AU2007100932A4 - Multi sector carbon trading method (MCTM) - Google Patents

Description

24 September 2007 Customer 5710220567

AUSTRALIA

Patents Act 1990 Page 1 of 14 Vj) 00 COMPLETE SPECIFICATION INNOVATION PATENT MULTI SECTOR CARBON TRADING METHOD The following statement is a full description of this innovation, including the best method of performing it known to me: Complete specification Innovation Patent Multi Sector c'arbon Trading Method Complete specification Innovation Patent Multi Sector' Cat-bon Trding Method 24 September 2007 Customer 5710220567 Page 2 of14

ABSTRACT

c 1. Background: The current debate on climate change and the role of a Greenhouse Gases (GHG) Emissions Trading system are based on the total CO 2 emissions. Both the proposed 00 methods by the Commonwealth' and the State Governments 2 as well as the European Emissions Trading Method 3 adopt a "Cap and Trade" method. These methods aim to establish a trading regime by setting a "cap" on emitters of greenhouse gases such as power stations, cement factories, smelters, iron and steel plants, and other industrial facilities. Those who improve their performance and keep their emissions below their allowed "caps" can sell the surplus to those who, for whatever reasons, are unable to keep their emissions below their "caps". This trading in CO 2 emissions between those who exceed their limits and those who have spare emission allowances, will determine the price of CO 2 The design of current "cap and trade" methods mentioned above, have some drawbacks, namely: The methods concentrate mainly on stationary emitters of GHG such as power stations, cement factories etc, but not other businesses in the energy sector such as appliance manufacturers and importers, building developers, energy network companies etc.

Energy efficiency and energy conservation are not explicitly included in the methods, but addressed via complementary public policy measures.

The methods do not have an active role for the residential customers of energy, or for the vast majority of business and who do not have on-site power generation facility, and The methods do not address the legitimate point made by developing countries and newly emerging economies that their economic growth should not be stymied by any emissions trading method.

This innovative method the "Multi Sector Carbon Trading Method" (MCTM) is designed to address the above features so that a carbon trading method acceptable to Australia and other major countries such as the USA, EU, China, India etc can come into force in the long-term.

"Report of the Task Group on Emissions Trading" by the Prime Ministerial Task Group on Emissions Trading, Commonwealth of Australia, 2007.

2 "Possible design for a National Greenhouse Gas Emissions Trading Method" A discussion paper prepared by the National Emissions Trading Taskforce., August 2006 3 European Emissions Trading Method in greenhouse gases started in the EU countries in 2005, and is applicable to about 10,000 sites, mainly power stations, big factories and manufacturing plants.

4 Greenhouse gases are defined in the above references. The term 'carbon', 'carbon equivalent' and 'carbon di oxide' are used synonymously in this document when referring to GHG as a whole.

Complete specification Innovlation Patent Multi Sector Carbon Trading Method 24 September 200 7 Customer 5710220567 Page 3 of 14 2. Description of MCTM: The fundamental premise behind MCTM is that global warming can be tackled N effectively only by a combination of four factors: 0) V) 1. Generation Efficiency: Technology improvements in energy supply 00 such as improving combustion efficiency, carbon capture and storage, N safe and secure nuclear power generation, and large scale renewable energy.

C, 2. Energy Usage Efficiency: Technology improvements in energy c ~consumption of buildings, equipment and appliances, and reducing energy lost in transmission and distribution.

3. Energy Conservation.- Adopting energy conservation practices and minimising per capita energy usage, particularly in countries where per capita emission of CO 2 is high.

4. Population Control: Adopting population growth control policies, particularly in countries with large population and or high population growth rates.

MCTM is a long-term method that aims to address all the four factors within the method itself, by having different "cap" parameters for different sectors, as shown below, but able to be linked to gross CO 2 emissions to enable trading: The different types of"caps" and sectors covered by MCTM are: Power generating facilities will be allocated "caps" for their energy intensity, i.e. CO 2 emittedper MWh generated, and not on total tonnes of CO 2 emitted as in other methods Transmission and distribution companies will be allocated "caps" based on f energy lost in transit,; Wholesalers of energy using technologies and appliances for business and residential customers, will be allocated "caps" based on the Appliance Energy Efficiency Index, which is the energy consumed by low energy efficient equipment expressed as a of total energy consumed by all equipment sold.

