Energetics and CDP - Closing Australia's carbon chasm 2013

Closing Australia’s carbon chasm 22 November 2013

Project details

CDP Contact

Energetics Contact

James Day

Dr Peter Holt

About Energetics

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Energetics is a specialist management consultancy celebrating 30 years of providing energy and carbon advisory services and solutions to Australia’s leading businesses and governments.

“Energetics” refers to Energetics Pty Ltd and any related entities.

We partner with our clients to: • benchmark and optimise energy performance, • find cost savings, and • reduce technology, compliance and financial risks to position for market leadership and drive investor confidence.

About CDP CDP is an international, not-for-profit organisation providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information.

We work with market forces to motivate companies to disclose their impacts on the environment and natural resources and take action to reduce them. CDP now holds the largest collection globally of primary climate change, water and forest-risk information and puts these insights at the heart of strategic business, investment and policy decisions.

Team Energetics Dr Peter Holt, Helen Wetherell, Dr Mary Stewart, Lauren Ainscough

CDP James Day, Maia Kutner, Leyla Basacik

© 2013 Energetics. All rights reserved.

This report is protected under the copyright laws of Australia and other countries as an unpublished work. This report contains information that is proprietary and confidential to Energetics and subject to applicable Federal or State Freedom of Information legislation, shall not be disclosed outside the recipient’s company or duplicated, used or disclosed in whole or in part by the recipient for any purpose other than for which the report was commissioned. Any other use or disclosure in whole or in part of this information without the express written permission of Energetics is prohibited.

Disclaimer This report has been prepared by Energetics based on information available at the time of publishing. The information contained in this report is of general character only and while Energetics has endeavoured to ensure that information contained in this report is accurate and based on reliable sources, no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Energetics nor any of its employees accept liability to any person for loss or damage arising from the use of this report.

To the extent that this report contains prospective financial information, that information has been based on current expectations about future events and is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from the expectations described in such prospective financial information. Past financial performance is not indicative of future financial performance.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular organisation. For this reason, Energetics does not endorse or recommend any investment decisions based on information provided in this report. Before you rely on or use the information in this report, you should independently verify and check the accuracy, completeness, reliability and suitability of the information contained within it and seek independent professional advice on how investment in the product will affect your specific situation.

Australian Financial Services License (AFSL # 329935).

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Executive summary

What do NGER and CDP schemes tell us about our emissions?

Can Australia close its carbon chasm?

Can Australia go further and meet emissions reduction targets of 15-25%?

Are the largest emitters helping to close the carbon chasm?

Which industries are setting emissions reduction targets?

Recommendations and what the future may hold

This report considers the contribution that Australia’s corporate sector is making towards the achievement of the nation’s greenhouse emission reduction targets for 2020 and beyond.

Companies have a significant influence on Australia’s ability to meet its reduction targets, as they are responsible for producing over three-quarters of Australia’s carbon emissions.

Australia is a significant emitter of greenhouse gas emissions (GHGs) in comparison to other countries, and was the world’s ninth largest emitter in 2010. There is bipartisan support across both major Australian political parties to reduce national carbon emissions by at least 5% below 2000 levels. There is also bipartisan commitment to more aggressive reduction targets of 15% and 25% by 2020, conditional upon a global climate change agreement coming into force.

This report finds that Australia is facing a ‘carbon chasm’: an overshoot of 20 – 131 million tonnes of annual carbon emissions by 2020 between its forecast carbon emissions and three possible carbon emission reduction targets of 5%, 15% and 25% below 2000 levels by 2020.

Where emissions reduction targets are set by CDP reporting companies, we can see that 1.4% of the task to achieve the minimum national 5% carbon reduction target will be met by Australian business.

If current government programs and policies are not continued, then the carbon emissions reduction task facing Australia is much more challenging, particularly if 15% or 25% reduction targets are set or become necessary. The new government, elected in September, has not yet developed plans for how to scale their climate change policy, known as the “Direct Action” plan, beyond a national reduction target of 5%, and it is not clear how Direct Action could scale up without much larger expenditures of taxpayer funds.

Energetics’ analysis is based on three information sources: data disclosed by 414 companies through NGER which is Australia’s mandatory National Greenhouse and Energy Reporting scheme; 308 additional companies reporting Australian emissions through CDP, and Australia’s National Greenhouse Accounts. These datasets provide valuable insights into Australia’s possible pathways to achieving its national emissions reduction goals.

Closing Australia’s carbon chasm will require bipartisan political support to provide the setting for policies and programs that can deliver certainty for Australian business. This, together with a stronger call for business to set and work to targets, will drive emissions reduction activity.

Furthermore, this analysis assumes that the government policies and programs currently in place are continued through to 2020.

This position is not assured, given the recent change in government.

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Foreword

I would like to see Direct Action address Australia’s carbon chasm to 2020 and beyond.

For readers of “Closing Australia’s carbon chasm” this report is published at a time of transition in Australia’s climate change policy framework. A new national government was elected in September which campaigned heavily on the promise of removing the carbon price. An alternative approach has been put forward in the form of the “Direct Action” plan and the new government has re-stated their commitment to achieving the 5% national emissions target set for 2020. However, Direct Action exists only as a set of principles and is currently in the consultation phase of its design.

I would like to see Direct Action address Australia’s carbon chasm to 2020 and beyond.

Here, the team provides insights into the relative contributions being made by emissions reduction programs operating across both federal and state jurisdictions. Some of those federal programs are expected to remain, however others will be dismantled once a repeal of their enabling legislation takes place.

A consistent theme throughout the business feedback I have seen is the need for certainty in climate policy. The failure of successive governments to achieve bipartisan agreement on a mechanism to reduce national greenhouse emissions has created a risk management issue for Australian business. We call for an end to the uncertainty – for our federal and state governments to identify areas of climate policy where they can achieve bipartisan agreement. We particularly call for bipartisan support for the development of a pathway to achieve emissions reduction targets beyond 2020.

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Australian businesses require policy settings that support investment especially in major capital projects that require substantial lead times. Australia’s energy sector provides a stark example of the effects of uncertainty in Australia’s climate change response with delays in both investment in conventional power generation and supply infrastructure, and large scale renewable projects remaining on hold.

As advisors on energy and carbon management for nearly 30 years, I have seen the rise and fall of support for action on climate change against the backdrop of increasing certainty in the science of climate change and a growing understanding of its impacts. As we look to the future and the deepening problem of climate change, businesses in Australia require a clear and stable policy framework that supports investments in emissions reduction measures that not only contribute to Australia’s climate change response, but also deliver efficiencies, productivity gains and ultimately, give rise to innovation.

Tony Cooper Chief Executive Officer Energetics

Foreword

Carbon dioxide levels in the atmosphere are continuing to increase and passed the milestone level of 400 parts per million for the first time ever in human history in May this year.

Carbon dioxide levels in the atmosphere are continuing to increase and passed the milestone level of 400 parts per million for the first time ever in human history in May this year. Scientific evidence shows that we need to cut global emissions by 80-95% below 1990 levels by 20501 in advanced economies like Australia if we are to avert dangerous climate change and continued disruption to our weather patterns.

The Australian Government has committed to unconditionally reducing the country’s emissions by 5% below 2000 levels by 2020, and by “25 per cent compared with 2000 levels by 2020 if the world agrees to an ambitious global deal capable of stabilising levels of GHGs in the atmosphere at 450 ppm (parts per million) carbon dioxide equivalent (CO2-e) or lower”.2 In its recent review of Australia’s greenhouse gas emission reduction targets, the Climate Change Authority has recommended in its draft report that a reduction target of 15% below 2000 levels by 2020 is the minimum target consistent with what is an equitable share for Australia of the estimated global emissions budget to 2050. It has also presented a second target option of a 25% reduction below 2000 levels by 2020, and a 40-50% reduction by 2030.3 This report investigates the extent to which companies reporting emissions in Australia through CDP can help achieve these emission reduction targets, based on the emissions reduction targets reported by the 300+ companies that reported emissions in Australia through CDP in 2010-2012.

As some three quarters of total global emissions4 are generated by corporations globally, the role of business in helping achieve the required emissions reductions is crucial.

This report is part of a broader “Carbon Chasm” series of reports that have been published by CDP in recent years analysing corporate emission trends. Other reports have analysed emission trends amongst companies listed on the USA’s S&P 100, the UK’s FTSE 100, South Africa’s JSE 100 as well as the Global 100. This is the first report in the carbon chasm series to research companies on a geographical basis, and analyses emissions data reported by both ASX 200 companies as well as other large international companies that reported emissions in Australia through CDP. Further work is needed by Australian companies to help Australia meet its emission reduction targets. Emission reductions can be achieved in every company, through energy efficiency, behaviour change, fuel switching, changes in processes and improved technology, many of which generate cost savings, often with a short payback.

More and more companies globally are identifying and acting on these opportunities to reduce emissions because they make good business and environmental sense.

James Day Director – Australia and New Zealand CDP

We are delighted to be working with Energetics to gain a better understanding of how Australian companies are tackling emissions reductions, based on this unique analysis of CDP data, and data from Australia’s mandatory National Greenhouse and Energy Reporting Scheme (NGER).

