Australia’s signing of the Kyoto protocol, part of the United Nations Framework Convention on Climate Change (UNFCC), commits Australia to a program of industry sector greenhouse gas (GHG) measurement and reporting from mid 2008 as well as penalties beyond 2012 for GHG emissions above target limits set under the protocol.

In anticipation of Australia not meeting its emission targets under the Kyoto protocol the Australian Federal government has begun examining options for an Australian Emissions Trading Scheme (AETS). With the aim of providing Australian companies a market based mechanism for the trading of carbon credits, the government has also commissioned an enquiry chaired by Professor Ross Garnaut, to examine the effects of climate change on the Australian economy and recommend options for a sustainable economy. The enquiry is due to present its findings by September 2008 with an AETS commencing as early as 2010.

This article examines the background and framework for the reporting of Australian carbon emissions, future carbon trading regimes and how Australian Transport and Logistics companies can best position themselves for a carbon constrained future.

Australian transport & logistics - projected GHG emissions and reduction measures

The Australian Greenhouse Office estimates that in the period 1990 to 2005 total emissions from the transport sector (cars, civil aviation, railways and road transportation) grew 22.5%. Cars accounted for half of the growth, followed by heavy trucks and buses (23%) and light commercial vehicles (21%). In the absence of emission abatement measures, the transport sector is projected to increase emissions to 88.6 Mt CO2-e by 2010 (up 44% from 1990 levels) and 104.8 Mt CO2-e by 2020 (up 70% from 1990 levels). Existing measures to reduce emissions across the transport sector will result in a reduction of only 8.8 Mt CO2-e by 2010, partly built on the expected effects of rising fuel prices.

The Kyoto Protocol

The protocol commits developed (Annex 1) countries to annual GHG reporting and emission targets. Annex 1 countries can meet their GHG target emission limitations through internal emission reduction programs or purchase of GHG emission reductions (credits), bought on open financial exchanges via projects which reduce GHG emissions in developing (Non Annex 1) countries. These projects are known as Clean Development Mechanisms (CDM) and include re forestation, solar/wind power, and alternative energy projects. CDM projects require approval by both the host country government and the responsible UN agency and approved CDM projects are then marketed on exchanges as Certified Emission Reductions (CER). CER credits can also be bought from other Annex 1 countries with excess credits. The exchange traded formula is one CER credit = one emission unit (EU).

The protocol restricts Australia to an increase of 8% in GHG emissions from 1990 levels in the period 2008 – 2012, despite average reductions amongst other signatories of 5.2%. The UNFCC reports however, that Australia’s 2004 GHG emissions could be as high as 125.6 % of 1990 levels if other assessment criteria were adopted - making Australia on a per capita basis, one of the world’s highest GHG emitters.

Carbon emission reporting

In mid 2008 over 700 Australian companies will begin reporting GHG emissions under The Australian Greenhouse and Energy Reporting Act 2007 (AGERA). Australian companies will be grouped by industry segment for the purpose of national activity reporting to the UNFCC.

The initial reporting thresholds are:

GHG emissions                         - 125 kilotonnes or more

Energy production                    - 500 terajoules

Energy Consumption     - 500 terajoules

Thresholds then reduce by approx 30% each year thereafter

Carbon credit trading and the role of financial markets

National emission limitation targets are commonly broken down by governments into industry segments or by company with each receiving an Assigned Allocation Unit (AAU). Each AAU = Emission Unit. Industry segments or companies not expecting to meet their target either embark on a GHG emission reduction program or seek to purchase exchange traded carbon credits.

The European Union Emission Trading Scheme (EUTS) is the best working example of a carbon credit trading marketplace, however the market is now essentially a volatile futures market due to lengthy CDM development/ approval processes and much of the emission limitations activity set for post 2012. In 2006 carbon credits reached as high of Euro $30/ton largely driven up by European electricity generators buying forward carbon credit contracts, however by 2007 the market had largely collapsed due to lower than expected EU emission targets being set.        

Australian Emission Trading Scheme (AETS)

In a recent speech to the Australian Industry Group, the Federal Minister for Climate Change & Water indicated that an AETS would form the first pillar of a government commitment to reduce greenhouse gas emissions by 60% by 2050. A limit or “cap” up to a maximum allowable limit would be set by government as early as 2010 with individual permits issued to companies up to the level of the cap. These permits would then be surrendered to the government each year, creating a market for the permits allowing them to be traded at a price. The minister stated “It is this price “the cost of carbon” that will change the way that decisions are made throughout the economy“. Furthermore “The introduction of emissions trading will constitute the most significant economic and structural reform undertaken in Australia since the trade liberalization of the 1980s”. The minister stated that the cap and trade system would be designed to have maximum coverage of industry sectors, place Australia on a low emission path whilst assuring economic prosperity, link to International carbon trading markets and address challenges facing emission intensive industries.    

The minister also indicated that in addition to the AETS the government would examine a range of complimentary policies such as renewable energy targets and clean energy plans. The government would also await the outcome of the Garnaut report examining the impacts of climate change on the economy and a range of medium to long term options for sustainable prosperity.    

An example of the impact of carbon trading on the Australian transport & logistics sector

The following simple example gives some idea of the potential impact if the sector finds itself above its AAU post 2012 and is forced to go onto the open market for carbon credits.

52,000 diesel fuelled truck movements Melbourne/Sydney/ Melbourne (5 day working week x 200 per day x 52 weeks per annum) could expect to generate approx. 43,680 Mt CO2-e per annum (final figure dependant on exact truck type and individual vehicle fuel efficiency – Source: US EPA -CO2 Mobile emissions). With 50 warehouses required to support this distribution activity each producing an average of 588 Mt of CO2-e emissions per annum (Source: GHG Protocol – Electricity, Heat, steam purchases), a total of 73,080 Mt CO2-e is produced per annum. If carbon credits are required to be purchased, even at an average figure of US$20 per tonne, the total carbon credit cost will amount to US$1,461, 600 or AUD$1,827,000 at today’s exchange rates.      