Architects, builders, and developers will be allocated "caps" to encourage the building of more energy efficient new buildings and retrofits All business consumers of energy will be given "caps" based on their efficiency of energy usage, i.e. their carbon footprint as a of their sales revenue; All residential consumers of energy in developed countries, with high per capita energy consumption, will receive incentives (and penalties) based on their per capita energy consumption, as an to progressively improve their efficient use of energy and conservation practices; and Countries with large population and/or a high growth rate in population will be allotted "caps" based on their growth in population as an incentive to reduce their population.

If the actual performance is below their allocated "cap", an entity will have surplus

CO

2 certificates, which can be sold or saved for acquittal in future periods. Those Complete specification Innovation Patent Multi Sector Cat-bon Tr-ading Method 24 Septembet- 20077 Customer 5710220567 Page 4 of 14 whose actual performance exceeds their "cap" will need to acquire CO 2 certificates to 0 make up their shortfall.

Each of the different types of 'caps" is described in detail in Sections 3.1 to 3.6. Once the above method has been agreed to by all parties, substantial modelling and negotiations will be required between countries and sectors to set appropriate "caps" 00 to all the above factors sectors, such that the total effect of improvements in all sectors and countries lead to an overall reduction in global greenhouse gases level to the desired level by 2050.

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r The MCTM is innovative since it is a 'cap and trade' method in principle, but differs markedly from all current emissions trading methods in all its features.

3. Details of MCTM 3.1 Emission Intensity Caps to Generators other stationary emitters: Fossil frel fired generators: At an individual power station level, The total emissions by a power station (Emission intensity in Tonnes MWh) (Energy generated by the station in MWh) The MWh generated by the power sector is dependent on the total demand placed on the system by customers as a whole, energy lost in the networks and used in power stations. Generators can and should improve their emission intensity through technology improvements and better operational practices. MCTM aims to provide incentives to improve the generator's emission intensity.

Power generators using fossil fuels will receive "caps" based on their emission intensity, i.e. Tonnes of CO 2 per MWh electricity generated, and not on the total emissions from their chimney stacks. If a power station improved its combustion and operational efficiency and kept its emissions intensity below the 'cap', then it will have some CO 2 credits to sell, even though it may in some cases be emitting more tonnes of emissions, in absolute terms, because of higher MWh generated.

A simplified example shows the broad principle: Generator's current annual generation 1,000,000 MWh Current Carbon intensity 1. 20 Tonnes /MWh The "cap "for next period is set at, say 1. 10 Tonnes /MWh The actual intensity over the period, is, say 1. 05 Tonnes /MWh Credit for outperforming the 'cap" 0.05 Tonnes /MWh Generation during the next period" 1,070,000 MWh

CO

2 certificates available (credit) 0.05 1,070,000 53,500 Tonnes.

Complete specification Innovation Patent Multi Sector Carbon Trading Method Complete specification Innovaction Patent Multi Sectoi- Cat-bon D~ading Method 24 Septemer 2007 Customer 5710220567 Page 5 of 14 Thus the generator has 53,500 Tonnes of CO 2 to its credit which it can either bank or sell.

N, If, on the other hand, the carbon intensity had been brought down only to, say 1.15 STonnes/ MWh during the next period, the generator would have a deficit of 53,500 Tonnes which will have to be bought from the market.

00 The "caps" for other stationary emitters will similarly be based on the efficiency of energy usage, for example it will be Tonnes ofcement/MWh consumed for the cement manufacturing sector as a whole. If an individual manufacturer beats the "cap" by producing more Tonnes of cement per MWh energy consumed, then that Cc company will get CO 2 credits and vice versa.

Non-fossilfuelfired generators: A slightly different approach will be adopted towards non-fossil fuel fired generators, O such as renewable energy generators and nuclear power stations.

These generators will not be subjected to a "cap" as such. Instead, they will receive a credit of CO 2 tonnes, to the amount equal to their generation output minus the energy used in station. The conversion of MWh output to CO 2 tonnes will be done using the real time carbon intensity for the Australian interconnected system as a whole.