1 Intergovernmental Panel for Climate Change Fourth Assessment Report (2007) 2 http://www.climatechange.gov.au/climate-change/greenhouse-gas-measurementand-reporting/australias-emissions-projections/australias 3 Climate Change Authority (2013), http://climatechangeauthority.gov.au/Node/100 4 http://www.pewclimate.org/facts-and-figures/international/by-sector

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Table of contents

Executive Summary............................................................................... 3

Appendix A. Comparison of CDP and NGER schemes.................. 21

Foreword

............................................................................................ 4

Differences between CDP and NGER............................................. 22

1. Introduction......................................................................................... 7

What do the two data sets tell us?.................................................. 22

2. Australia’s carbon chasm................................................................. 9

Businesses have varied responses to emissions reporting............. 24

2.1 What do the NGER and CDP schemes tell us about

Australia’s emissions?................................................................ 9

Appendix B. Details of impacts of programs................................... 25

3. Can Australia close its carbon chasm?........................................ 10 3.1 What is driving the reductions in emissions seen in

the latest reporting year?....................................................... 10 3.2. Can Australia sustain these emission reductions

until 2020? The impact of government policies

and programs.......................................................................... 11

3.2.1. The impact of corporate emission reduction

targets reported though CDP..................................... 13 3.3. Can Australia go further and meet emissions

reduction targets of 15% and 25%?...................................... 14 3.4. Global consensus progresses at a glacial rate................... 14 4. Are Australia’s largest emitters helping to close its carbon chasm?................................................................................ 15 4.1. The mix of emissions reduction initiatives ............................. 15

4.1.1. Utilities lag in implementing emission reductions...... 15

4.1.2. The materials sector is providing a high level of emissions disclosure............................................................ 15

4.1.3. Energy sector initiatives lower emissions and

improve business efficiency........................................ 15

4.2. Which industries are setting emission reduction targets?.................................................................................... 16

4.2.1. The majority of companies are not currently

reporting carbon reduction targets........................... 16

4.2.2. Companies that did report emission reduction

targets mainly used intensity targets.......................... 17 5. Recommendations. What the future may hold.

Businesses need to be ready. Governments need to provide policy certainty................................................................................ 18 5.1. Recommendations................................................................. 18 Recommendation 1: Political parties should identify areas of policy for bipartisan support.................................................... 18 Recommendation 2: Bipartisan political support be sought to develop a pathway for emissions reduction targets to 2050 and beyond.......................................................................... 18 Recommendation 3: A bipartisan and whole of system approach to Australia’s energy system...................................... 19 Recommendation 4: Analysts and fund managers should be transparent in incorporating and evaluating climate risk into investment decisions.............................................................. 20 Recommendation 5: Businesses should set emissions reduction targets........................................................................... 20 Recommendation 6: Expand CDP’s reach to include Australia’s utilities and encourage more participation from the energy and industrials sector........................................ 20 5.2. Conclusion............................................................................... 20

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Contact Details..................................................................................... 28

1. Introduction

Contrary to the widely held view in domestic political debate, Australia is a significant producer of greenhouse gas (GHG) emissions in comparison to other countries. Australia was the ninth largest emitter of greenhouse gas emissions (GHGs) in 2010, responsible for emitting 1.6% of global GHGs in that year1 despite only having 0.3% of the world’s population.2 The International Energy Agency (IEA) estimated that Australia’s 2010 per capita emissions of 17 tonnes of CO2 per year were the tenth largest in the world, exceeded only by a group of mostly large oil-producing nations such as Qatar, Kuwait and the US.3 Australia is also the world’s ninth largest energy producer with around 2.4% of the world’s energy production.4 However, Australia’s domestic energy consumption only represents one-third of its total energy production (including uranium)5 as much of its energy production is exported, especially coal, uranium and natural gas.

Australia’s national carbon emissions reduction targets There is bipartisan support across both major Australian political parties to reduce national GHG emissions by at least 5% below 2000 levels.6,7 Prior to the recent national elections, Australia’s Labor party had governed since 2007 during which time they committed to a 15-25% reduction target by 2020, conditional upon a global climate change agreement coming into force. Over the longer term, Labor also expressed a commitment to achieving an 80% reduction in national emissions by 2050.8 Labor’s 2050 emissions reduction target for Australia was in line with those of other advanced economies such as Germany and the UK which have both committed to reducing their 1990 GHG emissions by at least 80% by 2050.9,10 The newly elected conservative Liberal/ National Coalition government has not set any emissions reduction targets beyond 2020. As will be discussed throughout this paper, targets focus on emissions reduction activities. They are especially valuable given the long-term nature of the massive climate change challenge the world is facing, the relatively long implementation periods of most low carbon energy generation projects such as gas, renewables and nuclear, and the need investors have for certainty.

Corporations are responsible for over 75% of Australia’s national emissions The contribution made by corporations operating in Australia to the total reported national emissions is just over 75%. A combined total of 448 million tonnes of CO2-e (Mt CO2-e) was reported in 2011, (excluding land use change and forestry) in that year (583 Mt CO2-e).

Australian companies that pass established emissions, energy consumption and/ or energy production thresholds are mandated to disclose energy and emissions data through Australia’s National Greenhouse and Energy Reporting (NGER)11 Act. In 2011, a total of 414 companies reported 342 Mt CO2-e of emissions (scope 1 only).

This report, jointly prepared by CDP and Energetics, considers the contribution Australia’s corporate sector is making towards the achievement of Australia’s 2020 national emissions reduction target and beyond.

Our analysis is based on: • CDP data and information submitted for the last three reporting years by 403 listed companies with operations in Australia12. 73% of ASX 100 companies reported through CDP in 2011. When completing the CDP climate change questionnaire, participants voluntarily provide information under a range of climate change categories including carbon management, emissions profiles, reduction targets (where developed) and the risks and opportunities identified in respect of the impacts of climate change.

• Data provided under the Australian government’s National Greenhouse and Energy Reporting (NGER) Act. Emissions across Scopes 1 and 2 for Australia’s top emitters are reported publicly with 471 independent companies participating13. NGER requires all types of companies to report GHG and energy data if they exceed certain thresholds, including unlisted companies and state-owned enterprises such as the power generators often owned by state governments.

• Consideration of global and local trends: political, market and social.

• A discussion of trends in carbon reduction solutions and emerging opportunities to bridge the gap to achieving the 2020 target. The scale of these emerging opportunities as the transition is made to a low carbon economy can lead to the first predictable industrial revolution, according to Alan Brown, Chair of CDP’s Board of Trustees and former Group Chief Investment Officer at Schroder Investment Management.

1 World Resources Institute (2013), ‘Total GHG Emissions Including LUCF’, Climate Analysis Indicators Tool (WRI, CAIT), Available online at: http://cait2.wri.org 2 UN Department of Economic and Social Affairs (2013), http://esa.un.org/unpd/wpp/ Excel-Data/EXCEL_FILES/1_Population/WPP2012_POP_F01_1_TOTAL_POPULATION_BOTH_ SEXES.XLS 3 International Energy Agency (2012), ‘CO2 emissions / population’, CO2 Emissions from Fuel Combustion, http://www.iea.org/media/statistics/CO2Highlights2012.XLS 4 International Energy Agency (2012), World Energy Balances 5 Bureau of Resources and Energy Economics (2012), Australian Energy Projections, http:// www.bree.gov.au/documents/publications/aep/Australian-Energy-Projections-to-2050. pdf, p13.

6 http://www.climatechange.gov.au/government/reduce/national-targets/factsheet.aspx 7 http://www.greghunt.com.au/Portals/0/PDF/TheCoalitionsDirectActionPlanPolicy2010.pdf 8 Our national targets fall under the scrutiny of the Climate Change Authority which is due to provide recommendations on national carbon pollution caps and trajectories by 28 February 2014. As well as considering the appropriateness of the current national reduction targets, a path to achieving these emissions reductions will be proposed.

9 http://www.bmu.de/en/topics/climate-energy/transformation-of-the-energy-system/ resolutions-and-measures/ 10 http://www.legislation.gov.uk/ukpga/2008/27/part/1/crossheading/the-target-for-2050

11 NGERS was enabled by an Australian Act of Parliament (NGER Act 2007) and is a mandatory program under which 414 of Australia’s largest emitters were required to report in the FY11 reporting year. NGERS is compliance-driven requiring annual reporting with accurate and robust scope 1 and 2 emissions, energy consumption, and energy production data.

12 In 2011, 308 companies that reported emissions in Australia were included in the analysis.

An additional 95 companies reported to CDP for 2009 and/or 2010 13 Over the time period 2008/09 – 10/11/ Note there are 483 independent reporting controlling corporations though only 471 independent companies and the data has been aggregated accordingly

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1. Introduction

“Australia’s carbon chasm” has been written against a backdrop of deep division in national politics over the form that Australia’s response to climate change should take.

“Australia’s carbon chasm” has been written against a backdrop of deep division in national politics over the form that Australia’s response to climate change should take. The issue featured heavily in the lead up to the Australian federal election of 7 September 2013 which resulted in victory to the Coalition parties.

The new government is determined to remove the price on carbon which has been in place since 1 July 2012. As part of its first order of business before Parliament, the new Coalition government issued draft legislation to begin the repeal of the 17 pieces of legislation that make up the Clean Energy Future policy, which includes the price on carbon. In its place will be the proposed Direct Action policy with a variety of initiatives to reduce Australia’s carbon emissions, including: • A $2.55 billion Emissions Reduction Fund (ERF) to support direct action by business to reduce emissions. The ERF is based on a reverse auction system in which companies, farmers and others can tender to implement emission reduction projects.

• Boosting renewable energy, especially solar.

