Lowdown on the CPRS

02 Mar 2009Archived News Energetics in the News

PUBLISHED: Ecolibrium Magazine, by Sean McGowan - Dr. David Mitchell, Principal Consultant Carbon Solutions, Energetics Pty Ltd gives Ecolibrium readers the lowdown on the CPRS.

 

The Carbon Pollution Reduction Scheme (CPRS) is just 16 months from implementation, barring any unforeseen circumstance. So what does it mean for the HVAC&R industry, and the wider community? Sean McGowan dissects the White Paper with the help of industry experts.

There has been plenty of critique on the Rudd government’s Carbon Pollution Reduction Scheme White Paper since it was released in December last year. However, some confusion remains both in industry and the community about the details of the scheme.

So rather than add to the pages of opinion, we’ll leave the analysis to the internet blogs and editorial pages of the nation’s dailies, and instead unravel the details of the proposed scheme that are likely to effect you and your industry.

The CPRS in a nutshell

The CPRS will put a price on carbon from July 1, 2010 by employing a “cap and trade” emissions trading mechanism. This means aggregate national emissions are capped at a level that theoretically should be consistent with the environmental objective – with the White Paper setting a medium term target of reducing Australia’s greenhouse gas emissions by 5 – 15 per cent below 2000 levels by 2020.

Why 5-15 per cent?

Well, the 5 per cent target represents Australia’s minimum emissions reduction target, with the 15 per cent target to be implemented should “global agreement be reached where all major economies commit to substantially restrain emissions and all developed countries take on comparable reductions to that of Australia”.

Despite what is a major reduction on the mooted target of 20 per cent by 2020, the government has stated that it remains committed to its long-term target of 60 per cent reduction on 2000 levels by 2050.

The scheme cap (to be set in early 2010 based on indicative trajectories) will then dictate the number of tradable carbon pollution permits available. For instance, should the cap be set at 100 million tonnes of carbon dioxide equivalent (CO2-e) per year, then 100 million emissions permits (each equal to one tonne of CO2-e) would be issued annually.

These permits, some of which will be administered free to selected businesses and industries, will then need to be purchased or obtained and subsequently surrendered by liable entities to offset every tonne of their liable CO2-e emissions. The cost of each will be determined by the market, and will not only drive emissions reductions but provide a financial incentive for investment in low-emissions technology.

According to Treasury modelling, each permit could be valued at around $23-$25 at the commencement of the scheme, with the permit price perhaps 40 per cent higher should the target be increased to 15 per cent.

But just who will be required to purchase permits (liable parties) continues to be the source of some confusion. According to the White Paper, the scheme will cover about 75 per cent of Australia’s emissions, and place mandatory obligations on around 1,000 liable entities – Australia’s biggest emitters of CO2-e – whose facilities exceed the scheme threshold of 25,000 tonnes of CO2-e per annum. This means the vast majority of Australia’s 7.6 million registered businesses will not face direct obligations under the scheme.

Importantly, the CPRS will cover all six greenhouse gases covered by the Kyoto Protocol, with broad sectoral coverage across stationary energy, transport, fugitive, industrial processes, waste and forestry. Agricultural emissions could also be included in the scheme from 2015 after further research.

Refrigerant prices to soar

According to Dr David Mitchell, principal consultant – Carbon Solutions for Energetics, Australia’s leading integrated climate change and sustainable solutions provider, the impact of the CPRS on the HVAC&R industry will largely be seen in increased costs of energy, materials and refrigerants.

“Everybody in Australia is going to feel the impact of the CPRS,” he says. “Some companies will feel a direct impact because they will have to purchase permits, while everybody else is going to pay more for power, building materials, transport etc, as a lot of the cost to buy permits to pollute is going to be passed through.

“HVAC&R professionals are going to feel the impact of cost in general. However, people who are dealing directly with synthetic gases under the CPRS will also see an increase in refrigerant costs.”

It’s no surprise to find synthetic greenhouse gases included under the scheme, given that they are reported to account for around 1 per cent of Australia’s emissions and around 20 per cent of industrial process emissions.

Unlike other areas covered by the scheme, where an emissions event gives rise to a liability, the mechanics differ slightly for importers of synthetic greenhouse gases, who will be required to purchase enough permits to offset the full CO2-e of imported gases upfront, whether the gas will be released to the atmosphere in full or not.

“If you mine coal, you are liable for the cost of permits for fugitive emissions in the year the coal is mined, whereas refrigerant gases will go into a system and might hang around for a very long time. So the really big difference here is that the upfront cost is going to be very high on refrigerant gases and there will be a massive price increase as far as I can see,” says Mitchell.

For example, based on an arbitrary price of $10 per kg for R134a (with a GWP of 1410), Mitchell predicts the cost will rise to $38.20 per kg as a result of the scheme, assuming a permit price of $20 that is passed on in full.