Simplified example: Sent out output from a Wind generator during the year 300, 000 MWh Average system carbon intensityJfbr the year 0. 90 Tonnes of C0 2 /MWh

CO

2 certificates available to the wind generator 270, 000 Tonnes of C0 2 3.2 "Caps" on line losses for the Transmission and Distribution businesses Transmission and Distribution companies will receive an emissions "cap" based on electricity lost during transmission and distribution. Network companies need an incentive to reduce the energy lost in transporting energy from power stations (or gas fields) to customers' premises. None of the current methods provides any carbon price signals to the network companies, though their performance has a direct and material impact on emissions from power stations, as can be seen from the equation: MW generated Used in stations Energy sold to customers T&D losses Thus for a given level of energy consumption by customers, an increase in T&D losses will mean more power generation and additional GHG emissions.

The T&D Performance Index (TDPI) is defined as the ratio of(T&D Losses Energy sold). Therefore under MCTM, all T&D businesses will become liable parties with "caps" set on the TDPI.

The simplified example below shows how the concept will work. Note that for simplicity, the transmission and distribution losses are combined here, though in the actual MCTM these two will be treated separately.

Complete specification Innovation Patent Multi Sector Carbon Trading Method 24 September 2007 Customer 5710220567 Page 6 of 14 0

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(Nq Energy sold in the current period Line losses Throughput through the network Network losses as a of sale 9,200,000 MWh 800, 000 MWh 10,000,000 MWh 8.70% The current T&D Performance Index (TDPI) is 8.70% under this example.

Let us assume that the "TDPI Cap" is set at 8.50%.

Assume the network losses during the next period 8.44%, Network will get a credit of (8.50- 8.44) 0.06% of sales Sales during the next period 9,500,000 MWh (say) Credit available to Network 5700 MWh Average system carbon intensity for the system 0.90 Tonnes ofCO 2 /MWh

CO

2 certificates available to the wind generator 5130 Tonnes Again, there is no restriction on volume or growth, but only on the efficiency with which the networks are performing and minimising line losses. Similar concept can be used for improving the power factors and the harmonics issues facing the network businesses.

3.3 Efficiency "Caps" to Energv Equipment and Appliance Wholesalers: This stems from the fact that people do not consume electricity in kWh, but use appliances and equipment that consume electricity. The energy efficiency of the overall stock of energy using equipment and appliances in the society has to be improved to make significant reduction in energy usage and hence energy supply and greenhouse gas emissions.

The liable parties will be all wholesalers who sell energy consuming equipment appliances to the industrial, commercial and residential customers. In the initial phase, these will be restricted to a manageable number of appliances and equipment, as shown in Attachment 1.

The 'cap 'for the wholesaler sector will be applied to the wholesaler's "Appliance Energy Efficiency Index(AEEI) which is defined as Annual MWh consumed by low energy efficient appliance stock sold in the year Annual MWh of total stock of appliances sold by the wholesaler, manufactured or imported.

There are sufficient information on the annual energy consumed by different 'star' rated appliances and equipment. Table 1 shows a simplistic example of a wholesaler selling refrigerator, washing machines and dishwashers only Complete specification Innovation Patent Multi Sector Carbon Trading Method Complete speciication Innovaion Patent Multi Sector Carbon Trading Method 24 September 20107 Customer 5710220567 Page 7 of 14 00

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TABLE 1 Estimates of Tonnes of CO 2 released per year from the various appliances sold in the year High Low Total Product range of the Wholesaler Efficiency 5 efficiency Tonnes Refrigerator 12,000 17,000 29,000 Washing machines 5,000 2,000 7,000 Dish washers 4,000 7,400 11,400 Total 21,000 26,400 47,400 Current Appliance Energy Efficiency Index (AEEI) is (26,400 47,400), which is 56% Assume that the "cap" for the AEEI for the Wholesaler is set at The 'cap' in the above example will be 45% for the AEEI. There will be no restrictions on the number or the range of appliances that the wholesaler can sell, as long as the AEEI remains below the 45% cap.