• Support for emerging technologies through the Renewable Energy Target (RET).

Australian business has been invited to consult on the terms of reference of the Direct Action plan. It is intended that the new scheme will take effect 1 July 2014.

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2. Australia’s carbon chasm

The Australian Government’s current target is to reduce national greenhouse gas emissions by between 5-25% below 2000 levels by 2020, depending on whether there is a global agreement to reduce emissions. The Climate Change Authority recently released a draft review of Australia’s targets, considering the appropriateness of the target range to 2020 and referencing a longer term target of 80% below 2000 levels by 205014. The absolute values (scope 1 only) for the 2020 targets are: • 5% reduction target: 530 million tonnes CO2-e emitted in 2020 • 15% reduction target: 474 million tonnes CO2-e emitted in 2020 • 25% reduction target: 418 million tonnes CO2-e emitted in 2020.

In its review of Australia’s national 2020 emissions targets, the Climate Change Authority noted that a 5% emissions reduction target places Australia at the lower end of international action.

The draft report was released on 30 October, and in a media release the Climate Change Authority stated, “At this stage the Authority has not made a final recommendation on what that tougher 2020 emissions reduction target for Australia should be beyond believing that the 5 per cent target is not a credible option. Instead, two illustrative options – a 15 per cent reduction and a 25 per cent reduction – are canvassed in the draft report.”15

2.1. What do the NGER and CDP schemes tell us about

Australia’s emissions?

Energetics utilised NGER data and CDP climate change disclosures in this report, as each provided valuable insights into Australia’s pathways to achieving its national emissions reduction goals.

CDP climate change disclosures provide insight into companies’ emissions (Scopes 1, 2 and 3), carbon management practices and emissions reduction efforts. NGER on the other hand, is recognised as one of the world’s most rigorous greenhouse gas reporting frameworks for Scope 1 and 2 emissions.

NGER and CDP both hold important, yet quite different, places in the Australian reporting landscape, as the drivers behind the two schemes are different. NGER is a legal compliance requirement providing a licence to operate for Australian businesses. CDP responds to the needs of institutional investors to understand how businesses are managing climate change, mitigating risks and seizing climate change opportunities. Please refer to Appendix A for more details about the differences between CDP and NGER.

Table 1. Emissions reductions required to achieve different targets (absolute values – scope 1 only) Reduction amount (million tonnes CO2-e) from 2000 baseline

% delivered by current government programs

Emissions reductions still to be delivered (million tonnes CO2-e)

5% reduction target

171

89%

20

15% reduction target

227

67%

75

25% reduction target

282

54%

131

Target

Energetics’ analysis of NGER and CDP data, government policies and programs shows that there is a gap, or ‘carbon chasm’, between Australia’s forecast emissions and the emissions cap set by three possible reduction targets of 5%, 15% and 25%. The carbon chasm ranges from 20 – 131 million tonnes CO2-e, as is summarised in Table 1 and detailed further in Table 2.

Furthermore, this analysis assumes that the government policies and programs currently in place are continued. If these government programs and policies are abandoned, then the carbon emissions reduction task facing Australia is more challenging, particularly if reduction targets are increased to 15-25%.

The new Coalition government has not yet revealed details on how to scale their Direct Action plan beyond a national reduction target of 5%.

There is a gap, or ‘carbon chasm’, between Australia’s forecast emissions and the emissions cap set by three possible reduction targets of 5%, 15% and 25%. The carbon chasm ranges from 20 – 131 million tonnes CO2-e.

14 “Targets and Progress Review Issues Paper”, Summary, Climate Change Authority, http:// climatechangeauthority.gov.au/Node/107 15 Climate Change Authority, Media release: “Climate Change Authority releases draft “Targets and Progress Review”, Statement by the Chair, Mr Bernie Fraser, http:// climatechangeauthority.gov.au/content/climate-change-authority-releases-drafttargets-and-progress-review.

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3. Can Australia close its carbon chasm?

Australia’s emissions baseline forecast to 2030 is included in Figure 116,17. In this figure, the dark line is the emissions baseline projected in 2010. This was corrected in 2012 to include a more detailed understanding of Australia’s emissions using NGER information.

Figure 1 highlights the growth in emissions by 27 Mt CO2-e associated with Australia’s recovery from the Global Financial Crisis (GFC) and our resources boom.

This baseline is then extrapolated to 2030 using the government’s previous assumptions on emissions growth, and is represented as the light blue line.

Figure 1. Australia’s forecast emissions to 2020

900 800

Million Tonnes CO2-e

700 600 5% reduction target 15% reduction target 25% reduction target

500 400 300 200 100 0 1990

1995 Baseline (Mt CO2-e) Recast baseline

2000

2005 Year -15 % trajectory -5 % trajectory -25 % trajectory

3.1. What is driving the reductions in emissions seen in the latest

reporting year?

Based on our experience working with Australia’s largest emitters, Energetics believes that the emissions reductions most recently seen in NGER data are likely to be the result of a number of influences.

The consumption of electricity in Australia has been falling in recent years. This was clearly shown in the June 2013 report by the Australian Energy Market Operator (AEMO)18 showing actual consumption of electricity in the National Energy Market (NEM) falling, reducing forecast demand. The federal government19 developed an emissions forecast based on the AEMO medium

16 Australia’s Emission Projections 2012, DCCEE, http://www.climatechange.gov.au/~/ media/government/aep/AEP-20121106-Summary.pdf accessed February 2013 17 Australia’s Emission Projections 2010, DCCEE http://www.climatechange.gov.au/~/ media/publications/projections/australias-emissions-projections-2010.pdf accessed February 2013 18 National Electricity Forecasting Report (NEFR), Australian Energy Market Operator (AEMO), June 2013.

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2010

2015

2020

NGER + Sectors not covered by NGER 2000 level

scenario developed in 201220. In their forecast AEMO estimated that the NEM would use 227 TWh of electricity. In AEMO’s 2013 forecast, this value was reduced to 211 TWh. The fall in electricity demand is not unique to Australia. Similar trends are evident in the USA, the UK and New Zealand. None of these countries, however, have experienced the large electricity price increases seen in Australia, so it is unlikely that price rises are the sole explanation for the changes in demand in the NEM. Increased take-up of rooftop solar PV has driven part of this change, but this does not explain trends in New Zealand or the UK21 where take-up has not increased significantly in recent years.

19 Note: this federal government department has since been dismantled following the change in the national government. It is now the Department of Environment.

20 National Electricity Forecasting Report for the National Electricity Market, AEMO, June 2012.

21 See http://www.businessspectator.com.au/article/2013/3/11/energy-markets/summercant-stop-electricity-demand-dive

Baseline (Mt CO2-e)

-5 % trajectory

NGER + Sectors not covered by N

Recast baseline

-25 % trajectory

2000 level

-15 % trajectory

3. Can Australia close its carbon chasm?

It is worth examining some of the factors that may or may not have contributed to the falling demand for electricity, and what impact these factors may have on the future consumption of electricity in Australia.

Daniel Palmer22 analysed six reasons that have been proposed as factors that have caused electricity demand to fall: • High power prices: Electricity demand is not perfectly elastic but it is not unaffected by the recent price rises23 and anticipated price rises . The latter will contribute to on-going constraints in demand growth.

• Solar PV: High take-up of rooftop solar has curbed demand and this will continue as more solar panels are installed across the country. Recent forecasts from the Australian Energy Market Operator of rooftop PV growth are arguably on the low side. For instance, the forecast average of 320 MW of solar installed annually across the National Electricity Market seems low given that the national figure for 2013 is expected to be the order of 750 MW. The installed capacity of solar PV could be as high as 10 GW by 201724. The installation of additional solar PV will further constrain the growth of grid electricity.

• Manufacturing weakness: External pressures on the manufacturing sector remain, and are likely to continue.

Australia has several very large electricity users such as aluminium smelters and other metal smelters. These plants are several decades old and were attracted to Australia by the low electricity prices of the time, as compared to world standards.

Australia now has relatively high power prices, and the smelters face an uncertain future25. The Kurri Kurri smelter in NSW has already ceased production. Others such as Point Henry in Victoria are under extreme pressure and we should see a corresponding reduction in the demand for electricity.

• Cooler summers: Last summer was the hottest summer on record, yet there was no peak demand record in the National Electricity Market. We can conclude that the drop in demand was not due to mild weather conditions.

• Energy efficiency: Successful government programs have delivered improvements in energy efficiency, and this will serve to further reduce demand in the lead up to 2020, as will the building of new houses that have better insulation and more energy efficient features.

• Weakness in the economy: Recent commentary by economists has pointed to future weakening of the economy rather than strong growth. While some of the slowdown in demand could be due to reduced economic activity at the backend of the commodities boom, the expectation is of further reductions in growth. In the time since the AEMO 2012 forecast was prepared, the forecast growth for the Australian economy has been revised downwards26. The default growth rate of 3% used by Treasury may prove to be optimistic. It is worth noting that AEMO’s ‘medium growth planning’ scenario is based on 3% annual GDP growth, which is very close to what was experienced every year that demand declined.

Further, Energetics has observed that the introduction of a price on carbon has incentivised many of Australia’s large emitters to develop more accurate greenhouse gas inventories using higher order calculation methodologies, rather than apply industry standard emission factors to determine their carbon liabilities.

Energetics observed substantial reductions in reported emissions as a result of this change in reporting practices.

