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Submission by LEND LEASE CORPORATION in response to NSW ENERGY

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Submission by LEND LEASE CORPORATION in response to NSW ENERGY Powered By Docstoc
					                                     Submission by
                       LEND LEASE CORPORATION




                                     in response to




      NSW ENERGY EFFICIENCY TRADING SCHEME
                               DISCUSSION PAPER
                             RELEASED JULY 2008




6 August 2008




_____________________________________________________________________________________________________
NEET DISCUSSION PAPER RESPONSE                   1                       LEND LEASE CORPORATION
CONTENT
1.0       Executive Summary ....................................................................................................................... 4
   1.1       Objectives and Principles............................................................................................................. 5
2.0       The Importance of Energy Efficiency ........................................................................................... 6
   2.1       Relativity of Supply-Side Abatement to Energy Efficiency ........................................................... 6
   2.2       Lowest Cost Abatement from Energy Efficiency .......................................................................... 7
   2.3       Infrastructure Costs...................................................................................................................... 8
   2.4       Energy Security ........................................................................................................................... 9
   2.5       Timeliness.................................................................................................................................... 9
      2.5.1      Speed of Implementation .......................................................................................................10
   2.6       Predictability and Volume ...........................................................................................................11
3.0       Price Signals: A Common Misconception...................................................................................11
   3.1       Market Efficiency.........................................................................................................................12
      3.1.1      Market Based Instruments .....................................................................................................12
4.0       Why Should the Building Sector be Covered? ...........................................................................13
   4.1       Abatement Potential....................................................................................................................14
      4.1.1      NSW DWE Modeling..............................................................................................................16
   4.2       Least Cost Abatement ................................................................................................................16
      4.2.1      Minimising Administration, Compliance and Transaction Costs.............................................16
   4.3       Economic and Social Benefits of Abatement in the Building Sector ...........................................19
      4.3.1      Social Benefits .......................................................................................................................20
      4.3.2      Increased Health, Wellbeing and Productivity of Occupants..................................................20
      4.3.3      Skills, Technology and Jobs...................................................................................................22
      4.3.4      Social Acceptability ................................................................................................................23
   4.4       Leveraging Australian Building Sector Leadership .....................................................................24
   4.5       Global Leadership.......................................................................................................................25
5.0       Residential and Non-Residential Buildings.................................................................................26
6.0       An Error in the National Greenhouse Gas Inventory..................................................................26
7.0       Split Incentives or Principal-Agent Barriers................................................................................27
   7.1       In-Built Asset Depreciation..........................................................................................................27
8.0       Operational Efficiency, Passive Design and Onsite Generation ...............................................28
   8.1       Building Rating Tools ..................................................................................................................28
   8.2       Net Exporters of Electricity..........................................................................................................28
   8.3       Distributed Power Generation and On-site Renewables.............................................................28
   8.4       Proportional Increase in Renewable Energy Use .......................................................................29
   8.5       Technical Line Losses ................................................................................................................30
9.0       Existing Buildings .........................................................................................................................30
10.0      Mandatory Coverage of All Non-Residential Buildings..............................................................31
11.0      Penalties for Inaction ....................................................................................................................32
12.0      Interaction with the Federal Carbon Pollution Reduction Scheme ...........................................32
   12.1      Creating an Unconstrained Carbon Market.................................................................................32
   12.2      Disaggregation of Abatement Opportunities ...............................................................................33
   12.3      Downward Pressure on Excessive Fuel and Energy Prices .......................................................34
      12.3.1 Driving Energy Market Efficiency ...........................................................................................35
   12.4      Correction of Perverse Incentives...............................................................................................35
   12.5      Correction of Rebound Effect......................................................................................................36
   12.6      Overlap between Concurrent Emissions Trading Scheme and Energy Efficiency Trading
   Schemes....................................................................................................................................................36
      12.6.1 On-Site Emissions by Buildings .............................................................................................37
13.0      Design Features of an Efficiency Trading Scheme ....................................................................37
      13.1.1 Development of an Energy Intensity Cap...............................................................................39
      13.1.2 Abatement Certainty ..............................................................................................................41

