Aim of the Australian Climate Exchange

The Australian Climate Exchange was conceived by two former executives of Australia's largest independent oil and gas producers back in July 2005, who saw, from the perspective of large greenhouse gas emitters, that there were major structural market hurdles that prevented developers of low-emission technologies and projects from selling the resulting emission reduction benefits to the big emitters who needed it.

ACX was officially born in December of that year and has subsequently worked on frameworks and mechanisms to bring the suppliers and buyers of greenhouse gas (GHG) emission abatement together.

In a recent interview with Sustainability Matters, managing director of ACX, Tim Hanlin, discussed his views on sustainability and how he believes companies can make themselves more sustainable for the future.

SM: What is ACX?

TH: In July 2007, ACX launched the first electronic emissions trading platform (which was similar to the exchanges successfully trading GHG in Europe) in Australia. By listing for trade government-accredited emission commodities, the ACX ensures that the abatement that is counted in the certificates traded actually represents a true reduction in the nation's emissions.

This, combined with the abatement registries for the offsets listed, ensures that abatement is not double counted and that sellers actually have the right to sell. The business rules of ACX ensure an orderly and transparent market that no participants can manipulate or game.

The trading platform, which was built and administered by ACX's joint venture partners the Australian Pacific Exchange (APX), ensures that the price paid for the abatement is a fair market price. APX has many years of experience in running financial markets and making it a logical partner to deliver ACX's vision of a fair and transparent market for GHG emission abatement.

SM: How does it work?

TH: In many respects ACX is a leader in this field. In the greenhouse space, particularly in Australia, there are a lot of people that make a good living by talking about, advising on or calling for a price signal for carbon and a mandatory emissions trading scheme. ACX has gone out and done something about it.

We were the first electronic emissions trading platform in Australia, but we also achieved some world firsts. The ACX Carbon Board is the first exchange anywhere in the world to list government-accredited emission reduction commodities (VERs from the Greenhouse Friendly Approved Abatement program). In listing our first NGACs from the New South Wales Greenhouse Gas Abatement Scheme we became the first exchange in the world to list compliance certificates next to voluntary emissions commodities.

SM: What is emission abatement and how does it work?

TH: Essentially emission abatement, or carbon credits as they are sometimes called, are units of measuring 1 tonne of carbon dioxide equivalent (CO₂e) that has been stopped from being released into the atmosphere and therefore stopped from adding to the global warming effect that is causing climate change. By trading this abatement to someone else they are doing two things:

1. Getting value for the abatement, therefore providing the financial support for the abatement activity; and
2. Passing the right to claim that they caused the abatement to happen to the buyer of the abatement.

The physical trading is done by:

• Suppliers of abatement instructing their brokers to 'offer' a certain quantity of abatement at a certain price ($/tonne of Co₂e);
• Buyers instructing their brokers to 'bid' quantities at certain prices.

The market can see the bids and offers and participants can instruct their brokers to amend their bids and offers to 'meet the market'.

When the price bid matches the price offered, the electronic platform matches the two and a transaction occurs with a subsequent settlement and transfer process that can take up to five days to complete.

But the buying and selling is only half the story. For the abatement to be truly used it must be offset against an equal emission that has occurred. This is done by acquitting the abatement against an emission, thereby extinguishing both. This is done through the Abatement Registry, which records the acquittal of each abatement certificate. Once acquitted, abatement certificates cannot be used again.

SM: Why has it become important for companies to measure greenhouse gas emissions?

TH: There needs to be, and in fact, there will be a cost associated with the disposal and treatment/storage of what is essentially a waste stream for businesses i.e. its greenhouse gas (GHG) emissions. Without identifying the sources and measuring the amount of GHG that is produced from their operations companies cannot determine the potential commercial impact of various costs and regulations that will be imposed on their business in a carbon constrained future.

SM: What is EmMap and how does it work?

TH: EmMap, or the emissions measurement management and action pathway, is a system of guidelines and interactive workshops designed to take any organisation through the 12-stage process of managing emissions with minimal assistance from outside consultants. ACX developed EmMap in recognition that the market needed to be informed in order to be able to trade. We saw a shortage of skills and knowledge in the consulting world able to provide the assistance required to manage the company's emissions.

The system is designed to build internal capability so that organisations can manage their own emissions without a long-term dependence on consultants. It is available to companies that sign up to an annual membership of ACX.

The 12 steps in this process include:

1. Establish carbon accounting principles
2. Identify emissions sources
3. Measure and calculate the baseline
4. Establish an emissions profile
5. Identify abatement options
6. Evaluate cost abatement options
7. Develop the internal abatement cost curve
8. Build a business case for policy options including targets and timeframes and cost/benefit analysis of the abatement opportunity
9. Adopt an emissions policy
10. Develop an action plan which usually includes the elements of abatement, restructure and offsetting
11. Cost the action plan
12. Execute

SM: How do you capture carbon value?

TH: Carbon value is captured first by establishing the 'business as usual' reference or baseline. We then measure the improvement in emissions after the implementation of an abatement activity such as the replacement of an inefficient plant or the substitution of a lower emissions fuel. The measured improvement is then verified and certified by independent auditors and the subsequent 'credits' can then be traded or banked for future use. All this must be carried out under the rules and provisions of an accreditation scheme administered by an independent body such as the Australian Greenhouse Office (AGO).

SM: How can a company create a competitive advantage?

TH: There are several ways that companies can create a competitive advantage. The process of measuring emissions and looking for abatement opportunities in it uncovers operational efficiencies that can have an immediate effect on competitiveness and both top and bottom line performance. In fact a lot of the 'low hanging fruit' in emissions reduction is actually cash positive.

Consumers are starting to look at the emission footprint of their product and service providers and therefore there is an opportunity to build retail brands through commitments to reduce the emissions associated with them. For example, we are seeing companies like banks and national accounting firms making commitments to go 'carbon neutral' by a particular date. These companies also seem to rate highly with Generation Y employees. Attracting and maintaining high-quality staff will be a growing source of competitive advantage for many companies

By engaging this issue now and developing internal capability, companies can embed the management of this issue in their asset and project planning processes, procurement and contracting procedures and other management practices, avoiding the possibility of stranded assets and legacy arrangements which could see them lose a competitive advantage.

SM: What are ACX's strategies to enable this?

TH: By providing the tools to engage and develop capability through the EmMap system and the trading platform, ACX allows companies to assess and manage the risks and opportunities that operate in a carbon-constrained world.

SM: What are your thoughts on the future of carbon reduction in Australia and are we doing enough?

TH: Despite the fact that we represent only 1% of global emissions, Australia has more to lose and more to gain than any other country in terms of climate change and the world's response to it. As such we have more reason than any country to show leadership in emission reduction. Unfortunately, we are doing a great deal of talking about it and very little doing of anything. The only certainty is that the longer we leave it to begin to make serious cuts in emissions, the more severe the cuts will need to be in order to stabilise CO₂.