Uncertainty fuelling industry fears on CO2 scheme

JUST 18 months out from the introduction of a national emissions trading scheme, uncertainty still overrides the debate over how the scheme will directly, and indirectly, affect some of Western Australia's largest businesses.

Despite the release of the government's green paper, the Garnaut Review final report and Treasury modelling, some of the state's major greenhouse gas emitters say they are not yet confident enough to make long-term investment decisions.

Speaking at a WA Business News boardroom lunch forum, representatives from the energy, alumina, cement, transport, chemicals and engineering industries called on the government to provide certainty on the design of the scheme.

Verve Energy managing director Shirley In't Veld told the forum the uncertainty was problematic in terms of making forward investment decisions for new plant.

"There is an element of uncertainty and it means, in effect, there's almost a hiatus in relation to investment making decisions," Ms In't Veld said.

A good example of this was the fallout from Varanus gas crisis, where the government asked Verve Energy to examine the state's generation options and address its reliance on gas, which ultimately pointed to bringing more, relatively cheap, coal-fired power on line.

"With the potential emissions trading scheme looming it just didn't make sense to bring in a coal-fired power station based on technology that may well be obsolete in 10 or 15 years time because hopefully by that stage you've developed carbon capture and storage technology," Ms In't Veld said.

"And that meant our strategy really had to shift to react to that rather than 40- to 50-year time horizons for plant life; you're not going to build something, put $1 billion into something, that's going to be obsolete."

Verve could be liable for almost $220 million a year in emissions permits under the scheme at a carbon price of $20 a tonne, a cost that ultimately will be passed on to consumers.

Much of the concern at the forum involved the so-called energy intensive trade exposed (EITE) industries, including alumina, cement and chemicals.

The government's preferred position is to allocate up to 30 per cent of permits to firms in this category, with activities that have an emissions intensity above a threshold of 1,500t of CO2 per $1 million of revenue eligible for assistance.

The provision of assistance is a recognition of the potential for the scheme to cause 'carbon leakage', whereby carbon-intensive industries in Australia would relocate offshore and uses similar, or worse, emissions-intensive fuels and technologies.

Alcoa of Australia director business development Bill Reid believes that is very real possibility.

"[Alcoa] really does face the world. We export 90 per cent plus of our product into global markets. A lot of our competition comes out of China, the Middle East, South Africa, countries which, at this stage at least or what I believe, are unlikely to adopt an emissions trading scheme and certainly not within the time range postulated in the treasury modelling," Mr Reid told the forum.

"[Australia is] 30-40 per cent of the greenhouse gas intensity of alumina production in China. If we shut down or curtail production here and that goes to China it's a significant increase in greenhouse gas emissions.

"One would think that you would want to try and set it up such that the supply comes from the most greenhouse gas efficient areas of the world, not sending it to regions which generally tend to not have the same standard of efficiency as we have."

CSBP chief financial officer Charlie Perkins said the scheme affected the company because it was unable to pass the extra cost on to the end consumer.

"All of our locally manufactured product for the local resources industry is generally priced with regard to [the fact that] these are international commodities, they're manufactured throughout the world, generally where there is cheap gas," he said.

"So it impacts our business going forward to be able to pass that cost on through to the end customers, because if they don't source the product from CSBP they can source it from some other supplier throughout the world who won't have this cost impost on them.

"We can take steps to reduce our carbon emissions now, but when we look at expanding or growing our business, you look at Australia as having a higher cost impost than actually locating a plant somewhere else in the world."

The CFO of Cockburn Cement's owner Adelaide Brighton, Andrew Poulter, said the scheme could hamper further expansion in Australia.

"Australia isn't going to save the world in its reductions, but it's leadership role in South-East Asia and influence on the political stage...that is why were entering into the scheme, some would say prematurely, by 2010. We're predicting a material but manageable impact on our profit and loss from 2010, and that's being in the 90 per cent plus free credit bracket,'' he said.

"But the concern for us is the rate of decay in that curve because we know of no technology in cement manufacture to fundamentally reduce emissions.

"[Australia] imports 2mt of cement a year. The situation for the cement industry is if the carbon impost is such we would never build new capacity in this country, so it's the non-creation of future wealth and jobs. So we have a slightly different angle on being trade-exposed in the cement industry."

It's expected WA's LNG industry will be significantly affected by emissions trading, with the industry warning the scheme would threaten new multi-billion dollar projects and drive investment offshore.

Economic modelling by Concept Economics shows LNG output falling 37.4 per cent compared to what it otherwise would have been, to meet emissions reduction targets of 20 per cent on 2000 levels by 2020 and a 30 per cent reduction by 2030.

But according to engineering firm GHD global climate change response services leader, Chris Lund, there are two sides to emissions trading - the risk side and the opportunities side.

Dr Lund said places like California, which has had emissions reduction targets and high energy prices, were investing significant amounts of money in getting alternative energy technologies, including advanced solar thermal, ready for market.

"Companies who will do well out of this are the ones who reduce their risk but capitalise on the opportunities and move early and capture those opportunities," he said.

"Let's not just focus on getting the system in place, but the next step, as companies go through the changes to get ready for this, how can we turn it into a business opportunity when the rest of the world goes [introduces emissions trading schemes]?"