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NEET DISCUSSION PAPER RESPONSE                                              2                                  LEND LEASE CORPORATION
    13.1.3 Coverage ...............................................................................................................................42
  13.2     Assignment of an Abator.............................................................................................................42
  13.3     Facility and Portfolio Level Thresholds .......................................................................................42
    13.3.1 Residential and Non-Residential Thresholds .........................................................................43
  13.4     Permit Design .............................................................................................................................43
    Offset Price as a Risk-adjusted Permit Price ........................................................................................43
    13.4.1 Fungibility...............................................................................................................................45
    13.4.2 Prevention of Double-Counting ..............................................................................................45
  13.5     How it Would Work .....................................................................................................................46
  13.6     Inter-Temporality: Banking and Borrowing..................................................................................52
  13.7     Scheme Reviews ........................................................................................................................52
    13.7.1 Governance ...........................................................................................................................53
    13.7.2 Compliance and Penalties .....................................................................................................53
  13.8     Learning from International Examples ........................................................................................53
Appendix 1: Lend Lease Corporation ........................................................................................................55
Glossary of Terms .......................................................................................................................................56




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NEET DISCUSSION PAPER RESPONSE                                           3                                  LEND LEASE CORPORATION
1.0           Executive Summary

This submission (the ‘Paper’) is provided in response to the NSW Energy Efficiency Trading Scheme
Discussion Paper released in July 2008 (the ‘Discussion Paper’).

Lend Lease agrees with the statement in the Discussion Paper that :

           ‘Energy efficiency is critical to [the objective or reducing cost of abatement to the economy]
           because it can contribute to abatement at low cost – sometimes at negative cost – and has
           the potential to improve productivity through more economically efficient energy
           consumption and supply patterns’1

Indeed, Lend Lease recognises that energy efficiency is the cheapest, fastest, lowest risk way of reducing
greenhouse gas emissions while also providing a range of other economic benefits.

It is essential to note that virtually all of the cost negative carbon abatement opportunities in developed
countries worldwide exist in buildings.

However, despite the demonstrable need and potential for emissions reductions in the building sector,
uptake of emissions reduction initiatives has been poor. This is largely due to the split incentives nature of
the property industry and the lack of financial incentives that would ensure a return on investment from
energy efficiency is as competitive as other sector returns..

An Emissions Trading Scheme is the most effective tool to drive emissions reductions in the building
sector because it will drive though the split incentives and address emissions reductions which occur at
the design, construction and operation phases of both new building and refurbishment of existing
buildings, enabling owners and developers to make a competitive financial return on their or their
shareholders investments in emissions reduction initiatives.

Significantly too, unlike other policy measures which might drive greenhouse gas mitigation in the building
sector, an Emissions Trading Scheme would not only provide the ‘carrot’ but also the ‘stick’ for the sector,
through permits for inaction.

The failure to date of the Carbon Pollution Reduction Scheme as proposed at a Federal level to
adequately address energy efficiency and buildings is a major flaw that will deny Australia its best chance
of effectively and cost-effectively achieving deep and rapid cuts in greenhouse gas emissions. It will also
deny Australia of a raft of other co-benefits, including improved health and productivity of householders
and office-workers, as well as skills, jobs and technology growth.

Against this, Lend Lease believes the NSW Energy Efficiency Trading Scheme as outlined in the
Discussion Paper is a step in the right direction in that it seeks to address energy efficiency, but it will
have limited success as proposed.

As a Tradeable White Certificate Scheme, the NSW Energy Efficiency Trading Scheme will reward energy
efficiency gains but, by failing to penalise inaction it will not stimulate energy efficiency improvements in
all new and existing buildings across the various types of buildings.

The NSW proposal is to recognise energy efficiency from the building sector achieved on a ‘project’ basis,
according to a finite set of eligible abatement projects and approved methodologies. The NEET will limit
both opportunity and innovation by business in achieving the desired outcome.




1   NSW Energy Efficiency Trading Scheme Discussion Paper released (July 2008), Page 1
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NEET DISCUSSION PAPER RESPONSE                                      4                    LEND LEASE CORPORATION
In addition, international failures of similar schemes note the need for a project-based approval process
will not only drastically increase participation costs for both participants and administrators, but also
create delays in approval processes all of which adds a premium cost and risk to innovation.