Carbon pricing has also incentivised large emitters to implement emissions reduction initiatives. Energetics has seen entities liable under the carbon pricing scheme install technologies to reduce carbon emissions such as flaring methane emissions, rather than simply venting them to the atmosphere, and the installation of anaerobic biodigesters for wastewater management.

To understand the trends in more detail, the emissions reduction ability of the full range of government policies and programs, CDP and other business drivers needs to be quantified.

3.2. Can Australia sustain these emissions reductions until 2020?

The impact of government policies and programs Australian governments have enacted numerous programs to drive emissions reductions at both State and Federal levels. The impact that these emissions reduction programs are projected to have on Australia’s emissions by 2020 is summarised in Table 2 and has been used to construct Figure 2. This information is based on that published by the former Department of Climate Change and Energy Efficiency (DCCEE) in 2010. This has been augmented by their assumption of the impact of the carbon price as published in their 2012 report. In their work, the DCCEE estimates that the carbon price and the Carbon Farming Initiative (CFI) together would reduce national emissions by 55 Mt CO2-e in 2020 and 155 Mt CO2-e in 2030. We have not included the impact that purchasing international abatement would have on our national emissions baseline.

22 “Special report: Australia’s electricity demand collapse”, Daniel Palmer, Business Spectator, 23 April 2013 23 The average elasticity reported by the Productivity Commission is -0.3. See Productivity Commission http://www.pc.gov.au/data/assets/pdf_file/0003/109929/21-carbon-pricesappendixl.pdf.

24 Australian PV Market Forecast 2012-2017, SunWiz, and Solar Business Services, September 2012.

25 See “Future of Alcoa’s Geelong plant in doubt”, Philip Wen, The Age, May 2, 2013. Also Ray Mostogl, General Manager of Bell Bay Aluminium, stated that the business has been a loss-making business for a number of years, and while holding off closure at the moment, remains in a perilous state” (Tasmanian Minerals Conference media release Smelters sound grave warnings: 9 May 2013.

26 See the Reserve Bank’s Statements on Monetary Policy for 2012 and 2013 Refer to Appendix 2 for more details on government programs and policies.

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3. Can Australia close its carbon chasm?

Figure 2. Projected emissions reductions from different programs and schemes to 2030

850

800

Million Tonnes CO2-e

750

700

650

600

550

500 2000

2005

2010

2015

2020

2025

2030

Year Baseline (Mt CO2-e) Company commitments in CDP Impact of a carbon price and CFI Large-scale renewable energy target Equipment energy efficiency programs Landuse change Energy efficiency requirements: Building codes EEO

The percentage contribution of each scheme or program to reductions achieved in 2020 is included in Figure 2 and Table 2.

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Phase out of greenhouse intensive water heaters Small-scale renwable energy scheme Phase out of low efficiency incandescent lights Energy saver incentive scheme NSW energy savings scheme Framework cool efficiency program Mandatory disclosure requirements: buildings Solar cities

Of note in these results is the contribution that CDP respondents will make, taking into consideration the potential overlap as participants often respond to both government programs and CDP.

3. Can Australia close its carbon chasm?

Table 2: Contributions of programs or schemes to emissions reductions in 2020 Year

Reductions in 2020 (MtCO2-e)

% of total reduction

Impact of a carbon price and Carbon Farming Initiative (CFI)

55.0

36%

Large-scale renewable energy target

26.3

17%

Equipment Energy Efficiency Programs

20.3

13%

Land use change

18.4

12%

Energy Efficiency Requirements: Building Codes

11.8

7.8%

Energy Efficiency Opportunities (EEO)

4.2

2.8%

Phase out of greenhouse intensive water heaters

4.1

2.7%

Small-scale renewable energy scheme

3.7

2.4%

Emission reduction targets reported by companies through CDP*

2.2

1.4%

Phase out of low efficiency incandescent lights

1.9

1.3%

Energy Saver Incentive Scheme

1.6

1.1%

NSW Energy Savings Scheme

1.2

0.8%

Framework Cool Efficiency Program

0.4

0.3%

Mandatory disclosure requirements: Buildings

0.1

0.1%

Solar Cities

0.1

0.1%

Total reductions

151

* CDP is not a government program and is included here only for purposes of comparison

The programs listed in Table 2 will deliver the majority of Australia’s minimum 5% reduction target, if they are maintained by future state and federal governments until 2020.

This is by no means assured, and delivering the outcomes from these programs will be a substantial task.

3.2.1. The impact of corporate emissions reduction targets reported though CDP

The emissions reduction targets set by CDP reporting companies contribute 1.4% towards Australia’s national 5% emissions reduction target27.

The emissions reduction targets reported by CDP companies are in the same order of magnitude as some large scale government programs such as the phasing out of incandescent light bulbs and the small scale renewable program. This is no small achievement for a voluntary program.

27 In constructing this figure we included only those programs which were active at the end of the 2011 financial year (the most recent year for which NGERS information was available when conducting this analysis) as the impact of closed programs (such as Greenhouse Challenge Plus) would already have been included in the values recorded for that year. Information on these programs is available to 2020 only. We have assumed that reductions will decay by 10 % over the ten years between 2020 and 2030 for all these programs.

13

3. Can Australia close its carbon chasm?

3.3. Can Australia go further and meet emissions reduction targets of 15% and 25%?

Australia’s policy makers should also consider whether emissions reduction programs have the capacity to scale up to deliver the much larger emissions reductions that climate science tells us are necessary. Both major political parties have stated their preparedness to pursue more aggressive national targets in step with any international agreements should they be achieved.

The most recent policy setting, the Clean Energy legislative package, used a carbon price (to be replaced in 2015 with an emissions trading scheme) as the basis for driving emissions reduction. Changes to national reduction targets were intended to flow through the economy via this market based mechanism.

Under such a scheme, emissions are managed by a supply and demand equation driven by the overall cap. This provides a flexible approach to align emission targets with global agreements and climate science.

In considering only the current range of targets to 2020, the newly elected Coalition government has re-stated its commitment to achieving the minimum 2020 target, and confirmed its qualified support for deeper targets28. While their plan, Direct Action, lacks details, it intends to allocate fixed funds to buy abatement amounting to a 5% reduction target. Additional taxpayer funds would be required to drive deeper emissions reductions.

With the change in government, and as we await the implementation of the Direct Action plan, the path to achieving the minimum reduction target is unclear. Achieving additional reductions of 20 – 131 Mt CO2-e will be extremely challenging29.

So how does Australian climate policy and action compare with the rest of the world?

Encouragingly, over ten carbon pricing schemes have been launched or announced in recent years, including: EU, Australia, Chile, China (seven pilot schemes), Japan (Tokyo, Kyoto and Saitama), Kazakhstan, New Zealand, South Africa, South Korea and regional schemes in the US (California, Regional Greenhouse Gas Initiative and Western Climate Initiative).31 We can also see some of the largest emitters taking action on a national level. China has pledged a 40-45% reduction in carbon dioxide emissions per unit of Gross Domestic Product (GDP) below 2005 levels by 202032 whilst investing in non-fossil fuel energy sources of 11.4% of supply by 2015. India has made a commitment to reduce its emissions per unit of GDP by 20-25% below 2005 levels by 2020. US President Obama’s 2013 State of the Union speech specifically highlights a market-based solution to address climate change:

“...we can make meaningful progress on this issue (climate change) while driving strong economic growth. I urge this Congress to get together, pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago. But if Congress won’t act soon to protect future generations, I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.33”

3.4. Global consensus progresses at a glacial rate Political leadership to drive action on climate change is progressing at a glacial rate. Yet, in September of this year, the Intergovernmental Panel on Climate Change (IPCC) released the summary findings of the Working Group II. The Fifth Assessment Report (AR5) is the most significant analysis of scientific knowledge on climate change since the release of the IPCC Fourth Assessment Report (AR4) in 2007. The outstanding finding of AR5 is the reduced uncertainty of the impacts of climate change. There is now a 95% level of confidence that global warming is due to anthropogenic activities since the industrial revolution30.

Global consensus primarily exists as an intention to reduce greenhouse gas emissions. At the time of publishing this report, the 2013 COP19 meeting is taking place in Poland. However if we look to the 2012 COP18 meeting in Doha, supporters of the Kyoto Protocol dwindled from 2013 to a group including the European Union, Australia, Ukraine, Switzerland and Norway – accounting for less than 15 percent of the world’s greenhouse gas emissions.

Despite this, a timetable has been established for universal climate change agreements by 2020 with nations able to choose their own targets.

28 The Australian Coalition government has stated that they would support larger emissions reduction targets for Australia in the event that ‘genuine’ international agreement is achieved, with commitments to deeper emissions cuts made by countries such as China and the United States.

Across the range of intentions expressed by different nations, we can say that intentions to address climate change are yet to translate into binding targets to reduce greenhouse gas emissions.

Whilst the rules are still being developed, debated and deliberated, most businesses and policy makers have adopted a ‘wait and see’ approach.

The world continues to wait and question the slow rate of progress on climate change. We see this behaviour globally and in Australia.

31 CA Cheuvreux and CDP (2012), The ETS Spring, https://www.cdproject.net/Documents/ Climate-change-ETS-spring-2012.pdf

29 See Table 1

32 China’s Action on climate change - http://www.cleanenergyfuture.gov.au/chinasaction-on-climate-change/

30 Intergovernmental Panel on Climate Change, “Summary for Policy Makers”, http://www. ipcc.ch/report/ar5/wg1/, September 2013.

