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Allens Arthur Robinson

Focus: Climate Change – August 2007

Climate exchange markets and opportunities for Australian business

In brief: In addition to the newly launched Australian Climate Exchange that precedes the establishment of a national climate exchange market by the Federal Government, Australian companies are involved in generating and trading greenhouse gas emission reductions on international climate exchange markets. Partner Chris Schulz and Senior Associate Jacqueline Bredhauer provide an overview of the methods by which Australian companies can generate and trade greenhouse gas emission reductions in climate exchange markets within and outside of Australia.

How does it affect you?

  • With the possibility of mandated greenhouse gas emission reporting and reductions in the near future, some Australian companies may benefit from being involved in existing climate exchange markets so as to provide their business with additional income and capacity building opportunities, business efficiencies, and enhance relationships with customers, the public sector and the community generally.

The Australian Climate Exchange

On 23 July 2007, Australia's first greenhouse gas (GHG) emission reductions exchange, the Australian Climate Exchange (ACX), began operation. Since its commencement, the ACX has traded verified emission reductions (VERs) at prices ranging from $8.50 to $8.65 per tonne.

The ACX is a voluntary GHG emission offset program that allows the exchange of VERs between buyers and sellers. VERs exchanged on the ACX are verified by Greenhouse Friendly™, a certification process of the Australian Greenhouse Office (the AGO).

Greenhouse Friendly™ approved GHG abatement projects must occur in Australia and must generate permanent GHG emission reductions (or sequestration) in addition to 'business as usual' operations.

The ACX involves the following market participants:

  • Abatement providers which create VERs that are made available for purchase on the ACX; and
  • Transferees, that is, purchasers of VERs. Transferees in the ACX may include entities that wish to offset GHG emissions associated with their relevant product or service or reduce GHG emissions (including those entities potentially affected by the Australian Government's National Greenhouse and Energy Reporting Bill 2007, which requires companies that exceed specified greenhouse gas or energy thresholds to register and report on GHG emissions (see AAR Focus: Climate Change – August 2007).

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Australia's involvement in the Chicago Climate Exchange

Australian companies are also involved in the Chicago Climate Exchange (the CCX), which is another voluntary GHG emissions reduction program that provides for the trading of emission reductions generated both within and outside of the US.

Since the CCX began trading in 2004, the price of Carbon Financial Instrument® (CFI™) (CFIs) has ranged from US$0.71 to US$4.90.

There are four types of members on the CCX:

  • Participant Members – entities that create GHG emission reductions and sell them on the CCX.

Australian company CO2 Australia Limited became a CCX Participant Member in 2006 with the intention of creating CFIs through forestry projects.

  • Members – entities that emit large amounts of GHGs from facilities within and outside of the US (eg Ford Motor Company, DuPont, Rolls Royce, and Dow Corning).

CCX Members make a voluntary, but legally binding, commitment to meet annual GHG emission reduction targets. From 2007-2010, Phase II is in place, where Members commit to an annual GHG emission reduction schedule that results in year 2010 emission reduction commitments of 6 per cent below baseline emissions. Members who reduce GHG emissions below those targets will gain surplus allowances to sell or bank, and Members who emit above the targets must comply by purchasing CFIs.

Australian company AGL Energy Limited became a CCX Member in 2007 with the intention of utilising its portfolio of wind and hydro assets to offset its GHG emissions and trade its surplus CFIs.

  • Associate Members – entities with low levels of GHG emissions (eg businesses and service organisations) and these entities commit to offsetting GHG emissions associated with a selection of their business activities (eg energy purchases and business travel). For example, the City of Melbourne and CO2 Australia Limited have joined as Associate Members as part of their commitment to offset GHGs associated with their business activities.
  • Exchange Participants – entities or persons that do not adopt GHG emission reduction commitments, but establish a CCX Registry account for the purposes of offsetting GHGs for a particular event (eg a conference or a concert).

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Australia's involvement in Clean Development Mechanism projects

The Clean Development Mechanism (CDM) is a mechanism created under the Kyoto Protocol (which Australia has not ratified nor implemented into domestic law) and it is further defined in the Marrakesh Accords. The dual aims of the CDM are to:

  • contribute to the objectives of Annex I nations (also referred to as 'developed nations') that are parties to the Kyoto Protocol in achieving Certified Emission Reductions (CERs) which can be used to meet their Kyoto Protocol assigned targets in the first commitment period (ie 2008-2012); and
  • assist non-Annex I nations (also referred to as 'developing nations') that are parties to the Kyoto Protocol in achieving sustainable development and contributing to the ultimate objective of the United Nations Framework Convention on Climate Change.

In order to undertake a project under the CDM, the following is required:

  • a host party from a non-Annex I nation willing to undertake a CDM project within its national boundaries; and
  • a project participant from an Annex I nation (or a private entity from within or sponsored by an Annex I nation) that wishes to carry out a CDM project within the boundaries of the host party for the purposes of generating CERs.