Assuming say 1,000 transport users on this sector, this equates to A$1827.00 onto each customers annual freight bill.

How can Australian transport & logistics companies position themselves for future change?

Given the framework outlined above, it is clear that the Australian transport & logistics industry faces a difficult future. Regardless of the precise outcome of the Garnaut report, the sector will struggle to contain GHG emissions against a backdrop of general industry growth, few if any sector related emission reduction strategies, progressively reducing AAU’s and expensive carbon credit trading costs in markets dominated by companies prepared to pay high prices or companies seeking easy financial killings through sales of their own carbon credits.

AT&L companies will find it difficult to simply approach carbon credit costs as a form of GST with costs to be split amongst customers, as these customers will also be facing their own unique AGERA emission reduction pressures and will expect a more pro-active approach. Given the centrality of transport to Australian business life, these customers will over time gravitate towards the transport & logistics provider with the lowest emission cost for the desired service level.

In fact, Australian transport & logistics profitability may in the long run become a function of the right mix of customers, the most efficient/lowest energy usage possible to perform the work and the minimum of carbon credit trading costs. Furthermore transport and logistics customers may in the future be assessed as much by their impact on GHG/ carbon credit trading costs as their contribution to the bottom line.   

It would seem that the most prudent approach for Australian transport & logistics companies to position themselves for future carbon change is to develop skills in the following:

• Accurate measuring of CO2-e emissions
• Managing and reducing CO2-e emissions
• Trading in carbon credits

With Australia’s current lack of skills in the GHG measurement arena, a consultancy may be the best starting point. For example, CarbonView www.carbon-view.com.au) and Carpenter Ellis (www.carpenterellis.com) offer a range of applications and techniques designed to accurately measure and record CO2-e footprints through Distribution, Manufacturing, Service, Government and Defense Industry environments. In the public domain, tools such as the GHG Protocol (www.ghgprotocol.org) offer a range of easy to use business specific carbon measuring tools and formulas as well as guidelines on accounting standards required for GHG balance sheet reporting. The Victorian EPA (www.epa.vic.gov.au) has conducted a complete audit of GHG emissions across the organization (using the GHG Protocol tools) with the aim of becoming carbon neutral. Now having achieved this, the Victorian EPA has now made available the results of its work including measurement tools and reduction strategies providing a model for other businesses to use. Through its Carbon Innovators Network the Victorian EPA also aims to provide a resource link between climate change experts and businesses looking for climate change advice.  

The ability to manage and reduce CO2-e emissions will be paramount to the Australian transport & logistics sector. Industry specific programs such as the US Environmental Protection Agency SmartWay program (www.epa.gov/smartway) offer excellent ideas and approaches to energy conservation and reduction strategies in all transport industry segments as well as comprehensive CO2-e measurement formulas and fleet modeling.

Other opportunities for Australian transport & logistics companies to reduce CO2-e may include some or all of the following:

• Re configuring distribution networks to minimize CO2-e emissions
• Increasing loads carried on back hauls to increase CO2-e efficiency
• Use of more efficient fuel, vehicles or transport modes
• Energy efficient yard vehicles
• Working with customers to reduce packaging and transport space required
• Use of energy efficient lighting and equipment in warehouses
• Solar panel driven lighting and heating, rainwater tanks

The ability to understand and trade profitably in the carbon credit trading market is important, but owing to the complexity and volatility of the market, advice from major consulting firms or investment banks should be sought, including advice on the purchase of carbon credit offsets from reputable vendors. PricewaterhouseCoopers (www.pwc.com/au) offer consultancy in this area and in the broader implications to business of the global climate change debate, such as corporate social responsibility and strategy, protection and enhancement of shareholder value, assurance and advisory services on legal and taxation issues and carbon emission measurement and reduction strategies.      

In conclusion, due largely to the complacency of Australian government and business, Australia has been slow to develop an awareness of, and the skill sets required to contain and reduce GHG emissions, however it is not too late to develop these skills before the full impact of the Kyoto protocol is felt. Casting aside controversy as to the precise level of Australia’s current GHG emissions it is reasonable to assume that by 2012 Australia will have difficulty containing GHG emissions to the level required under Kyoto.  Australian transport & logistics companies will play a large part in Australia’s success or otherwise in containing and reducing GHG emissions in the future. What is particularly important for the sector to bear in mind for the future is the very public nature of the climate change debate and the very public price that companies will pay for not adapting to change in this area.

In my next paper I will be exploring further the practical steps that Australian transport and logistic companies and the wider business community can take in containing and reducing carbon emissions whilst continuing to provide a sustainable long term business. 

References

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http://www.greenhouse.gov.au/inventory/2005/pubs/inventory2005.pdf

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Department of Climate Change, viewed January 11^th 2008.

http://www.greenhouse.gov.au/inventory/2005/pubs/inventory2005-economic.pdf

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www.chicagoclimatex.com

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http://www.ghgprotocol.org/files/measuring-to-manage.pdf

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http://www.carbon-iew.com/pdf/Gartner.

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http://unfccc.int/resource/docs/convkp/conveng.pdf

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http://unfccc.int/kyoto_protocol/items/2830.php

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http://unfccc.int/methods_and_science/items/2722.php

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http://unfccc.int/ghg_emissions_data/items/3800.php

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www.epa.gov/smartway/

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Viewed January 9^th 2008

www.epa.vic.gov.au/greenhouse/

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©Copyright

Michael Barrett

Melbourne, Australia

February 2008