33 State of the Union Address 2013, President Obama http://www.whitehouse.gov/thepress-office/2013/02/12/remarks-president-state-union-address

14

4. Are Australia’s largest emitters helping to close the carbon chasm?

4.1 The mix of emissions reduction initiatives The information disclosed by CDP respondents provides insights into business action to reduce emissions. The majority of emissions reduction initiatives taken up by businesses reporting to CDP relate to energy efficiency measures.

Of the 415 emissions reduction initiatives reported to the CDP in 2012, 55% related to energy efficiency including efficiency in building design, building services, and processes. Transport (10%), behavioural change (8%), and low carbon energy installations (7%) made up the next three tiers with the balance (19%) being contributed by process emissions reductions, low carbon energy purchases, product design and other initiatives.

Emission reduction initiatives byby type Figure 3. Number of emissions reduction initiatives type

• energy conservation projects which reduced gas consumption at the Torrens Island power plant by 53.63 TJ. • process improvements at the Somerton Power station are expected to reduce AGL’s footprint by a further 24 TJ of gas per year commencing FY2011.

4.1.2. The materials sector is providing a high level of emissions disclosure The materials sector contributed 16% of the total number of emissions reduction initiatives reported under CDP, 38% of which were energy efficiency measures. Examples of energy efficiency measures reported through CDP in 2012 include: • BHP Billiton has implemented several emissions reduction activities, including investing in the replacement of emissionsintensive energy sources with the use of hydroelectric power to supply 98% of the electricity needs at its Mozal aluminium smelter in Mozambique.34

19%

8%

55%

8% 10%

Energy efficiency

AGL Energy identified a number of emissions reduction initiatives including:

Transport

Low carbon energy installation

Behavioral change All other

In this section we consider the emissions reduction measures pursued across Australia’s largest emitting sectors: utilities, materials and energy.

4.1.1. Utilities lag in implementing emission reductions Although this sector is one of the top emitting sectors in Australia, utilities currently only contribute 5% to the total number of emissions reduction initiatives reported under CDP, with the majority (42%) occurring in organisations with lower carbon and lower energy intensity.

• Alcoa, on a global level, has voluntarily committed to reducing greenhouse gas emissions, specifically reducing perfluorocarbon (PFCs) in their global smelting facilities. Under the “Million Ton Challenge” initiative, these emissions have been further reduced by 1.4 million tons of CO2-e annually since 2008. These sustainable reductions were the result of process improvements, better raw material feeding distribution and enhanced computer controls.

4.1.3. Energy sector initiatives lower emissions and improve business efficiency The energy sector reported emissions of 49 million tonnes CO2-e through NGER in FY2011. In 2010 Woodside, identified a number of voluntary initiatives both at the Angel offshore platform and the Maersk Ngujima-Yin Floating Production Storage and Off take vessel (‘FPSO’). The two initiatives at the Angel platform involve process improvements and energy efficiency assessments and combined have the potential to save up to 265 PJ (265,443 GJ) of energy per year. The initiatives identified at the Maersk Ngujima-Yin production facility involve process changes and will reduce diesel consumption (and associated scope 1 emissions) by approximately 24,241 GJ per annum.

Origin Energy and Santos were the only two companies included in the CDP 2012 ASX200 Carbon Disclosure Leadership Index (CDLI) from the energy sector.

• Origin Energy identified two process energy efficiency opportunities which include preheating the feed offgas stream into the thermal oxidiser unit which will reduce fuel usage at Lang Lang. They are also taking off fuel gas stream prior to compressors in Spring Gully which reduces fuel gas (energy) usage.

AGL has committed to become Australia’s largest retailer of new renewable energy by volume through contracting at least an additional 1 TWh of new renewable energy.

AGL Energy

• Santos identified three energy efficiency opportunities at the Cooper Basin Fields. These measures involve combining satellites to improve the efficiency of compression, replacement of raw fuel gas with sales gas, and the upgrade of engine management control systems to optimise fuel combustion in a changing environment.

34 BHP Billiton (2012) Sustainability Report

15

4. Are Australia’s largest emitters helping to close the carbon chasm?

Cost effective emission reductions enhance efficiency and business productivity. Yet the new Australian Coalition government plans to dismantle a range of grant funding and financing programs implemented under the previous Labor government, which were designed to support efficiency measures. These programs were popular across Australia’s manufacturers at a time when this sector struggled under the burden of high input costs and a high Australian dollar.

The contribution that energy efficiency can make to business competitiveness has been recognised in the US as the Obama administration has announced the adoption of a goal to double energy productivity for the US economy by 2030. Arguably, Australia could do the same. By doubling energy productivity, Australia would halve the amount of energy needed to generate GDP.

4.2. Which industries are setting emissions reduction targets?

An aspect of managing emissions applicable to all businesses is the value that can be derived from developing realistic and achievable emissions reduction targets. The CDP questionnaire asks respondents to disclose any emissions reduction targets they may have set, the range of emissions reduction measures and other responses to the challenges of climate change. From this information we gain insights into how businesses are strategically approaching emissions reductions, or conversely, choosing to take little action.

4.2.1. The majority of companies are not currently reporting carbon reduction targets Only 18% (55 of the 308) of CDP reporting companies reported carbon reduction targets in their CDP responses in 2012. By contrast, 73% (73) of the Global 100 companies have set some form of reduction target35. Why is Australia so different?

As discussed, in Australia the majority of emissions reductions as reported through CDP take the form of energy efficiency measures which are embedded in many Australian businesses through: • legislative requirements within Australia, particularly the demands of the Energy Efficiency Opportunities (EEO) program, which drives large energy intensive businesses to focus on cost effective energy efficiency measures.

• financial mechanisms in place to manage emissions such as a shadow price on carbon.

“Santos has committed within its Climate Change Policy, to reducing the carbon intensity of its products by focusing on energy efficiency, technology development, and by embedding a carbon price in all activities… Rather than an absolute target, Santos has integrated a carbon price into all its activities and bases all business decisions to reduce carbon, on financial feasibility. This includes, for example, energy efficiency opportunities, which are assessed under the Energy Efficiency Opportunities and implemented as appropriate based on the expected payback. Santos does not expect a significant change in the emissions intensity associated with production over the next five years, therefore expect emissions to track in line with production volumes.” CDP, 2012

35 Carbon Disclosure Project, The Carbon Chasm (https://www.cdproject.net/ CDPResults/65_329_219_CDP-The-Carbon-Chasm-Final.pdf)

16

Only 18% (55 of the 308) of CDP reporting companies reported carbon reduction targets.

• tackling the efficiency of core processes. For example, all Boral operations worldwide are implementing LEAN manufacturing, which will inherently improve efficiencies by eliminating wasted effort, overproduction or rework, or outright wasted product.

“Boral is currently focussed on, and investing significant internal and external resources in, implementation of a LEAN manufacturing process across the entire organisation as a result of a significant change in corporate direction. With its focus on eliminating waste in all its forms at every level of the organisation, the LEAN program will inherently improve energy efficiency across the board, and given most of our emissions are from manufacturing processes, inherently improve emissions efficiency as well. The changes from the program will however mean that comparison to historical data will be virtually meaningless effectively we are re-establishing what constitutes baseline efficiencies that can then be subject to targeted improvements and projects. While in absolute terms a 5 year forecast is currently meaningless, in particular as the recovery of the USA housing market is highly problematic (and could shift Boral’s overall inventory by 5-10%), we would think that improvements in efficiency of 10% or more are possible. It must be noted Boral’s emissions inventory is totally dominated by five cement and lime works that at best can be improved by say 7-8% over that time.”

CDP 2012 Some businesses are evaluating targets such as Newcrest Mining, whilst other businesses have decided not to set any targets including OneSteel/Arrium.

• Newcrest mining. “Potential targets are being evaluated as part of the current business planning cycle. Over the next five years preliminary data indicates that total emissions will initially rise in year 2 as new projects are commissioned and ramp up to full production. In years 3 to 5 total emissions stabilise and then decrease slightly. The preliminary data also indicate that Newcrest’s emissions intensity, when measured on a CO2-e tonnes per oz of gold decrease consistently over the five year period.”

• “Fortescue recognises that as a mining company we are responsible for the generation of greenhouse gas emissions.

Having only begun production 2008, we are still in the process of expansion to fulfil our potential. Our operations will continue to expand as we service an increasing market demand for iron ore.

In only our third year of production we remain focused on growth, with expansion of our existing Cloudbreak mine site, rapid development of our Christmas Creek site, detailed project planning for our new Solomon mining hub and continued exploration among our undeveloped tenements. This expansion will naturally give rise to increased energy use and hence greenhouse emissions. While Fortescue strives to achieve minimisation of greenhouse emissions intensity wherever possible through fuel and energy efficiency initiatives, formal targets for greenhouse emission reduction have yet been set.”

• “OneSteel’s greenhouse emissions are closely linked to production levels and can vary materially based on market conditions. As such we do not consider it appropriate to set targets at this time.” CDP 2012

4. Are Australia’s largest emitters helping to close the carbon chasm?

4.2.2. Companies that did report emissions reduction targets mainly used intensity targets In 2012, 33 companies (11%) reported 52 separate intensity targets (totalling1.8 million tonnes CO2-e). Many companies report that intensity targets better reflect the efficiency of their operations as they can take into consideration the variable nature of the baseline and operations. Companies are often changing in structure, production rate or size (including acquiring and divesting businesses) and intensity targets provide a more manageable measure for determining the efficiency of many businesses.