At worst, the NEET could actually promote the wrong solutions. Tradeable White Certificate Schemes
reward one-off investments in energy efficiency initiatives which result in operational energy reduction
only; they do not reward energy efficiency gains through non-investment reductions, particularly through
passive design initiatives, which deliver significant emissions reductions. So for example, if the air-
conditioning system in a university campus building is at its end-of- life and requires replacement,
Tradable White Certificates would promote the replacement of this plant and equipment with a new air
conditioning system, rather than allowing the consideration of alternatives, including 100% passive
ventilation – i.e. no air conditioning system. .

Lend Lease believes operational energy improvements reduce greenhouse gas emissions by
approximately 25%; innovative design and technology solutions can make a building 100% more energy
efficient and improve the occupant health and wellbeing.

As well, by virtue of being complementary to Emissions Trading Schemes, nor do Tradable White
Certificate Schemes have the same financial value as carbon credits under an Emissions Trading
Scheme so their impact as a fiscal incentive is further minimised.

Finally, Lend Lease notes that the energy efficiency component of the Greenhouse Gas Abatement
Scheme (GGAS) on which the NEET is based, has had less than 0.35% of its total Greenhouse Gas
Abatement Certificates (GGAC) from non-residential buildings. Therefore less than 1% of commercial
buildings such as offices, retail centres, health facilities, public buildings, industrial sheds have been
incentivised to participate in GGAS.

As well as responding to the Discussion Paper, this Paper therefore also describes in detail a
methodology for including the building sector in an integrated Emissions and Efficiency Trading Scheme
(EETS).

The benefits of such a scheme are that it will provide clarity for the building sector which in turn will drive
significant greenhouse gas abatement through energy efficiency improvements.

With enormous potential for abatement in the building sector, as outlined above, this scheme will also
allow for a steeper, more aggressive trajectory for decreasing greenhouse emissions over time to be set
for the building sector.

The methodology proposed in this Paper ensures administrative and monitoring costs are not excessive
and that as many parties as possible will participate in Australia’s Emissions Trading Scheme.

Simply put, it will recognise energy efficiency gains in the same way as emissions avoided are recognised
in the proposed Australian Emissions Trading Scheme (‘Carbon Pollution Reduction Scheme’).

This Paper draws on local and international experience and expertise and shows that many of the energy
efficiency projects in the building sector are initiated at the design stage and implemented during the
construction of new buildings or the refurbishment of existing buildings and therefore would not be
metered. On the basis that the energy efficiency of all buildings can be accounted on an annual basis
through simple calculation from utility bills, it proposes a verification methodology for the greenhouse gas
emissions savings having been implemented.


1.1      Objectives and Principles


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NEET DISCUSSION PAPER RESPONSE                       5                         LEND LEASE CORPORATION
This document is based on ten principles outlined below and discussed in detail in the subsequent
sections:

      •   Energy efficiency is as important, and potentially more important, than regulating emissions as it
          is a cheaper, faster, high volume, lower risk means of carbon abatement.
      •   A simple price signal from a national Carbon Pollution Reduction Scheme as proposed by the
          Federal Government will be ineffective in driving significant improvements in energy efficiency
          without first having significant collateral damage to households and small businesses, and
          raising material issues of inequity.
      •   Buildings should be the most important focus of an efficiency scheme as they simultaneously
          consume the most energy and offer the most cost effective and highest volume energy efficiency
          opportunities.
      •   Buildings must be addressed in two categories, with two different abatement strategies, owing to
          the differing profiles including occupancy and ownership patterns and building attributes. These
          two categories are residential and non-residential (commercial).
      •   While current estimates in Australia place energy use by residential buildings higher than non-
          residential these estimates are based on a flawed assumption in the allocation of emissions by
          ANZSIC subdivision in Federal government data made in 2005. Commercial
      •   An energy efficiency strategy for buildings must address the split-incentives or ‘Principal-Agent’
          barriers between developers, owners and occupants.
      •   An energy efficiency strategy for buildings must not only address operational efficiency, but also
          passive design on onsite generation as these provide higher volume opportunities for carbon
          abatement.
      •   An energy efficiency strategy for buildings must not focus on just new buildings only, but must
          incentivise building reburbishment and retrofitting of existing buildings as less than 2% of building
          stock is replaced or upgraded each year, and 80% of the buildings in 2020 have already been
          built. Changes to building codes and standards do not impact existing buildings.
      •   An energy efficiency strategy for buildings must be mandatory, as every voluntary energy
          efficiency schemes worldwide have shown less than 2% uptake by the sector.
      •   An energy efficiency strategy for buildings must not only provide a ‘carrot’ or incentive for action,
          but must also include a ‘stick’, or penalty for inaction.