This could represent a 382 per cent price increase. However, refrigerants bearing even larger GWPs may see price increases closer to 800 per cent.

Mitchell believes that, because permits aren’t likely to be required before commencement of the scheme, the industry will see a substantial transitional phase due to the likely stockpiling of refrigerants. However, buyers will need to be aware.

“It may mean price increases won’t come through immediately or that suppliers will put the price up to include the carbon cost, for which they really don’t have to pay,” he explains.

“Of course, I’m not suggesting that suppliers would do that, but everyone in the industry needs to know how that is going to be handled because it’s easy to see there might be a perception of price gouging going on.”

For importers of synthetic gases, a range of cash flow issues are also likely.

Although permits will not have to be purchased and subsequently surrendered until the following December under the terms of the scheme, the fact that synthetic gas importers will be responsible for offsetting the total CO2-e of their product upfront could see further price increases simply to help recover these costs quickly.

“So there’s a very direct impact [on the HVAC&R industry], in that anyone who uses the synthetic gases that are covered is going to have a substantial carbon impost placed directly on the use of the gas,” Mitchell warns.

The scheme threshold of 25,000 tonnes of CO2-e per year is expected to achieve 95 per cent coverage in this market and require the participation of about 45 of the largest synthetic greenhouse gas importers, which may or may not also include importers of packaged systems with pre-charged refrigerant.

While some companies may be tempted to look at restructuring in attempt to avoid obligations, Mitchell says it is unlikely to be financially beneficial.

“You would effectively have to break yourself up into fantastically small entities owned by different people,” he says. “We’re not suggesting that the industry is going to break up into milk bar-sized service people. It just doesn’t work like that – you just have to adjust to the cost.”

An obvious spin-off of these massive cost increases will be the shift towards natural refrigerants such as ammonia, and the expedited development of low-GWP versions of synthetic gases, which have been promised by refrigerant manufacturers. How quickly the inclusion of HFCs under the scheme impacts on these shifts remains to be seen.

Montreal gases to be banned

The White Paper has also acknowledged industry concerns surrounding HCFCs managed under the Montreal Protocol. Specifically, this includes the import of HCFC equipment that has not been subject to any limit and could lead to market distortions following introduction of the CPRS.

Rather than include HCFCs under the scheme, the government will prohibit the import and domestic manufacture of equipment containing HCFCs from the commencement of the scheme on July 1, 2010, effectively encouraging the early phasing out of HCFCs and bringing Australia in line with measures implemented in the US, Europe and Japan.

Emissions-intensive trade-exposed (EITE) industries

The aim of the EITE assistance program is to reduce the risk of carbon leakage while providing transitional assistance to those industries affected most by the introduction of the CPRS in Australia.

This is designed to happen ahead of similar action in other countries, which could lead to a loss of competitiveness.

Assistance will be provided in the form of an administrative allocation of “free” permits to the most emissions-intensive trade-exposed activities. Permits will be allocated at a 90 per cent rate for most emissions-intensive activities and at 60 per cent for those which are moderately emissions-intensive.

This approach will ensure that all industries incur some of the carbon cost, with scaled assistance for those facing more material costs than others, the government states.

It seems unlikely that any area of the HVAC&R industry would fall under this category.

Energy prices to drive efficiency

Another major impact of the CPRS will be the significant increase in the price of energy, particularly electricity.

While some suggest a one-off increase of 15 per cent followed by a doubling in price over the following five years – it is still too early to put an accurate figure on the increase because a wide range of factors remain at play, including the different types of generation across the country, retail price protection policy, levels of competition in markets and the impact of the Renewable Energy Target.

There is no doubt, however, that large price increases are looming and will make energy efficiency that much more important. This leaves the HVAC&R industry with a major role to play in reducing energy usage in the built environment, whether through energy efficiency of equipment or through more innovative design.
“HVAC&R businesses will come under increasing pressure from both clients and government to ensure buildings and HVAC&R systems become much more efficient,” says Alan Pears, Adjunct Professor at RMIT and associate director of RMIT’s Centre for Design, as well as director of sustainable solutions.

“Understand the multiple benefits energy-efficient low-greenhouse impact buildings and equipment can deliver, so you can promote them to clients. And focus on how elements of a building and its systems interact – a thermally good building envelope will need smaller-capacity HVAC equipment and will run at part load more of the time.”

Measurement and reporting

According to Mitchell, it is important to differentiate between the CPRS and NGER (National Greenhouse & Energy Reporting) when discussing mandatory reporting.

“You have to be included in a particular part of the ANZSIC Code classification to report synthetic gas or refrigerant activity – you have to be in food product manufacturing, beverage and tobacco product manufacturing, retail trade, warehousing and storage services, wholesale trade or rental hiring and real estate services,” he explains.

“So if you are outside those ANZSIC Codes, you would have to declare emissions from synthetic gases. And the important thing to remember is that it has to be a gas in the determination [of which R22 is exempt], it has to be in equipment with a refrigerant charge of 100kg or more, and it has to have a GWP of more than 1000.”