Fewer companies reported on absolute targets with only 25 companies (8%) reporting 42 targets (totalling around 351,000 tonnes CO2-e). Where absolute reductions are communicated publicly, they are generally presented as a reduction associated with a suite of projects (e.g. Barrick Gold), and usually make no reference to the impact on the total emissions of the company, which may be growing. Only six companies are reporting both absolute and intensity based targets. These are Australia and New Zealand Banking Group, National Australia Bank, Charter Hall Group, Commonwealth Property Office Fund, AGL Energy and Sims Metal Management.

Figure 4. Intensity (top) and absolute (below) based carbon targets reported through CDP in 2011 Intensity-based carbon reduction targets Intensity Based Targets

3%

3% 3%

9%

31%

22%

Industrials

Financials Consumer Staples Health Care

Materials Utilities Energy Telecommunication Services

Absolute carbon reduction targets

4% 17%

42% 8%

4% 17%

Industrials

Consumer Staples Utilities

Energy

The remaining sectors are typically less emissions intensive and are not captured to the same extent by mandatory reporting programs. To this end, the use of data gathering and tracking systems is immature and the information not readily at hand to help in the development of targets.

Targets are significant as they indicate a conscious decision by an organisation to focus on emissions reductions rather than doing nothing.

There are many benefits in setting public targets, including: • Greater likelihood of achieving higher emissions reductions and higher profitability. CDP research in 2012 found that high emitting companies that set absolute emissions reduction targets achieved reductions double the rate of those without targets, with 10% higher profitability36

• Risk mitigation benefits. Supports emissions reductions, improves global reputation, assists in managing carbon risks and increases investor confidence. Business needs to have a greater understanding of their risk profile through the assessment of operations on both a local and global basis.

Improved management of regulatory, physical, operational and reputational risks recognises that the risk of doing nothing will lead to a greater cost in the future. Setting targets can increase an organisation’s social licence to operate across a broad range of stakeholders.

• Competitive advantage/growth. Demonstrating business efficiency through costs savings, typically energy efficiency and abatement opportunities. Targets help align business action, enabling a nimble approach when the time is right. They provide a competitive edge through market differentiation leading to enhanced environmental credentials.

Australia’s large emitters can apply their experience to global operations and roll out low emissions technology solutions. In late 2012, the then Australian government focussed on commercial opportunities with the release of the Australia in the Asian Century White Paper which discusses business links with Asia to “…to become a world leader in the commercialisation and deployment of renewable energy technology and energy efficiency.”

8%

Financials

The Industrials, Materials and Consumer Staples sectors are becoming more mature in data capture and reporting. The implementation of NGER required businesses to have more robust and accurate means of gathering and reporting emissions data.

These systems are allowing greater visibility into business operations and opportunities for improvement through carbon reduction projects and energy efficiency. Of those Materials companies that have set public targets, many have set intensity-based carbon reduction targets (eg BHP Billiton, Rio Tinto, and Anglo Gold Ashanti).

• Improved investor relations. Creating increased reputational advantage in the market place and a positive investor perception of an organisation’s culture, systems and management structure. The development and public disclosure of targets indicates to the market place that carbon is high on the agenda and that there is a positive management culture focussed on continuous improvement.

13%

16%

The Financials sector shows the greatest tendency for developing and disclosing targets. This is not a completely unexpected outcome as the financial sector controls large property portfolios.

Materials Consumer Discretionary 36 CDP (2012) ‘Carbon reductions generate positive ROI’, https://www.cdproject.net/ CDPResults/CDP-Carbon-Action-Report-2012.pdf

17

5. Recommendations. What the future may hold. Businesses need to be ready.

Governments need to provide policy certainty.

“Australia’s Carbon Chasm” shows that Australia’s emissions have fallen over the most recent NGER reporting period after years of increases. A number of factors are potentially driving this turnaround, from falling electricity consumption as economic conditions soften, reactions to recent large energy cost increases, energy efficiency measures driven by government and the high penetration of solar PV. But are the reductions we’re seeing over the last NGER reporting period evidence of a decarbonising economy? Will Australia achieve a structural adjustment in which renewable energy sources are dominant? Will businesses choose low carbon growth paths, operational efficiencies and position themselves to take advantage of opportunities such as the sale of renewable energy and energy efficiency technologies and services into overseas markets?

The answers to these questions are dependent on the policy settings and supporting programs that governments provide.

Given the long term nature of the necessary investments to achieve a structural adjustment away from the current dominance of fossil fuels, bipartisan support would provide the critical signal business needs to aggressively decarbonise operations and their supply chains.

Recommendation 1: The major political parties should identify areas of climate policy where they can achieve bipartisan support.

A recurrent theme throughout “Australia’s Carbon Chasm” is the need for certainty in government policy settings. Political uncertainty leads to business inaction. Certainly we saw businesses Recommendation 2: adopt a “wait and see” approach in the lead up to the Bipartisan political September Australian federalsupport election. should be sought

to develop a pathway for emissions reduction

However, with the election of the conservative opposition toand 2050 and beyond.

Coalition parties,targets the “wait see” period continues as we enter a period of consultation, the results of which will inform the final design of Direct Action: the new emissions reduction policy framework. Will our emissions reduction trajectory in turn be affected by this transition?

Recommendation 3:

Section 2.3, Table 2 shows that had the Clean Energy legislative A bipartisan and whole of system approach package continued, together with current state government to Australia’s energy bythe Australian federal, climate change policies andsystem programs, majority of the greenhouse emissions to meet the 2020 state reductions and localrequired governments minimum target would have been achieved.

The gap between the perception and reality of the impact of the short-lived price on carbon emissions will no doubt prove to be the subject of ongoing discussion in Australia. Its introduction on 1 July 2012 was arguably one of the most divisive political issues our Recommendation 4: country has ever seen, and was pitched as the source of a Businesses should set emissions number of economic ills.

reduction targets

We argue that the time has come for not only bipartisan commitment to achieving a range of emissions reduction targets, but that agreement should be secured on a major emissions reduction measure. Government policy settings can affect a business’ risk profiles, decisions to undertake large capital investments and theirRecommendation confidence to pursue5: new low carbon products and services.

Investment analysts and fund managers should

be transparent in how they incorporate and evaluate climate risk into investment decisions

Aside from the price on carbon, and as discussed previously, the falling demand for energy in Australia’s National Energy Market (NEM), the shift to a low carbon economy in Australia is driven by the national Renewable Energy Target (RET) which currently requires that 20% of energy is sourced from renewables by 2020.

Again certainty is lacking as the RET will be subject to a review under the new Coalition government and there are calls from politicians, Coalition state governments and the pricing regulators for the RET to be abandoned. The uncertainty has resulted in the scaling back of investment plans. For example, it has been estimated that some $19 billion of wind energy investment is at stake if the RET is diluted.37 The RET is a prominent example of a measure that would benefit from a restatement of bipartisan commitment to provide certainty and confidence for Australia’s business community.

Finally, bipartisan support for climate change Recommendation 1:policy and programs should not be limited to the federal political sphere. Australia’s major political parties should identify state andThe territory governments should set aside political differences to ensure a co-ordinated complementary areas of climate policy and where they can approach to programs.

Climate changesupport. mitigation and emissions achieve bipartisan reduction policies must persist to focus Australia’s largest emitters on the task of reducing their carbon intensity.

Recommendation 2: Bipartisan political support should be sought to develop a pathway for emissions reduction targets to 2050 and beyond.

Recommendation 3: The development of a pathway for long A bipartisan andtargets whole would of system term, aggressive be approach beneficial tonow Australia’s energy system by Australian given the substantial lead time for federal, major capital investments. state and local governments

The pathway could consider options such as4:the nation’s energy Recommendation mix, land use, economic activities, identified growth sectors and Businesses should set emissions the required supporting infrastructure.

reduction targets

Science tells us that the problem of global climate change is deepening. In June, Australia’s Climate Commission reported that concentrations of greenhouse gases in the atmosphere were at their highest levels in over one million years. The Climate Commission states, “Despite global efforts (concentrations of greenhouse gases) continue to increase at 5: a rate much faster Recommendation than at any other time in the recent geological record.38

Investment analysts and fund managers should

Given be the scale of the problems world faces, in addition transparent in howthe they incorporate and to continued emissions reduction through to 2020, Australia evaluate climate risk efforts into investment decisions needs a pathway from 2020 to 2050 of interim targets. In addition to interim national targets, commitments can be made to drive lower level emission levels through investment priorities. For example: • Relating to the electricity grid and phasing out brown coal Recommendation 6: power stations.

Expand CDP’s reach to include Australia’s utilities and encourage more participation 38 “The Criticalfrom Decadethe 2013: energy Climate change science, risks and responses”. and industrials sectorClimate 37 Parkinson, Giles: “Wind industry declares it’s had enough of anti-wind nonsense”, ReNewEconomy, 18 June 2013

Commission, http://climatecommission.gov.au/report/the-critical-decade-2013/, June 2013

18

Recommendation 6:

Recommendation 2: Bipartisan political support should be sought to develop a pathway for emissions reduction targets to 2050 and beyond.

5. Recommendations. What the future may hold. Businesses need to be ready.

Governments need to provide policy certainty.

• Supporting innovation in the manufacturing sector as it transitions in turbulent economic times through the use of improvements that improve process efficiencies, utilise waste heat and incorporate on-site renewable energy.