Finally in Section 13.0 ‘Design Features of an Efficiency Trading Scheme’, the proposed solution to the
design of an effective efficiency trading scheme that addresses the above objectives and principles is
provided.

2.0       The Importance of Energy Efficiency

Energy is efficiency is possible even more essential to successful carbon abatement then cleaning up the
emissions generated by existing industry.
Efficiency is a cheaper, faster, higher volume, lower risk way of reducing greenhouse gas emissions while
also providing a range of other economic benefits.

2.1       Relativity of Supply-Side Abatement to Energy Efficiency

A significant benefit of focussing on energy efficiency is that it reduces more associated emissions than
decarbonising emissions themselves. The abatement impact of any energy efficiency abatement will
always be greater relative to any corresponding emissions abatement, as shown below.
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NEET DISCUSSION PAPER RESPONSE                        6                        LEND LEASE CORPORATION
             30%
                         Technical Line Loss (3%)
                                                                             53%
                                                         30%                                    1.0
                                                                                               tCO2e




           Buildings                                Stationary Energy

            0.33                                          0.2
            tCO2e                                        tCO2e


In the above diagram, a simultaneous improvement by 30% in both end-use efficiency, and supply-side
emissions results in 0.33 tCO2-e per tonne through efficiency but only a 0.2 tCO2-e per tonne in supply,
making energy efficiency 65% more effective than supply-side abatement (includes 10% distribution loss).
A simultaneous decrease in demand reduces the relative effectiveness of a supply-reduction.

The potential energy efficiency savings from the building sector are greater than 60%, even excluding the
additional 6% reduction in technical line (distribution) losses this would provide. For more information on
technical line losses see Section 8.5, ‘Technical Line Losses’ below.

2.2      Lowest Cost Abatement from Energy Efficiency

It is widely assumed that the lowest cost emissions abatement opportunities exist in developing countries
owing to lower associated costs such a labour in those countries, coupled with basic infrastructure and
agricultural and planning practices. This however is incorrect.

The lowest cost abatement opportunity, being cost-negative abatement, exist in developed countries and
only occur where for many years infrastructure has been built without consideration of energy efficiency
resulting in high volumes of captive efficiency potential.

In its report ‘An Australian Cost Curve for Greenhouse Gas Reduction’ released 15 February 2008,
McKinsey also stated:

      ‘By 2030, a total of 60 Mt of carbon-reduction opportunities can be found in the building
      sector, all at low or negative cost. Most of these opportunities (~50 Mt) will be available by
      2020 and many can be implemented today.’

Of these building efficiency abatement opportunities more than half represent a net profit to the economy
of more than $150 per tCO2-e, or approximately $5.2 billion.




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NEET DISCUSSION PAPER RESPONSE                       7                       LEND LEASE CORPORATION
                                                                                       Industrial CCS
                                                                     Coal-to-Gas shifts, New Builds
150
                                                     Energy Efficiency, Basic Materials Production
                                                                               Reforestation                                                                    60
                                                                    Coal CCS New
100                                                      On-shore Wind
                                          Forest Management
                              Afforestation, Pasture
 50
                    Agriculture - Soils
               Agriculture - Livestock
  0
                                                                                                     Solar PV

-50                                                                                           Coal CCS Retrofit
                                    Conservation Tillage                                                           Geothermal
                                 Residential Heating/Ventilation Efficiency                                       Avoided Deforestation
                                Refrigeration Efficiency                                                                              Soil CO2
-100
                              Residential Lighting Efficiency                                                               Afforestation, Cropland
                             Biofuels                                                                                                                 Biomass
-150                        Residential Stand-by Savings
                           Commercial Lighting Efficiency
                           Residential Water Heating Efficiency                                                                             60 1990 Emission Levels
-200                   Car Fuel Economy
                                                                                                                                                 Buildings
                  Commercial Air Handling
           Motor Systems

       0                          100                          200                           300                          400                         500             600
       Note: Abatement opportunities are not additive to those of previous years
       Source: McKinsey Climate Change Initiative



The area in the above diagram shown in diagonal lines represents abatement opportunities in the building
sector. It is worth noting that almost two-thirds of all cost negative abatement opportunities exist in this
sector.