Let us assume that during next year, the wholesaler sells the same range, but more of the efficient appliances, as shown in Table 2.

TABLE 2 Estimates of Tonnes of C02 released per year from the various appliances sold in the year Product range of the Low Total Wholesaler High Efficiency efficiency Tonnes Refrigerator 18,000 13,000 31,000 Washing machines 6,000 4,000 10,000 Dish washers 8,000 5,000 13,000 Total 32,000 22,000 54,000 New AEEI is (22000/54000), i.e. 41% The wholesaler gets a credit equal to (45 41), i.e. 4% 2,160 Since more efficient equipment have been sold proportionately, the wholesaler gets a credit of 2160 Tonnes of Co 2 which can be traded or kept for future compliance. Note that there is no restriction on economic growth, and that the total emissions have gone up from 47,400 to 54,000 Tonnes in this example. The wholesaler is being rewarded for building up the energy efficiency of the appliance stock as a whole.

High efficiency and Low efficiency can be defined by using the appliance labeling criteria that is already widely in use.

Complete specification 1nnovatlion Patent Multi Sector Carbon Trading Method 24 Septemer 200 7 Customer 5710220567 Page 8 of 14 0 The "AEEI cap" can be set for the total wholesaler sector after obtaining data from Sthe individual wholesaler for all appliances a bottom up approach to setting the "AEEI cap" for the sector). It will be up to the individual wholesalers as to how they 1D keep their individual AEEI below the "sector cap". They can change their product V mix, or buy offsets or sell their credits etc.

00 The only aim of the MCTM for this sector to progressively increase the of high energy efficiency equipment, with rewards penalties attached to the wholesaler's C ability to meet not meet their AEEI cap.

3.4 Efficiency "Caps" to the Building Sector SEnergy consumed by customers depends very much on the energy efficiency of the Sbuildings they occupy residential, commercial or industrial. At present architects, O builders and developers work under many regulations and rules to create energy efficient building stocks, but they do not face explicit carbon pricing signals. The aim of the MCTM is to bring this sector into the MCTM as liable parties subject to emission caps and the right to trade.

The 'cap 'for the building sector will be applied to the "Building Energy Efficiency Index" (BEEI) which is defined as Annual MWh consumed by low energy efficient building stock built in the year Annual MWh of total stock of buildings built by the sector Note that the above BEEI refers to the energy consumed by the building shell, and would not include those appliances already covered under the cap for Appliance Energy Efficiency Index discussed in Section 3.3 to avoid double counting. For example, energy saved from compact fluorescent lamps would be included either in the calculation of the 'caps' for Appliance Energy Efficiency Index and not the Building Energy Efficient Index. Table 3 shows a simplistic example of how this will work in practice.

TABLE 3 Estimates of Tonnes of C02 released per year from the various buildings built in the year Building type High Efficiency Low efficiency Total Tonnes Supermarkets 4,300,000 7,500,000 11,800,000 Office Buildings 4,000,000 6,850,000 10,850,000 Residential Buildings 75,000,000 50,000,000 125,000,000 Total 83,300,000 64,350,000 147,650,000 Current Building Energy Efficiency Index (BEEI) 44% The Cap for the sector will be the BEEI at Complete specification Innovation Patent Multi Sector Cat-on Trading Method 24 September- 200 7 Customer 571022056 7 Page 9 of 14 00

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The current BEEI is 44% based on estimated energy consumption by the low efficiency building stocks 64,350,000/ 147,650,000). Let us assume that the BEEI cap is set at 40%, and that, as a result, more effort was spent on promoting more energy efficient buildings, and the data for the following period is as per Table 4.

TABLE4 Estimates of Tonnes of C02 released per year from the various buildings built during the year High Low Total Building type Efficiency efficiency Tonnes Supermarkets 5,600,000 8,000,000 13,600,000 Office Buildings 7,600,000 5,000,000 12,600,000 Residential Buildings 80,000,000 42,000,000 122,000,000 Total 93,200,000 55,000,000 148,200,000 New EEl is 37% The sector gets a credit equal to (40 37), i.e. 3% 4,446,000 There is no restriction on the extent of the building activities or curbs on growth. The incentives (and penalties) are related to the proportion of energy efficient buildings that are built. The method can be designed to accommodate renovations and improvements to existing buildings as well. Ifa builder were to build mainly low energy efficient buildings, that builder would face a shortfall of CO 2 certificates which will have to be made up by the business.