• The 2012 World Energy Outlook, published by the International Energy Agency stated, “energy efficiency is widely recognised Recommendation 1: but current efforts as a key option in the hands of policy makers fall wellThe shortmajor of tapping its full parties economic potential.”

Australia political should identify should set a goal of doubling its energy productivity by 2030. areas of potential climate ispolicy whereinthey canImproving Energy efficiency still significant Australia. achieve bipartisan support. energy efficiency is particularly important given Australia’s energy productivity is not only lower than most developed countries, it’s improving at a lower rate.

• Consider opportunities in Asia for the promotion of Australian expertise in renewable energy and energy2:efficiency Recommendation technologies.

Bipartisan political support should be sought

• Encouraging novel and innovative growth sectors for Australia to develop a pathway for emissions reduction which are not dependent on fossil fuels. Australia’s federal and targets to 2050 and beyond. state governments should lead and invest in low emissions vehicle fleets, for example.

Recommendation 3: A bipartisan and whole of system approach to Australia’s energy system by Australian federal, state and local governments Regulatory and legislative reform is required to decarbonise the economy whilst securing energy supplies.

Australia has significant challenges when it comes to energy Recommendation 4: supply. The price of energy commodities has risen substantially Businesses should set emissions over recent years and will continue to move over the next reduction targets decade until we reach world parity prices. Our energy mix is dominated by centralised energy sources and distribution networks. In the past, this served Australian economies well, though a more flexible system is now required to meet future energy demands. Innovation in distributed and novel energy solutions are hampered by barriers (in the form Recommendation 5: of regulation of capacity tariffs) which protect the current conventional energy analysts and fund managers should utilityInvestment model.

be transparent in how they incorporate and Australia’s utilities require an updated regulatory framework to evaluate climate risk into investment decisions enable them to adjust their business models.

Recommendation 3: bipartisan wholebenefits of system • ThereAare substantialand economic to beapproach gained from pursuing demandenergy side management whichfederal, have flow to Australia’s system byoptions, Australian on emissions reduction potential. Better planning of networks is state and local governments needed which considers demand side management options alongside network upgrade needs.

Recommendation 4: Businesses should set emissions reduction targets

Recommendation 5: Individual business preparations can beshould Investment analysts and fund managers well served by setting for emissions be transparent in howtargets they incorporate and reductions.

Targets evaluate climate riskdrive into action. investment decisions

Recommendation Australian business can make a substantial 6: contribution to greenhouse emissions reduction CDPAustralia’s information shows Expand CDP’s reachactivities. to include that an investment in emissions reduction measures is cost effective, utilities and encourage more participation delivers paybacks and positive bottom line impacts. Certainly, as from the industrials sectortrend seen questions remain overenergy whetherand the latest encouraging in NGER indicates decarbonising business operations, more needs to be done to lower greenhouse emissions.

There is also a compelling risk management aspect that business should consider. Climate science clearly tells us that the problem of a changing climate is deepening. Changing weather patterns and increased extreme storm activity may heighten concern across communities, which in turn drives governments to step up climate change mitigation and adaptation activity, and also results in changes in consumer behaviour. Businesses need to be prepared for such a “tipping point” and drive down the emissions intensity of their operations, ahead of a change in public and consumer opinion.

Further, business should understand their emissions exposure in detail and identify and act on efficiency opportunities which will achieve multiple business outcomes as well as reduce emissions levels.

This challenge, set against the background of the decarbonising economy, requires a new way of thinking about energy markets, and it will take a greater level of co-operation between federal and state governments to create a vision that Recommendation 6: works in step with the pathway to achieving long term emissions reductions.

Expand CDP’s reach to include Australia’s This includes: utilities and encourage more participation

from theapproach energy and sector side • A whole of system whichindustrials considers demand management measures with the integration of different energy sources. In particular, considering the potential for decentralised, local energy supply solutions.

• Alignment of investments to ensure emissions reduction outcomes are incorporated into cost benefit analysis aspects of planning.

19

Recommendation 5: 5. Recommendations.

What the future mayInvestment hold. Businesses need to be ready.

Recommendation 4: analysts and fund managers should Businesses should set emissions be transparent in how they incorporate and Governments need to provide policy certainty. reduction targets evaluate climate risk into investment decisions

Recommendation 5: Investment analysts and fund managers should be transparent in how they incorporate and evaluate climate risk into investment decisions

Recommendation 6: Expand CDP’s reach to include Australia’s utilities and encourage more participation from the energy and industrials sector

Be transparent in the evaluation of climate change risks, the approach employed, factors considered and rationale for overall risk ratings.

Australia’s CDP reporters account for just over 40% of the total NGER reported emissions. The three highest emitting sectors – utilities, materials and energy sectors together account for 89% of reported NGER emissions in FY11.

Recommendation 6:

InvestorsExpand and fundCDP’s managers should transparent with how this reach to be include Australia’s information is used to inform strategic portfolio investments.

utilities and encourage more participation Corporations should investors the importance of from thecommunicate energy andtoindustrials sector

Only 24% of emissions from the Australian utilities sector are being reported through CDP. Many of Australia’s utility companies are state government owned and CDP currently only requests listed companies to report climate change information through its Investor CDP program.

Australian federal and state governments can also pursue a number of actions that will assist business and investors. A practical example is the Australian government should publish ANZSIC mappings to enable analysis of emissions reduction activities using data from both mandatory and voluntary schemes.

As data and information provides the basis for meaningful emissions reduction activities, “Australia’s Carbon Chasm” demonstrates the value that can be gained from publishing the Australian and New Zealand Standard Industrial Classification (ANZSIC) mappings.

5.2. Conclusion

emissions reductions and climate change mitigation measures.

By publishing and committing to emission reduction targets, corporations can provide a meaningful measure for benchmarking their own performance.

What will be the trigger or triggers that will bring about meaningful action on climate change and deep cuts in global emissions?

Who will lead and when? In other words, what will be the “tipping point” that propels governments, businesses and communities to finally close the global carbon chasm and transform carbonintensive economies?

There is increasing urgency as the evidence of a changing climate builds, especially in the form of extreme weather events which are costing nations and corporations billions of dollars. Despite these impacts, international negotiations proceed slowly and ineffectually, and short term policy uncertainty argues for the status quo. This may create a false sense of security, because when change comes, it will come rapidly.

As commented in this report, the pace of negotiations to achieve an international agreement is slow, yet both political parties in Australia have stated that they will only move to more aggressive emissions reduction targets in the event that a global target is set.

Australia, cannot and should not, wait. We should take a leadership position rather than simply hoping to be the “first, second” country to move.

Business needs to be ready and Australia’s governments need to set aside partisan politics to create stable policy settings and programs that support the transformation to a low carbon economy. Coupled with bipartisan commitments to long term national emissions reduction targets, bipartisan political support is needed for actions to reduce emissions and this should encourage business to pursue innovation and confidently invest in new low carbon products, services and markets.

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Appendix A. Comparison of CDP and NGER schemes National Greenhouse and Energy Reporting (NGER) Scheme

Characteristics

CDP

Description

CDP operates voluntary global programs to which companies are invited to respond by investors and/or large purchasing companies, either publicly or privately, on an annual basis. In 2011, 308 companies operated out of Australia were included in the analysis.

NGER was enabled by an Australian Act of Parliament (NGER Act 2007) and is a mandatory program under which 414 of Australia’s largest emitters were required to report in the FY11 reporting year.

Types of data reported

Both qualitative and quantitative. Provides investors and the broader community with greater insight into the business, its operations and outputs. Scope 1, 2 and 3 emissions are reported, as well as emission reduction initiatives and targets, climate change strategy, and governance. CDP encourages accurate and transparent disclosure of business information which provides investors and stakeholders with confidence in the management structure, business operations and values of the company. Companies benefit from reporting to CDP as it assists in the management of risk, the implementation of cost and emissions reductions activities and the maintenance of their social licence to operate.

Quantitative only. NGER is compliance-driven requiring annual reporting with accurate and robust scope 1 and 2 emissions, energy consumption, and energy production data.

The Act is supported by stringent calculation and regulatory requirements with penalties in place where legal compliance is not met.

There is no requirement to provide detail on qualitative data such as a reporting organisation’s management structure or governance strategies. The accuracy of the data provides businesses with a clear picture of their emissions and energy profiles, improving the tracking and monitoring of their performance and assisting to identify areas for emissions reductions. The data also underpins the emissions trading scheme introduced in Australia on 1 July 2012, and has therefore become a financial instrument.

Companies participating

4,100 reporting globally39

471 reporting in Australia40

Australian companies participating

308 (2011)41

414 (2010 -11)42

Boundaries

Flexible approach with respondent being able to decide between operational, financial, equity or other boundary.

Clearly defined by law as operational control the authority to introduce and implement any or all of the operating, health and safety and environmental policies for the facility and/or corporate group.

Classification

CDP reporting companies are classified with the Global Industry Classification Standard (GICS) code for their operations that is assigned to them by the maintainers of the GICS standard.

NGER requires reporters to identify the appropriate Australian and New Zealand Standard Industrial Classification (ANZSIC) codes for their facilities and operations and to report information against the codes.