Providing adequate stimulation to resolve the current split incentives within the sector will trigger a market
correction, unlocking the captive value represented below the line in the above cost curve and drive
sector-wide responses that are likely to drive new innovative technologies and alternative energy
solutions.

It is only by implementation of fully fungible, cap-and-trade of efficiency that this captive value can be
most quickly unlocked.

Significant greenhouse gas abatement opportunities exist in the building sector which are cheaper than
changes to land management practices. If building efficiency is treated as an offset the inclusion of lower
costs abatement opportunities could potentially disincentivise land management practice abatements, but
only if buildings are not addressed under a cap-and-trade mechanism which generates a corresponding
increase in permit demand.

This is another reason why an Efficiency Trading Scheme is essential to a national least cost abatement
pathway.

2.3          Infrastructure Costs

By slowing growth in demand for energy the need for investment in new and upgraded energy
infrastructure is also reduced.

Opinions vary with regard to the current condition and capacity of Australia’s electricity distribution,
transmission and generation infrastructure. In the section titled "Future Generation Supply" (p50) of the
Garnaut Climate Change Review Discussion Paper it is stated:

           ‘It is generally recognised that the national electricity market (NEM) is rapidly approaching
           the time at which investment decisions will be required for new base-load generation

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NEET DISCUSSION PAPER RESPONSE                                                           8                                         LEND LEASE CORPORATION
        capacity; indeed the industry has argued for some time that the absence of clarity on carbon
        policy has been a significant deterrence to such decisions being taken.’

However, as described detail in the ‘Infrastructure Australia Bill 2008’ 2 the current state of Australia’s
electricity infrastructure is generally estimated to be acceptable citing one approximate of only $1.15
billion required to bring electricity distribution, transmission and generation to an ‘A’ level, and $2.6 billion
for gas transmission and distribution however it was also generally noted that Infrastructure Australia will
need to perform as its one of its functions an audit is to determine the adequacy of infrastructure taking
account of forecast growth. Until such time no current, authoritative figures exist in this regard.

Based on an aggregation of planned capital expenditures by Australian energy utilities in FY 2009 will
exceed $3.488 billion.3

Either way, opportunities for significantly savings exist as a result of reduced domestic growth in energy
consumption through energy efficiency. Importing permits from other markets will not provide this benefit.

2.4        Energy Security

Reducing Australia’s greenhouse gas emissions domestically through energy efficiency has the additional
benefit of further increasing both short and long-term energy security.

As demand for the limited global supply of natural gas increases, and as mobile emitters continue to
become more flexible in terms of fuel source, either switching to battery power or other fuel cell
technologies such as hydrogen which rely on stationary energy for generation, this increased stationary
energy security becomes increasingly meaningful in all sectors and further facilitates uptake of low
emission technologies.

2.5        Timeliness

Australia is currently on track to meet its Kyoto target of an 8% increase in total greenhouse gas
emissions compared to 1990 levels. This has been achieved almost exclusively through changes to land
use practices, more specifically land clearing.

                            200



                            150                                                        +5            -3       -92
                                                                          +13
            Emission




                                               +26           +8
                   MtCO2e




                            100    +108


                                                           55% increase
                                                                                                                        -21
                            50                              in stationary
                                                             energy use                                                            +44


                             0
                                                                                       Agriculture
                                  Stationary




                                                                                                             Land Use
                                                                        Processes
                                               Transport




                                                                                                                                   TOTAL
                                                                         Industrial




                                                                                                     Waste
                                                             Fugitive




                                                                                                                        Forestry
                                                                                                             Change
                                   Energy




                                                                                      Sector
         Source: “Tracking to the Kyoto Target, Australia’s Greenhouse Emissions Trends 1990 to 2008–2012 and 2020”- DCC, 2008



2
 http://www.aph.gov.au/library/pubs/bd/2007-08/08bd069.htm
3
 ‘Emissions Trading: Making it work for us, Energy Efficiency: The Emissions Trading Connection (Chris Dunstan
NSW Manager, Clean Energy Council, 1 November 2007), and ‘Budget 2005-06, Delivering Our Commitments, Fact Sheet (Western Power,
http://www.dtf.wa.gov.au/cms/uploadedFiles/portfolio_western_power.pdf)
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NEET DISCUSSION PAPER RESPONSE                                                    9                                 LEND LEASE CORPORATION
In 11 years little else has been done to kerb significant growth in Australia’s greenhouse gas emissions
from sectors other than Agriculture. Further abatement opportunities still exist through land-use practices,
they are however diminishing and finite.