This information is detailed on page 29 of the NGER Determination 2008.

Under NGER, the amount of refrigerant charged in the unit is irrelevant. Rather, a default calculation for leakage is provided. Mitchell says there have been suggestions to include reporting on recharge status, but this is not in the determination as it stands currently.

There are two levels of thresholds under NGER at which corporations are required to register and report – facility thresholds which, like the CPRS, are set at 25,000 tonnes of CO2-e emissions including fugitive emissions from refrigerants annually; and corporate thresholds, which will be set at 125,000 tonnes of CO2-e per annum for 2008/2009.

“So it’s not all about synthetic gases – it’s about your total carbon Scope 1 and Scope 2 direct and indirect emissions, of which fugitive emissions from refrigeration systems make up a part,” Mitchell says.

It remains unlikely that most businesses in the HVAC&R industry will be liable to report under NGER or be liable to participate under the CPRS (excluding refrigerant importers). However, there will be many companies that AIRAH members currently service that will be caught under the scheme and also be required to report under NGER.

The good news for HVAC&R members is that this presents a range of opportunities.

Time to shine

One consequence of the scheme that should be recognized industry-wide is the vital role industry members can play in supporting clients who will be obliged to participate in the scheme, and/or monitor and report under NGER.

According to Doug Binns, general manager of Emerald Sustainable Performance, AE Smith’s new energy services division, the key focus of the industry should be on working with clients to help them meet the scheme’s obligations.

“Help [clients] understand where they stand in relation to any reporting obligations they may have, what their current energy profile and carbon footprint is and what can be done in a commercially viable way to reduce this over time in line with the overall reduction trajectories set by the government,” Binns advises.

“A very important aspect of this will be to monitor energy reductions from specific initiatives along the way and report these on a regular basis, so that remedial action can be taken in a timely manner to ensure reductions are actually achieved.”

It will be those who can satisfy these emerging needs best that are likely to reap the rewards of the scheme’s introduction.

Another area of enormous opportunity, and until now not fully embraced, is that of refrigeration reclaim.

According to the White Paper, destruction of synthetic greenhouse gases represents less than 5 per cent of new gases introduced into the domestic market, with the cost of recovery and destruction recognised as a major barrier to their disposal.

In response, the government has committed to providing permits to destruction facilities or entities that have a contractual arrangement with a destruction facility to destroy used synthetic greenhouse gases.

“This will allow the market to determine the most efficient option for submitting claims for synthetic greenhouse gas destruction. Claims for synthetic greenhouse gas destruction will need to be made in accordance with specified requirements for verification. These will be designed to ensure there are no perverse incentives to import or manufacture these gases to receive permits for their destruction.”

Time to prepare

There remains much to happen before the CPRS is formalized and starts in 15 month's time. And while Mitchell believes the industry is likely to see a transitional period upon its introduction, he says a lot of pressure will be placed on the industry to be more-efficient and look at all sorts of alternatives.

Similarly, Pears believes business should be skilling their workforce in preparation of the changes, while also talking to their supply chains about removing the emissions embodied in their products and services. He says mechanisms can be set up that will allow both businesses and suppliers to share the savings relative to traditional solutions.

Australian industry now waits on the public release of key draft regulations due in June, with the government aiming to achieve passage of the Bills through Parliament sometime mid-year.

Industry reaction to the White Paper

“We think it’s a robust scheme that has very wide coverage, and while I think everybody would like the targets to be greater, the really important thing to understand is that this is a scheme designed to affect change over 50 or 100 years, not five years. So I think it’s quite natural to expect that there’s a period of transition.

“It would be much worse if the thing fell over because we pushed it too fast then maybe have a few emissions leak out the side. I think we have to act fast but we have to act sensibly also.” – David Mitchell, Principal Consultant – Carbon Solutions at Energetics

“The initial targets and reduction trajectories have been set at the bare minimum levels in light of the current economic conditions.

The targets and reduction trajectories will need to be reviewed in the short term to ensure we can meet our overall objectives in relation to fighting climate change. This review will need to be done once a clearer picture emerges of the impact on jobs and the broader costs to the economy.” – Doug Binns, General Manager of AE Smith’s Emerald ESp.

“Placing a price on carbon is very important, and it is critical that it be done soon to minimise uncertainty and support action sooner rather than later. But the present CPRS proposal has some serious weaknesses: a target well short of what science tells us we need to do; the failure to properly credit voluntary abatement; and the massive hand-outs to industries that lobbied hardest stand out.

As Professor Garnaut said, while in principle a trading scheme is preferable, a simple tax would be better than a compromised trading scheme.” – Alan Pears, Adjunct Professor at RMIT, associate director of RMIT’s Centre for Design and director of Sustainable Solutions Pty Ltd.

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