carbon through emissions trading, drive the deployment of renewable energy or create a mandated market for energy efficiency improvement. Carbon Markets Report 2007 describes the main design features of these schemes.

Emissions Trading

Internationally, the European Union operates an emissions cap-and-trade scheme which is in place until 2012. In the US, while the Bush administration has to date refused to place mandatory controls on greenhouse gas emissions, there are two regional emissions trading schemes which have taken shape, involving a coalition of state governments - the north eastern states’ Regional Greenhouse Gas Initiative and the Western Climate Initiative. Furthermore, at the time of publication, within the US Congress there are ten proposed bills for greenhouse gas emissions cap-and-trade schemes that would apply nationally, with another in draft form.

Energy Efficiency

The European Union has set an energy efficiency target that would deliver a 20 per cent saving in total primary energy consumption by 2020. This target is binding on member countries but they have discretion on the policy mechanism by which they deliver on the target. Italy has a ‘white certificate’ scheme which became operational in 2005 and has the goal of reducing the country’s energy intensity by placing an obligation for gas and electricity distribution companies to achieve specific annual energy savings. France also introduced an energy efficiency target and associated white certificates scheme in 2005. The UK has a scheme similar to white certificates known as the Energy Efficiency Commitment (EEC), which applies to the residential sector. In the US a number of state government jurisdictions have begun to put in place requirements for energy utilities to deliver energy efficiency targets, often with the flexibility of achieving them through market-based trade-able certificate schemes.

Renewable Energy

In Europe, a number of European nations that have aggressively promoted the deployment of renewable energy have avoided the use of market measures like MRET and have instead set legislated premium prices known as feed-in tariffs for electricity generated from renewable energy. Sweden and the UK are the two European nations that have chosen to use market-based tradeable certificate schemes. In the United States, 50 per cent of the state governments have put in place renewable energy target schemes which have become major drivers of investment in renewable energy power projects.

An Australian emissions cap and trade scheme

The new Australian Government under Prime Minister Rudd has committed to implementing an emissions trading system by 2010. Carbon Markets Report 2007 discusses the key elements surrounding such a scheme based on a review of material from the Howard Government and state government groups that have reported on the design of an Australian scheme, including emissions caps, covered sectors and price caps. However the most important part of a cap and trade scheme - the emissions cap – has not yet been spelt out. Other elements that will influence the price of carbon under such a scheme include the switching price between coal and natural gas for power generation, the energy efficiency and renewable energy policies government chose to implement, and the underlying fundamental demand for energy.