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Michael Barrett looks at how Australian transport and logistics companies can position themselves for future change.
Australia’s total carbon emissions in 2005 stood at 559.1 million tonnes of carbon dioxide equivalence emissions (Mt CO2-e). Australian transport’s share amounted to 79.5 Mt CO2-e tonnes or 14%. At present rates of growth Australian transport emission levels are projected to rise to 104.8 Mt CO2-e by 2020 or 70% above 1990 levels.
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 commissioned an inquiry into 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 Garnaut Climate Change Review is due to present its findings by September 2008 with the 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 (T&L) companies can best position themselves for a carbon constrained future.
Australian T&L: 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 that reduce GHG emissions in developing (non-Annex 1.) countries. These projects are known as Clean Development Mechanisms (CDM) and include reforestation, 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 (AGER). 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 = 1 EU. 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/tonne 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.
The Australian Emission Trading Scheme (AETS)
The ETS public discussion paper released by the Garnaut Climate Change Review in March 2008, calls for the introduction of a price on emissions as the primary instrument for securing Australia’s overall environmental objective. The Garnaut review further proposes that the most efficient ETS would allocate rights to emit within Australia’s emissions budget over a specified period and allow the owners of permits to use them at a time of their choosing within that period.
Given the preceding, 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 dependent on exact truck type and individual vehicle fuel efficiency – Source: US EPA -CO2 Mobile emissions). With 50 warehouses required to support this distribution activity and 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 USD30 per tonne, the total carbon credit cost will amount to USD2,192,400 or AUD2,436,000 at today’s exchange rates.
Assuming 1,000 transport users on this sector, this equates to AUD2,436 onto each customers annual freight bill.
How can AT&L companies position themselves for future change?
Given the framework outlined above, it is clear that the AT&L industry faces a difficult future as regardless of the precise outcome of the ETS, the sector will struggle to contain GHG emissions. Against a backdrop of general industry growth, few sector- related emission reduction strategies now in place and progressively reducing AAUs, the T&L sector faces high costs for future carbon credits in markets dominated by companies such as power generators prepared to pay high prices or companies seeking easy financial gains in selling their own carbon credits to the highest bidder.
T&L companies will also 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 T&L provider with the lowest emission cost for the desired service level.
In fact, T&L 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, 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 T&L 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, Supply Chain Consulting (www.scm.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 the manufacturing, supply chain, logistics and distribution 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 organisation (using the GHG Protocol tools) with the aim of becoming carbon neutral. 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 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 T&L 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 modelling.
Other opportunities for Australian transport & logistics companies to reduce CO2-e may include some or all of the following:
• Reconfiguring distribution networks to minimise CO2-e emissions.
• Increasing loads carried on backhauls to increase CO2-e efficiency.
• Use of more efficient fuels, 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) offers consultancy in this area and in the broader implications to business of the global climate change debate, in areas such as environmental and social governance, 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 governments and businesses, 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.
* Excerpted from Australasian Freight Logistics Issue 12, June/July 2008 (pp.32-4)
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