Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. The direct and indirect effects of putting a price on greenhouse gas emissions Australian Industry Group Climate Change Forum Thursday 15 November 2007 Kate Phillips, Senior Associate Baker & McKenzie’s Environment + Environmental Markets Practice

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 2 Australian Emissions Trading Scheme (AETS)

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 3 Climate Policy in Australia Recent development of political consensus for regulating emissions –Emissions Reporting –Emissions Trading Picture developing of Australian policy alternatives in relation to clean and renewable energies

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 4 AETS – a carbon price for Australia Based on PM’s Taskgroup and subsequent announcements – largely the same as ALP proposal Coverage of the scheme is likely to extend to stationary energy, fugitives (excluding open-cut coal mines), industrial processes and transport, where facility-level emissions exceed 25kt CO2-e. Coverage would generally be of direct emissions for large facilities, but with upstream coverage of fuel suppliers (non-industrial coal, gas and petroleum) for other energy emissions. Agricultural and land use emissions and possibly the waste sector would initially be excluded, with the possibility of later inclusion.

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 5 AETS – a carbon price for Australia Gateway caps will be used, but not yet announced Offsets can be generated in non-covered sectors Free permit allocations to reduce impacts on energy intensive or trade exposed industries –Only available for assets in existence at time of PM’s 3 June 2007 announcement to investigate implementing AETS Likely to “transition out” of State-based schemes eg NSW + ACT GGAS Potential for early abatement credits – only from projects commencing after 3 June 2007

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 6 Summary of Future Policy for Energy Sources Current Government (Liberal) = Emissions Trading + Clean Energy Target Opposition Party (Labor) = Emissions Trading + Mandatory Renewable Energy Target (MRET) with target increased to 20% Emissions reporting is a key requirement under either alternative –National Greenhouse and Energy Reporting Scheme (NGERS)

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 7 Cap-and-Trade Emissions Trading Systems

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 8 What is a Cap-and-Trade Scheme? Entity A Entity B Allocated Permits Emissions Caps Offset Project

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 9 Entity A Entity B Trade Offset Project

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 10 Entity A Entity B Trade Offset Project

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 11 Entity A Entity B Offset Project Allocated Permits Emissions Caps Emissions reductions in addition to business as usual scenario

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 12 Entity A Entity B Offset Project Create offsets

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 13 Entity B Offset Project Trade Entity A

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 14 Entity A Entity B Offset Project Trade

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 15 Entity B Offset Project Allocated Permits Emissions Caps Offsets Entity A

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 16 Cap-and-Trade Enforcement $ Corresponds to penalty Government Regulator Shortfall Emissions Cap Entity A

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 17 Analysing Effect of Carbon Price on a Business

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 18 Implications of Emissions Reporting and Trading Schemes Company Upstream Pressures? Impacts of regulation on suppliers and inputs Downstream Demands? Impacts of regulation on needs and preferences of customers Direct Liabilities?

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 19 Direct Liability Must establish your carbon footprint Companies have potential to come under AETS and NGERS if they meet direct emissions thresholds –Transport fleet emissions –On site machines emissions –Emissions of contractors? –NO cradle-to-grave analysis of materials. More likely to come under reporting obligation –Energy produced or consumed counted under NGERS –Only direct emissions produced are counted AETS

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 20 Upstream Pressures Suppliers will pass on cost of carbon –Materials – particularly those with high energy inputs such as cement, aluminium, steel –Electricity – liability of electricity producers –Fuel suppliers – potential increased costs from upstream liability Certain materials may develop higher demand because of use in low emission activities –The development of the ethanol industry in Australia may push up the price of sugar –Potential increased competition for forest resources because of forest sink activities or biomass fuel source  Increase price of timber

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 21 Downstream Demands Customers want products and services with lower costs. Carbon price gives incentive to purchase low emissions products and services  avoid carbon liability + Environmental Sustainability Demands –Rise of carbon neutral and emissions reduction programs in the corporate world –Companies that have made carbon neutral pledges include HSBC, Swiss Re, IAG and NewsCorp –Companies will increasingly want products and services that help reduce their carbon footprint –Large companies exerted pressure on their supply chain  eg WalMart working with manufacturers and freight service providers

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 22 Compliance Cost vs Opportunity

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 23 Compliance Cost vs Opportunity By staying ahead of regulatory moves you can differentiate on environmental credentials Premiums paid for ‘green’ and ‘carbon neutral’ products –Air flights with carbon offset service –Efficient office buildings Reputation advantages of action and dangers of inaction

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 24 Compliance Cost vs Opportunity Market opportunity and income streams from emissions reductions –By generating emissions reductions against a Business-As-Usual Scenario emitters can reduce carbon liability of upstream suppliers and downstream customers Emissions reductions measures often generate significant cost savings –McKinsey 2007

Direct and Indirect Effects of a Price on Carbon ©2007 Baker & McKenzie 25

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. Questions? Kate Phillips, Senior Associate Baker & McKenzie’s Environment + Environmental Markets Practice