An Australian entity may participate in a CDM project if it obtains the consent of the relevant project participant and host party. Some of the ways in which Australian companies and their related entities may become involved in CDM projects include the following:

Creation or acquisition of a project participant

An Australian company may set up a registered corporation in an Annex I nation to act as a project participant for a CDM project in a non-Annex I nation, or purchase a shareholding in a company registered in an Annex I nation that is a project participant for either a potential or existing CDM project.

For example, Lihir Gold Limited, a public company incorporated in Papua New Guinea, which also has related entities registered in Australia, uses steam wells drilled as a component of its gold mining operations on Lihir Island to generate electricity to displace GHG emitting diesel electricity generation. The revenue estimated to be generated by Lihir Gold Limited as a result of this CDM project is $USD 3 million per annum.

Joint venture

Australian entities may become involved in CDM projects by entering into joint venture arrangements with non-Annex I parties. For example, Australian wind and hydro electricity generator Pacific Hydro Limited has entered into joint venture arrangements through its subsidiaries with:

  • Statkraft Norfund Power Invest (a Norwegian-based energy company) in relation to a run-of-river hydro electricity project in Chile; and
  • the Fijian Electricity Authority in relation to two run-of-river hydro electricity projects in Fiji.
Providing technology, services and resources

An Australian-controlled and registered company may enter into a contract providing technology, services or resources to a CDM project. For example, the Northwest Shelf Australia LNG Company Ltd is providing liquefied natural gas to the Guangzhou Zhujiang power plant in China to displace coal-fired electricity generation. In addition, Hychill Australia is to provide its product 'Hychill Minus 30' to enable an Iranian car manufacturer to create CERs through the substitution of fluorinated refrigerants in vehicle air-conditioning systems.

Funds and syndicates

Australian entities may also create funds and syndicates that support the creation and implementation of GHG emission reduction projects. A number of institutions that have established themselves internationally as CDM backers and traders include: the World Bank's Prototype Carbon Fund; the Japan GHG Reduction Fund; the European Carbon Fund; and the Rabobank Carbon Facility.

For example, the World Bank's Prototype Carbon Fund (the PCF) is a public-private initiative of six governments and 17 multinational companies that purchases Kyoto Protocol-compliant emission reductions from projects in developing countries. The PCF invests contributions made by companies and governments in CDM projects and participants receive a pro rata share of the CERs that are verified and certified as a result of the projects. Participants in the PCF include companies such as BP P.L.C, Chubu Electric Power Company, Electrabel, Deutsch Bank and Mitsubishi Corporation.

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Risks and benefits relevant to GHG emission reduction projects and markets

There are a number of potential benefits and risks in relation to GHG emission reduction projects and climate exchange markets that an individual entity needs to consider taking into account its particular circumstances. Some of the reported benefits include:

  • business efficiency and cost savings;
  • capacity building;
  • achieving and developing a position in local and international GHG emission reduction markets;
  • mitigating the cost of any imposed GHG emission cap or tax regime;
  • deriving an income stream through the sale of GHG emission reductions;
  • contributing to the entity's environmental indicators and the 'triple bottom line'; and
  • enhancing relationships with customers, clients, governments and communities.

Currently Greenhouse Friendly™ approved GHG emission reductions are recognised by the AGO and Greenhouse Challenge Plus™ members may use these certified reductions in their Greenhouse Challenge Plus™ emissions inventories, or to meet GHG reduction goals as Greenhouse Challenge Plus™ Leaders. 

However, one of the risks to be considered in relation to the ACX and the CCX is that there is no certainty that GHG emission reductions generated or purchased under these markets will be recognised by the Australian Government (or the States) in the proposed national climate exchange, or any mandatory GHG abatement action.

In relation to CDM projects, some of the risks include:

  • uncertainty as to whether additional commitment periods will be adopted by the parties of the Kyoto Protocol when the initial commitment period expires in 2012; and
  • social and infrastructure issues that may be relevant to a host party's involvement in a CDM project proposal, for example, administrative and infrastructure barriers that may cause delay to the implementation and operation of the CDM project, or political and civil issues such as expropriation, nationalisation, war, riots or strikes.

Some more general risks to be considered in relation to GHG emission reduction projects and climate exchange markets include:

  • non-acceptance of the project proposal by the relevant government or local community;
  • the relevant registration body for the project proposal refusing to register the project, or changing an approved methodology or GHG emission reduction mechanism, thereby affecting the potential for future GHG emission reductions and revenue under the project;
  • inaccurate monitoring or a failure to comply with the relevant baseline obligations that may result in the GHG emission reductions being reduced, or a relevant agreement being terminated forcing the project to be operated in the open market without the GHG emission reduction income stream;
  • the reduction of the relevant GHG emissions baseline for a project through the advancement of technology, reducing available GHG emission reductions and revenue; and
  • contract repudiation or frustration, or a dispute of ownership of the GHG emission reductions or income generated from the project.

We will continue to monitor the progress of climate exchange markets within and outside of Australia and keep you informed.

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