The existing building rating schemes will be used to define "low efficiency" and "high efficiency" building stocks.

Coplt spcJcto noainPtn ut eco abnTaigMto Complete speciicaion Innovation Patent Multi Sector Cat-bon Trading Method 24 September 200 7 Customer 571022056 7 Page 10 of 14 "Caps" to all medium and large businesses not covered in earlier sections: 0 MCTM aims to promote efficient and wise use of energy by all businesses, irrespective of their size or nature. A simple measure of efficient use of energy would D be the Energy Usage Index (EUI) which is defined as: 00 Carbon footprint of the business in Tonnes of CO 2 per annum Revenue generated by the business per annum r Note that both the direct energy consumption as well as the embodied energy (such as energy consumed in making office furniture, computers, carpets etc.) is used here.

O Care should be taken to ensure that there is no double counting of the impact of Sbuildings and appliances used in 3.3 and 3.4.

O The simplified example in Table 5 shows that the EUI for the business is 0.875%. Let us assume that the "cap" for EUI has been set at 0.840%.

TABLE Current MWh energy used 35,000 Gross revenue from the business 4 000 000 Energy Usage Index 0.875% Cap set at (say) 0.840% If the business keeps their new EUI below 0.84%, it would get a credit and if it is above 0.84% it would incur a deficit. Assume the performance in the next reporting period is as per Table 9.

TABLE 9 New MWh MWh energy used 38,000 Gross revenue from the business 4,050,000 Energy Usage Index 0.938% Deficit to be made up -0.098% Deficit in Equivalent energy MWh 37 Since the new EEUI is 0.938%, and above the EUI cap of 0.840%, the business would need to make up the deficit in its energy efficiency performance to the tune of 0.098%, or about 37 MWh, which would be equivalent to about 33 Tonnes of CO 2 assuming a figure of 0.9 Tonnes /MWh for the Australian interconnected electricity system's carbon intensity factor. The business would need to source 33 Tonnes from the market. If, on the other hand, the business had lowered its Energy Usage Index to a value below the 'cap' of 0.840%, it would have received a credit of C02 tonnes which could be sold to another party. While large businesses may choose to transact these in the carbon market, smaller businesses may be able to transact via their energy retailer.

Complete specification Innovation Patent Multi Sector Carbon Trading Method 24 September 200 7 Customer 5710220567 Page 11 of 14 3.6 Extended MCTM (includes residential customers): The ultimate goal should be to bring all residential energy consumption into the a MCTM, in particular the two key factors, which determine the emissions from a Scountry: 00 1. Energy consumed per capita in a country, and N 2. Number of people in a country.

3.6.1 "Caps" to all residential customers of enerav businesses based on Cck Wh/person: SHaving brought in energy efficiency of power generation, building stocks, appliances Sand equipment, transmission and distribution performance, the last remaining key element of MCTM is one of providing the residential customers with the right Sincentives and opportunities to adopt efficient and wise use of energy, i.e. the behavioural aspects.

Note that this method will be applicable only to those residential customers in those countries whose per capita CO 2 emission is above an agreed threshold level. In general, developing countries and newly emerging economies with low per capita

CO

2 emissions will not be subject to this method.

The principle behind this approach is not to set "caps" to residential users, but to provide incentives to customers to progressively adopt energy conservation practices.

The method can be explained with the example below.

Case In the case of a residential customer, assume that this year's annual consumption is 6000 kWh, compared to say 7000 kWh for the previous year. As there is a saving of 1000 kWh, the customer will get a credit of, say 30% of savings, i.e. of 1000 kWh 300 kWh. As such the customer will be billed by the Retailer not for 6000 kWh, but 5700 kWh only.

