This slide-deck explains the role that emissions trading can play in a policy framework aimed at addressing climate change.

2. A new direction is needed The way we produce and use energy today is not sustainable

3. Pathways to 2050 for Australia 0 50 100 150 200 250 300 350 400 $0 $20,000 $40,000 $60,000 $80,000 GDP per capita, US$ 2000 (ppp) Energy per capita, GJ A significant shift required in both “energy per GDP” and “CO 2 per unit of energy used” 1971 Improving energy efficiency 2025 2050 1990 2004 CO 2 per energy unit used, t / TJ Slope = Energy per GDP

4. Australia 2004 Solar (5 GW) Wind (5 GW) Coal / CCS (5 GW) Hydro (5 GW) Biomass (5 GW) Coal (5 GW) Gas (5 GW) Direct use (0.2 EJ) Vehicle (2 million) High efficiency vehicle Alternative fuel vehicle ~ 2GW capacity 20 million people 3.25 EJ Final Energy GDP $US 30 K per capita* 350 MT energy CO 2 * USD 2000 (ppp)

5. Australia 2025 Solar (5 GW) Wind (5 GW) Coal / CCS (5 GW) Hydro (5 GW) Biomass (5 GW) Coal (5 GW) Gas (5 GW) Direct use (0.2 EJ) Vehicle (2 million) High efficiency vehicle Alternative fuel vehicle ~ 2GW capacity 25 million people 3.45 EJ Final Energy GDP $US 45 K per capita* 300 MT energy CO 2

6. Australia 2050 Solar (5 GW) Wind (5 GW) Coal / CCS (5 GW) Hydro (5 GW) Biomass (5 GW) Coal (5 GW) Gas (5 GW) Direct use (0.2 EJ) Vehicle (2 million) High efficiency vehicle Alternative fuel vehicle ~ 2GW capacity 28 million people 3.27 EJ Final Energy GDP $US 74 K per capita* 168 MT energy CO 2

7. Pathways to 2050 for the USA (illustrative) 0 50 100 150 200 250 300 350 400 $0 $20,000 $40,000 $60,000 $80,000 $100,000 GDP per capita, US$ 2000 (ppp) Energy per capita, GJ A significant shift required in both “energy per GDP” and “CO 2 per unit of energy used” 2025 2050 1971 CO 2 per energy unit used, t / TJ 1990 2004 Slope = Energy per GDP Improving energy efficiency

8. USA 2004 Solar (50 GW) Wind (50 GW) Coal / CCS (50 GW) Hydro (50 GW) Biomass (50 GW) Nuclear (50 GW) Coal (50 GW) Gas (50 GW) Direct use (5 EJ) Vehicle (20 million) High efficiency vehicle Alternative fuel vehicle 294 million people 66.5 EJ Final Energy GDP $US 36 K per capita* 5.8 billion tonnes energy CO 2 * USD 2000 (ppp)

9. USA 2025 (illustrative) Solar (50 GW) Wind (50 GW) Coal / CCS (50 GW) Hydro (50 GW) Biomass (50 GW) Nuclear (50 GW) Coal (50 GW) Gas (50 GW) Direct use (5 EJ) Vehicle (20 million) High efficiency vehicle Alternative fuel vehicle 335 million people 65.5 EJ Final Energy GDP $US 57 K per capita* 4.9 billion tonnes energy CO 2 * USD 2000 (ppp)

10. USA 2050 (illustrative) Solar (50 GW) Wind (50 GW) Coal / CCS (50 GW) Hydro (50 GW) Biomass (50 GW) Nuclear (50 GW) Coal (50 GW) Gas (50 GW) Direct use (5 EJ) Vehicle (20 million) High efficiency vehicle Alternative fuel vehicle 400 million people 60.1 EJ Final Energy GDP $US 88 K per capita* 2.4 billion tonnes energy CO 2 * USD 2000 (ppp)

11. Key Sectors in the “energy and CO 2 economy” Oil Biomass Gas Coal Nuclear Renewables Primary Energy Liquids Direct combustion Industry and Manufacturing Mobility Final Energy Agriculture and Land Use Energy Energy Energy Buildings Power Generation

12. A structured policy approach is needed A simple, high profile and credible target for the renewables’ share of power generation, supported by a range of incentives to encourage investment. Measures to incentivise new fuels based on their “well-to-wheels” CO 2 reduction potential, implementation of vehicle efficiency standards and vehicle/road-use programs targeted at drivers A series of robust energy standards for buildings, appliances etc. with incentives for retrofit of existing infrastructure. "Cap and trade" emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.

13. Emissions Trading or “Cap-and-trade” Initial emissions 100 Mt p.a. Year 5 at 95 Year 15 at 80 Year 10 at 88 Offsets Allowance trading between facilities $ CO 2 Government issues 88 million allowances into the economy CCS Project Efficiency Project

17. Global competition issues $ US product price € EU product price (+ € C) EU installation – carbon constrained ME Installation – no carbon constraint The facility without a CO 2 constraint has a competitive advantage into both domestic and export markets, leading to either or both CO 2 leakage and profit leakage.

18. The CO 2 price and allocation Points of regulation Resource Power Generation Factories Heavy industry Light industry Consumer Electricity Time CO 2 price impact Free allocation early on as little / no price pass through Progressive shift to auctioning as the CO 2 price impacts the economy Full auctioning as the CO 2 price impacts the entire value chain Auction funds recycled to consumers through the tax system

19. A profit neutral approach CO 2 allowances a $ = b $ a $ % $ CO 2 + Product b $ % auctioning Some pass-through $ Recycled, e.g. through the tax system

24. Going global ! 2000 2005 2010 2015 2020 2025 Pre-Kyoto Kyoto Post 2012 Linkage framework Linkages develop between all systems and more systems appear Danish-ETS UK-ETS Australian ETS US National “cap-and-trade” Norwegian ETS EU-ETS CDM CDM evolves to includes sectors Expanding EU-ETS Japan technology standards New technology mechanisms evolve (e.g. for CCS) China adopts CCS standard New Zealand ETS