Kyoto ratification crucial in Australian plans for Chile hydro-development – Carbon Offsets purchased in Europe critical to dam construction.

SELLING INDULGENCES: The Kyoto Treaty may have failed to curb the world's carbon emissions but its Clean Development Mechanism still has substantial value to Australian mining and hydroelectric corporations.

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Coalition victory a Chile thought for Kyoto

PACIFIC HYDRO chief executive Rob Grant has good reason to sweat on the prospect of a Labor victory next month. It's a $200 million hydro-electric project the company wants to build in Chile next year. (More about La Confulencia Project here.)

But unless Australia ratifies the Kyoto protocol very soon, it will be very hard for an Australian-based company like Pacific Hydro to qualify for the carbon credits available under the Kyoto scheme. That's a big loss -- given that he expects to earn at least $2-3 million a year from selling these credits on to the European market.

"The timing of it is critical," he says. "If Labor gets in and ratifies Kyoto, it won't be a problem. If Labor loses, we will have to do some serious thinking about what our options are."

Underneath the fevered political rhetoric about climate change in the future, Grant's dilemma represents the complicated reality of doing business for Australian companies right now, particularly in the renewable energy sector.

Plenty are already trying to adjust to the prospect of operating in a global environment where carbon emissions cost real money.

But the Government's refusal to sign the protocol means that it is more difficult for businesses like Pacific Hydro to financially leverage their advantages, either nationally or internationally, in providing alternative energy sources, such as water or wind.

And it also means relatively few Australian companies have had practice in the confusing world of emissions trading that is already well under way and is certain to quickly grow.

This Kyoto system means, for example, that investments by companies based in developed countries can apply for a form of carbon credits for emission reducing projects in developing countries. In the arcane world of Kyoto terminology, it's called the clean* development mechanism (CDM).

*(Clean apparently does not mean the environment: False Environmental Impact Statements induce Regional Environment Commission to Implement Fines. )

Not only are these credits worth cash to companies, the reduction in carbon emissions as a result of the project would also count towards meeting the home country's emission targets. Australian companies have tried to get around this by operating joint ventures. Pacific Hydro, for example, has taken this route with its other hydro projects in Fiji and Chile (With SN Power of Norway on the Tinguiririca River). But now that it wants to own 100 per cent of a new project, it is unlikely to be officially eligible in the absence of Australian ratification.

Nor do similar emission reduction projects in Australia currently qualify either -- whether built by Australian or other international companies. The reason is basically the same. No Kyoto ratification from a government, no internationally recognised -- and internationally tradable -- credits for a company. That goes straight to the bottom line.
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Both Labor and Liberals are now promising to ratify a new international agreement -- as long as developing countries also make commitments to reducing their emissions.

This omission was always the fatal flaw of the 1997 Kyoto protocol and ensured that global emissions have only continued to rise -- and will rapidly accelerate -- no matter what targets the developed countries agreed to a decade ago. And getting agreement on what those future targets should be for everyone will take years of bitter diplomatic negotiations with no guarantees of success.

But leave that wrangling to the various governments. What has been little appreciated in Australia has been the changes going on in the market already, often in advance of the politics. Business often needs certainty and notice of changes in order to plan long-term projects. That's one reason why the Business Council of Australia finally moved a year ago into supporting the idea of developing an emissions trading scheme. After years of resistance, the Prime Minister seized on this shift to start moving too.

But the other issue is whether and how much Australian companies have been affected by not being part of the Kyoto scheme over the last couple of years.

The Prime Minister has always maintained that he would not damage Australian business or jobs by committing Australia to meeting its Kyoto targets while trading partners remained outside. But that logic has evaporated as it has become clear Australia would meet its 2012 targets anyway, even if this is largely due to a reduction in land clearing in Queensland.

On the other side, a study for the Australian Conservation Foundation says that the failure to ratify Kyoto has cost Australia $3.8 billion a year. It argues that $1.24 billion of that is in lost opportunities associated with emission reduction projects in Australia, $2.38 billion through the clean development mechanism in developing countries and $180 million in carbon credit transactions.

Those figures will always be open to dispute and extremely difficult to quantify. But Tony Beck, chairman of the Australasian Emissions Trading Forum and a consultant with Allens, says there is no doubt that Australia has been excluded from the Kyoto system to its cost.

"The international markets are opening up and we're standing on the sidelines," he says. "It is theoretically possible for major Australian companies to work around the restrictions but we are not part of a network that facilitates that, particularly for smaller companies.

"There are over 700 projects approved in developing countries under the Clean Development Mechanism and we should be a natural leader but our market share is negligible.

"We could also have expected to sell environmental credits to countries like Europe and Japan and Canada but that area of trade is cut off from us."

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BHP Billiton, for example, has a trial operating at its London office where it staples credits to coal deliveries for some customers. (Similar to the one implemented by the Norwegian Government, no doubt.)

Ian Wood, vice-president of community relations, says the company's participation in the European emissions trading system has been an extremely valuable way to get experience for the organisation.

"It's clear we are moving into an era where emissions trading will become a normal part of the operating environment," he says.

The global market is dominated by the European Union's Emissions Trading Scheme, which began operating in 2005 and recorded trading worth over $30 billion last year. Prices of credits fell dramatically due to an initial oversupply of permits but have now rebounded sharply to be worth around $30 a tonne of emissions. Japan has been a big buyer with demand expected to increase.

Here is the full article.