Case 2: Conversely, if the consumption of the customer this year is 8000 kWh, compared to 7000 kWh last year, the extra consumption will be 1000 kWh. The customer will be billed for an additional 30% of that extra consumption, i.e. 30% of 1000 kWh 300 kWh. Thus, the customer will be billed for 8000 300 8300 kWh for that year.

In the next year, benchmark comparison will be made against this year's consumption only, i.e.6000 kWh in case 1, and 8000 kWh in case 2. Thus, any windfall gains or losses due to abnormal energy consumption pattemrn in any year will apply for only one year.

In order to keep the scheme simple, no adjustments are proposed to metered consumption such as unseasonable weather, occupancy rates, number of appliances, efficiency of appliances, etc.

In this example, the customer is given only 30 of the savings (or excess), since energy efficiency of building stocks and appliances in the household also affect Complete specification Innovaion Patent Mulii Sector Carbon Trading Method 24 September 2007 Customer 5710220567 Page 12 of14 energy consumption, which is targeted separately in the MCTM. As this is done through energy retailers, the issue of compensation for any net shortfall in their revenue incurred by them would need to be addressed.

t", SThe option to convert the kWh savings (or penalties) into tradeable carbon certificates can be considered at a later stage, as also the inclusion of transport fuel, using "fuel 00 used per person-km travelled" as the index.

3.6.2 "Caps" based on population growth: Cc Note that this will be applicable to only those countries which currently have a population level above a threshold, or a population growth rate above a threshold.

Countries such as China, India, Brazil, Indonesia, and USA would be expected to be covered by this section.

SThis cap recognises the fact that the more people there are in a country, the more greenhouse gas emissions there will be.

The concept is explained using a simple example. Assume a country has a population of 200 Million, and that an average cap of 2.0% increase per annum has been agreed to for this group. Also assume that the per capita emission of GHG is 7 Tonnes per person.

If the country restricts its population growth to i.e. 203 Million, it will be 1 Million less than the agreed cap of 204 Million. Hence it will get a credit of 7 Million tonnes of carbon that it will be able to trade. 1 Million 7 Tonnes per person.) If, however, the population growth is i.e. the new population is 205 Million, and then it will have to procure 7 Million tonnes of carbon to meet its obligations, using the pre-existing per capita emission figure.

This method links the effectiveness of a country's population planning programmes to the carbon market.

4. Advantages of MCTM: The main advantages of MCTM over the current methods are: It does not hinder economic growth of any country or any business, It is likely to be acceptable to all countries and businesses.

Climate change is a global problem and any solution should involve the participation of as many people in the word as possible. MCTM aims to do that.

It actively encourages the adaptation of energy efficient technologies all along the value chain, not just at power stations, i.e. it provides equal weight to both energy supply and demand.

It brings in wise use of energy and conservation at the individual level into the method.

Every liable party has only obligations that are within the control of the liable party.

Complete specfication Innovaion Patent Multi Sector Cat-bon Trading Method 24 September 2007 Customer 5710220567 Page 13 of14 SIt lends itself to relatively easy implementation due to the ability to link up with 8 existing regulatory and data collecting mechanisms.

The principles behind this method can be eventually adapted for other key economic activities such as all forms of transport such as air, road, sea and rail, Sfugitive emissions, fugitive emissions land use, land use change and V) forestry (LULUCF).

00 0 The MCTM is compatible with the other two Kyoto flexible mechanisms, namely Clean Development Mechanisms (CDM) and Joint Initiative (JI).

MCTM will enable the dismantling of a plethora of government regulations.

N 0 MCTM has the potential to create a deep and liquid global carbon market, with the price of C02 being able to be factored into all human economic activities.

a Carbon can become a currency as widespread as the US dollar, with the carbon price becoming an indicator of the global environmental health.

It is a bottom-up approach, that would provide a realism check in the setting of Sany long-term CO 2 emission targets, so that such targets are achievable and practical, and do not remain just wishful thinking.

The principles behind MCTM are likely to be acceptable to both the developed and developing countries, and the scheme offers scope for each country to adjust its pace of implementation based on its current state of economic development.

Lompt etc speci/ication Innovation Patent Multi Sector Carbon Trading Method Complete specfication Innovation Patent Multi Sector Cat-bon Trading Method