Reducing greenhouse gas emissions from liquid fuels

Key messages

Australian emissions trading scheme

The downstream petroleum industry is committed to producing progressively cleaner fuels and providing them to Australian customers reliably and at competitive, market determined prices. AIP member companies support policy outcomes that effectively address climate change risks while minimising risks to business in order to deliver sustainable environmental outcomes to Australia.

AIP member companies are working closely with the Australian Government to assist with the development of a comprehensive and sustainable suite of policies to address climate change concerns.

The design and implementation of a comprehensive Australian emissions trading scheme (AETS) which includes liquid fuels poses significant challenges. No other trading schemes have developed a template for efficiently imposing a carbon price on all relevant liquid fuels where there are millions of individual fuel users and greenhouse gas emitters.

AETS design features should ensure that:

• the relevant carbon price applies to all liquid fuels entering the Australian market, whether produced locally or imported
• there is transparency of the carbon price
• there are no barriers, other than normal market competition, to price pass-through to final fuel consumers
• the design of the scheme does not distort the choice of business models for the delivery of fuels to Australian consumers
• business and government administrative costs are minimised
• business risks associated with the acquisition of emissions permits are minimised and able to be managed effectively.

Inclusion of liquid fuels in the AETS will mean that AIP member companies will have an obligation to acquire some 115 million emissions permits on behalf of fuel users (around 23% of the total number of emissions permits available in Australia in any one year). The cost of these permits will be about $3.4 billion if emissions permits are valued at $30 per tonne of CO₂. This is equivalent to 160 per cent of 2006 downstream petroleum industry profits, or the current value of typical volumes of crude oil and petroleum product stocks on hand.

From a consumer perspective, emissions permits valued at $30 per tonne CO₂ are equivalent to an additional direct cost of 8–9 cents per litre on the retail price of petrol and diesel.

Impacts of carbon prices

Australian petroleum refineries are energy intensive operations, whether measured in terms of total energy consumed in their operation, or energy costs as a percentage of operating costs (excluding raw materials costs).

The introduction of the AETS is expected to increase direct and indirect petroleum refining costs in Australia.

Since almost all liquid fuels imported into Australia come from countries which are unlikely to impose a carbon price on their refinery operations in the foreseeable future, Australian refiners will be placed at a commercial disadvantage to their overseas competitors. These additional costs will not be recovered from consumers. If the costs are not offset under the AETS, then industry profits will decline. In the case of Australian refiners, this amounts to around $190 million per annum (or 0.6 cents per litre of fuel sales) if emissions permits are valued at $30 per tonne of CO₂. This is equivalent to 33 per cent of average industry profits over the past ten years.

Complementary measures

A range of complementary measures may be needed in the transport sector to achieve significant reductions in greenhouse gas emissions from liquid fuels over the timeframe envisaged by the government. Past experience confirms that fuel price rises of the order of 10–15 cents per litre have not had a sustained impact on liquid fuel use. For example the petrol price spike of 13 cents per litre in the month following Hurricane Katrina in 2005 resulted in a 6 per cent reduction in fuel demand, which was subsequently restored as consumers became accustomed to higher fuel prices. Higher fuel prices have not resulted in a significant and sustained shift towards the purchase of smaller, fuel efficient cars.

Complementary measures in the transport sector to be considered by governments include:

• fuel quality requirements for new generation engine technologies, subject to a full lifecycle analysis of costs and benefits
• the role of alternative liquid fuels
• improvements in fuel efficiency for small to medium petrol and diesel fuelled vehicles, and the introduction of hybrid and electric vehicles
• improved fuel efficiency of heavy transport vehicles
• accelerated fleet turnover to more fuel efficient vehicles
• driver education programs and incentives to encourage more efficient use of vehicles
• improved public transport as an alternative to private motor vehicle use.

In each case, full consideration needs to be given to assessing the benefits and costs of these measures to ensure that climate change benefits will be realised across the full fuel lifecycle, and that all other non-climate-change costs and benefits are identified. Before introduction of any of these potential measures, stakeholders will need to be assured that there are overall net economic benefits from adopting them, and that the measures do not undermine the effects of the AETS.