With infrastructure influencing around 70% of carbon emissions in the economy, decarbonising our infrastructure is fundamental for reaching Net Zero. The value of carbon used in business cases and Cost Benefit Analysis (CBA) is proving critical to funding the decarbonisation projects needed to achieve Net Zero by 2050, from renewable energy zones and transmission upgrades to zero emission fleet transitions and active transport initiatives. In this article, our experts take a look at what it takes to get the value of carbon right, and why this is essential for meeting Australia’s Net Zero targets.
The value of carbon refers to the monetary cost assigned to the release of carbon dioxide and other greenhouse gases into the atmosphere, taking into account the economic, social, and environmental impacts of these emissions. This value is typically expressed in terms of a cost per tonne of carbon dioxide equivalent (CO2e) and is used as a critical tool for policymakers to incorporate climate change considerations into their decision-making processes.
Historically, Australian guidance for cost benefit analysis on infrastructure projects has valued carbon much lower than other countries, meaning that decisions may not accurately reflect the costs and benefits to society of implementing a project where carbon emissions are concerned. The figure below shows a hypothetical* decarbonisation project which is highly sensitive to the varying of the carbon value assumed.
Infrastructure Australia recently released an interim Guide to assessing greenhouse gas emissions, which includes plans to consult with Australian government stakeholders on developing national guidance on a carbon value. The guide notes that there is currently no consistent national value in Australia that could be used to value emissions in CBA.
Infrastructure NSW is leading other states and territories, recently releasing a Decarbonising Infrastructure Delivery discussion paper and roadmap, setting out an agenda to reduce carbon emissions from the delivery of public infrastructure and including actions to consistently measure and value carbon in business cases. NSW Treasury has updated its guidance on the carbon value in CBA, nearly doubling the value commonly adopted for transport business cases across Australia but stopping significantly short of much higher values being used in the European Union and United Kingdom at the time of publication. The guide also identifies the need for carbon abatement cost data for the NSW and Australian economy to inform carbon valuation in line with net zero targets.
Supporting complex infrastructure decisions
For WSP’s Ray Winn, Technical Executive - Economics and Business Cases, and James Logie, Net Zero Lead – Strategic Advisory, carbon emissions and other environmental and social factors are becoming increasingly important considerations for the economic appraisals and business case work that they conduct.
Ray describes why the cost of carbon is so important, saying, “Setting monetary values for carbon impacts over time that reflect the expected impacts on society is key to properly assessing and prioritising projects to effectively implement governments’ Net Zero policies.”
James adds, “A consistent approach to measure and manage whole of life carbon is also very important – we need to be able to weight up the benefits and disbenefits over the project lifecycle and you can’t manage what you don’t measure.”
Three possible approaches for valuing carbon
There are three main ways of valuing carbon, which are all used in Australia. These are the: Damage Cost Approach, Target Consistent Approach, and the Market Price Approach.
Target Consistent Approach
The Target Consistent Approach is a practical method that can be applied in the business case or the investment decision stage of a project. What it does is say, ‘OK if you have a target of Net Zero by 2050 and an intermittent target of 50% reduction by 2030 (for example), then what's the cost of achieving that?’ It looks at all the sectors in the economy and the emissions of each. Essentially, it answers the question of, “How much it will cost per tonne to make that entire sector zero emission?”.
Damage Cost Approach
The Damage Cost Approach is really a theoretical estimate. We don’t know what the future cost of impacts will be exactly. There are models that predict this, but it’s difficult to know how accurate they are, since climate change is such a big issue. There will be environmental impacts and social impacts, but we don’t have precise information on what all those impacts will be.
Market Price Approach
The Market Price Approach is a good way of knowing how society values carbon at a given point in time. However, it is susceptible to market failures and imperfections, as well as artificial caps on pricing. The value attributed to carbon should avoid dependency on market imperfections.
In the absence of an appropriate damage cost or target consistent approach study in Australia, the updated NSW Treasury Guidance takes a market price approach using a 12-month average from the European Trading Scheme (ETS).
Australia’s carbon valuation guidance
Excluding the NSW Treasury guidance update, the most recent transport sector guidance comes from the 2022 Australian Transport Assessment and Planning (ATAP) Environmental Parameter Guidelines, recommending a value of $65/tCO2-e ($2022). The underlying source of this estimate is based on a combination of low damage cost estimates from pre-2000 studies and outdated target-consistent estimates derived from the Kyoto Protocol targets, which have been superseded by the Paris Agreement. Consequently, Australia's approach to carbon valuation needs to be updated to accurately reflect the benefits of reducing emissions in line with current commitments and the latest research.
Since 2003, Australian guidance on valuing GHG emissions in the transport sector was found to be largely based on European studies dating back to as early as 1995. A review of the underlying studies found that Australian guidance has been consistently based on ‘low range’ damage cost estimates and outdated emission targets. Utilising central estimates from the source literature would lead to a significant increase in the valuation of carbon.
Towards best practice
In WSP’s analysis of the methods outlined above, the Target Consistent Approach was judged to be the best way to value carbon emission changes in CBA. It is the most practicable method to apply consistently between projects and over time. It also aligns with international best practice, and most accurately captures the cost to society of meeting emissions commitments.
WSP research of international jurisdictions and valuations found that:
- The Target Consistent Approach is the most common method of GHG valuation.
- Despite the presence of the European Union Emissions Trading Scheme (market price), the EU commission endorses the Target Consistent Approach over a Market Price Approach for transport sector appraisals.
- Different jurisdictions reach different valuations based on their policy targets and carbon abatement costs.
The Market Price Approach does not appropriately reflect the costs of Greenhouse Gas (GHG) emissions for use in the CBA. The limitations with the EU ETS, or market prices more broadly, are related to market scope, design, and operation.
From an economic point of view, using the Damage Cost Approach is preferable to the Target Consistent Approach as it directly measures and values the impacts of climate change. Conceptually, it provides the best estimate of the monetary value of impacts. However, the absence of accurate and reliable, short-term and long-term damage cost estimates, undermines using this method to value carbon in CBAs.
With Australian guidance using a mixed range of methods, and typically valuing carbon far lower than our global counterparts, it is difficult to make informed decisions that align with our current Net Zero targets. Low carbon valuations can make it look like projects that reduce GHG emissions are not worth doing – when we know they will be crucial for Australia to reach Net Zero. To make the right decisions moving forward, it is time to re-examine our approach, and bring it in line with Australia’s ambitions for more sustainable transport and infrastructure.
According to Ray “We need better information on how much it costs to reduce GHG emissions so that this can be accurately reflected through a Target Consistent Approach to valuation. We also need a standard way to value GHG emissions for all government projects, so we can easily compare and contrast.”
Without such changes, it will be difficult to achieve Australia’s ambitious, but necessary Net Zero targets.
For more information, contact James Logie, Nick Gallaugher, Paras Bhutiani, or Ray Winn.
* In this scenario, the hypothetical project is a project where 50% of benefits (relative to costs) are derived from carbon value and 50% benefits (relative to costs) from other sources.