Dates/periods

Flexible reporting periods – companies can align their CDP reporting with their financial reporting periods which vary all over the world

Fixed - Australian financial year for all respondents

Coverage and organisation structure

Global and typically responded to from global head office

Australian only with responsibility at the controlling corporation registered within Australia

39 The CDP datasets include a vast amount of corporate climate change information for investors and other stakeholders. In many cases, companies aggregated and included data from more than one region prior to reporting it through CDP (e.g., combining data from their Australian and NZ operations and reporting under the headings of ‘Australia and NZ‘ or ‘Asia Pacific (including Australia)’ etc. For this report, to eliminate any nonAustralian data, only the ‘pure’ Australian reported data has been included. The result is that some Australian data will have been omitted from the analysis.

40 Note there are 483 independent reporting controlling corporations though only 471 independent companies and the data has been aggregated accordingly 41 In 2011, 308 companies that reported emissions in Australia were included in the analysis.

An additional 95 companies reported to CDP for 2009 and/or 2010.

42 In 2010/11, 414 independent controlling corporations reported to NGER. An additional 57 controlling corporations reported during 2008/09 and/or 2009/10 (total 471 controlling corporations)

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Appendix A. Comparison of CDP and NGER schemes Characteristics

CDP

National Greenhouse and Energy Reporting (NGER) Scheme

Trigger

Voluntary participation. CDP invites ASX 200 listed companies to participate.

Mandatory if threshold is reached at either facility or corporate level Facility thresholds are 25 kilotonnes (kt) greenhouse gases – carbon dioxide equivalence (CO2-e) (scope 1 and 2) or 100 terajoules (TJ) of produced or consumed energy.

Corporate thresholds (2010–11 and onwards) are 50 kt of greenhouse gases (CO2-e) (scope 1 and 2) or 200 terajoules (TJ) of produced or consumed energy.

Scope 1 & 2 emissions

Yes

Yes

Scope 3 emissions

Option to report

Not required

Targets, risks and opportunities

Only CDP captures the target (absolute and intensity), risks and opportunities information

None required though large energy users (greater than 0.5 PJ) are required to participate in the Energy Efficiency Opportunities program

Differences between CDP and NGER

What do the two data sets tell us?

The substantial differences between CDP and NGER make analysis complex. Emissions from one company may differ between NGER and CDP, due to:

In Australia there are 414 independent reporting organisations under NGERS and 308 companies report to CDP on their Australian operations.

• differing reporting requirements with respect to information detail and accuracy, emissions sources and corporate structures.

Australia’s CDP reporters account for just over 40% of the total NGER reported emissions. These reporters are summarised below and information is organised according to the magnitude of emissions reported under NGER.

• boundary conditions including reporting year and geography • organisational structure (who is the controlling corporation as defined by NGER, this concept is not found in CDP report) and how a company has decided to report to CDP. For example, GDF Suez and Xstrata.

GDF Suez is not considered a controlling corporation in Australia. The Australian operations were identified as International Power (Australia) Holdings Pty Ltd and Loy Yang Holdings Pty Ltd. The emissions have been aggregated and presented as one company for the purposes of comparison to CDP, however they were reported as two separate companies to NGER. In the CDP dataset, Xstrata is a combination of NGER data reported for AZSA Holdings Pty Limited, Oceanic Coal Australia Limited and Xstrata. These three companies are the highest level of controlling corporation registered in Australia for this reporting entity. Comparison with CDP information which is reported for Xstrata’s operations globally is challenging.

As an additional complexity there is no publicly available mapping between GCIS (used by CDP) and ANZSIC (used by NGER) classifications. This makes manipulating the datasets for cross reference and checking essentially impossible.

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A breakdown by sector of emissions reported from both schemes can be found in Table 3. The three highest emitting sectors are utilities, materials and energy sectors which together account for 89% of reported NGER emissions in FY11. It is worth noting that only 24% of emissions from the Australian utilities sector are being reported through CDP (see Figure 3 and Table 2). Many of Australia’s utility companies are state government-owned and CDP currently only requests listed companies to report climate change information through its Investor CDP program.

Appendix A. Comparison of CDP and NGER schemes Table 3. Comparison of emissions reported in CDP and NGER (Scope 1 and 2) NGER FY11 (million tonnes CO2-e)

CDP 2011 (million tonnes CO2-e)

CDP reported emissions as % of NGERS

Utilities

207

48.76

24%

Materials

141

94

67%

Energy

49

21

42%

Industrials

22

10

45%

Consumer Staples

15

11

69%

Financials

4.5

1.7

37%

3

1.5

49%

Telecommunication Services

1.9

0.1

3%

Health care

1.1

0.17

16%

Information Technology

0.4

0.2

45%

Not included in GICs

2.5

0

0%

Grand Total

448

188

42%

GIC Sector

Consumer discretionary

The emissions coverage of consumer staples (led by food and beverage) and materials (with significant representation from the mining industry) companies to the CDP information request are the highest with 69 and 67 percent respectively. This is followed by a group of sectors: energy (oil and gas), industrial (transport and infrastructure), financial (banks), information technology and consumer discretionary (retail), where 40 to 45 percent of emissions are reported to CDP. While this sector reported emissions to CDP in the 2011 reporting year it was not possible to differentiate Australia-specific emissions from emissions in other jurisdictions. For this reason this sector is not represented in this analysis.

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Appendix A. Comparison of CDP and NGER schemes Businesses have varied responses to emissions reporting Only 61 companies report to both CDP and NGER. The following table indicates the top 10 reporters across both reporting schemes.

Table 4. Top 10 reporters to both CDP and NGER Total CDP emissions (scope 1 and 2) (t CO2e)

% to CDP total

Total NGER emissions

% to NGER total

Rio Tinto

28,792,736

15.3%

27,164,463

6.1%

Alcoa Inc.

16,710,000

8.9%

18,038,269

4.0%

BHP Billiton

15,970,700

8.5%

12,914,928

2.9%

ND

-

ND

-

Woodside Petroleum

7,897,691

4.2%

8,239,915

1.8%

Wesfarmers

6,147,900

3.3%

5,044,230

1.1%

Qantas Airways

4,578,431

2.4%

4,579,748

1.0%

Anglo American

3,619,318

1.9%

3,871,727

0.9%

Arrium

3,825,266

2.0%

3,825,661

0.9%

Santos

3,457,500

1.8%

3,497,804

0.8%

Organisation

Confidential

The 10 reporting organisations that follow those listed above include Origin Energy, Woolworths, Orica, BP, ConocoPhillips and Amcor.

Those companies participating in both reporting schemes are typically organisations that are the largest emitters and must comply with the legislative requirement to report to NGER. They are also mature in their attitude to transparency and maintain good communications with their stakeholders. They see investor relations, social licence to operate and competitive advantages in reporting to CDP. Industry reputation also places importance on these organisations reporting to both programs, and often other voluntary reporting initiatives such as DJSI to show their understanding and commitment to reducing their impact on the environment and their overall contribution to climate change.

From this result it is obvious that the organisations leading greenhouse gas reduction efforts are not always the biggest emitters, which are the power generators. As most utilities are privately held or government corporations, they are not formally requested to disclose through CDP. Reporting from the energy and industrial sectors is also low, whereas reporting from the materials sector is relatively high. These results from the materials sector are encouraging given the magnitude of its emissions and the importance of the mining industry to the Australian economy.

Looking across the other sectors, the reporters to NGER or CDP are typically the leaders and often the largest emitters. Their CDP reports align with their sustainability reports and provide evidence of transparent governance processes to their investors.

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Appendix B. Details of impacts of programs The information included in the DCCEE’s report of 2010 contained details of how different programs would contribute to national emissions reductions. These are summarised in Table 8. Programs no longer active in 2012 are included in Table 9 for completeness..

Table 8. Schemes active in 2012 and onwards Name of Scheme

Kyoto abatement period

2015

2020

Landuse change

18

19.6

18.4

EEO

2.7

5

4.2

Energy Efficiency Requirements: Building Codes

4.2

7.7

11.8

Equipment Energy Efficiency Programs

6.3

13.1

20.3

Framework Cool Efficiency Program

0.1

0.2

0.4

<0.1

<0.1

<0.1

0.1

1.9

4.1

1

1.8

1.9

NSW Energy Savings Scheme

0.1

0.6

1.2

Large-scale renewable energy target

4.5

16.5

26.3

Small-scale renewable energy scheme

0.2

2.1

3.7

<0.1

<0.1

<0.1

0.2

0.8

1.6

Mandatory disclosure requirements: Buildings Phase out of greenhouse intensive water heaters Phase out of low efficiency incandescent lights

Solar Cities Energy Saver Incentive Scheme

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Appendix B. Details of impacts of programs Table 9. Schemes no longer active in 2012 Kyoto abatement period

2015

2020

<0.1

<0.1

<0.1

2.3

2.3

<0.1

0.1

0.1

Home insulation program

1.3

1.5

0.1

Greenhouse Challenge

5.3

3.9

2.6

Greenhouse Friendly

1.3

0.7

0.7

Greenhouse Gas Abatement Program

3.4

3.6

3.6

Industry Greenhouse Program

0.2

0.3

0.3

Low Emissions Technology Demonstration Fund

<1

0

0

NSW Biofuels Act

0.1

0.3

0.3

NSW Greenhouse Gas Abatement Scheme

0.7

1.1

0.9

Queensland Gas Scheme

2.2

4.7

4.3

Renewable remote power generation scheme

0.1

0.1

0.1

Schemes closed between 2010 and 2012 Alternative fuels conversion program Carbon Capture and Storage Flagship Energy Efficiency in government operations

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