The consumption of stationary energy has continued to rise more than 55% above 1990 levels. More
importantly 67.5% of growth in Australian greenhouse emissions has occurred in consumption of
stationary energy.

Australia must now find real and substantial reductions quickly if it is to achieve any significant reduction
in future greenhouse gas emissions. This must include rapidly curbing growth in stationary energy
consumption as a principal area of focus.

For an abatement opportunity to be rapidly adopted it is helpful if it is well understood, proven, socially
acceptable, and low-risk.

Energy efficiency opportunities in the building sector fulfil all these objectives. They are, in general, faster
to implement than supply-based abatements such as new generation methods which require construction
of new infrastructure, retooling, and R&D.

New South Wales may play a key role in helping Australia achieve ongoing abatement targets by taking
the lead in addressing buildings in its NSW Efficiency Trading Scheme.

2.5.1    Speed of Implementation

In its document ‘Climate Solutions: The WWF Vision for 2050’ the Worldwide Fund for Nature
published the following findings, showing abatement opportunities over time:

                                            200

                                            180                                             CCS

                                            160                                              Industrial Efficiency
          Final Energy Created or Avoided




                                                                                             Building Efficiency
                                            140

                                            120                                              Wind
                       (EJ/yr)




                                            100

                                            80
                                                                                            Biomass
                                            60
                                                                                             Solar PV
                                            40

                                            20
                                                                                             Coal-to-Gas

                                              2000   2010   2020        2030   2040        2050


Coal-to-gas switching identified in this diagram peaks at only 45 EJ/yr, and declines by 2025.

In addition to its faster implementation, building and industry energy efficiency are only individually
surpassed by Carbon Capture and Storage in terms of the total abatement opportunity and then only a25
years form now.

Combined, energy efficiency opportunities in buildings and industrial exceed wind, solar and biomass
combined in terms of total abatement potential.
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NEET DISCUSSION PAPER RESPONSE                                     10                 LEND LEASE CORPORATION
2.6      Predictability and Volume

In addition to the added certainty cap-and-trade provides in predicting levels of compliance (see also
Section 3.1.1.1, ‘Quantity Based’ Type Instrument ’) market-wide energy efficiency opportunities in
buildings can be modelled with greater accuracy than theoretical generation abatements, both in terms of
the outcomes from individual projects, and sector-wide.

As shown in the following diagram from the IPCC 4th Assessment Report, the relative margin of error in
projections for total abatement opportunities in the built sector is lower than in all other sectors.

               Highest total abatement
        7      and smallest margin of
                 error in projections                                                       Other
        6                                                                                   Transition Economies
                                                                                            OECD
        5                                                                                   World total

        4

        3

        2

        1

        0
            <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100         <20 <50 <100 <20 <50 <100
              Energy         Transport   Buildings       Industry     Agriculture      Forestry       Waste
              Supply
                                         Total Sectoral Potential at <US$100/tCO2e
                                                         GtCO2e/yr
                                         Source: IPCC 4th Assessment Report

It is worth noting that the IPCC 4th Assessment Report also notes that low-cost greenhouse gas emission
abatement opportunities in the building sector exceed all other sectors. In fact, the total abatement
available in OECD countries at less than USD$20 per tCO2-e is equivalent to around 80% of the
opportunities in all other sectors combined.

The most effective way to maximise environmental benefit as well as achieve a high degree of economic
efficiency in carbon abatement is to implement a true Market Based Instrument for energy efficiency in the
same way they are currently being implemented worldwide to manage emissions.

3.0      Price Signals: A Common Misconception

It easy to show to the lack of correlation between energy costs and energy efficiency. A simple analysis of
building energy efficiency by country, and by state in some countries, in corresponding climates and
cultures shows that in the most cases higher energy costs only occasionally result in more efficiency
buildings, and even then so rarely that it may be the product of random distribution.

Especially in non-residential buildings the relative cost of energy to other business operating costs is so
small that it would have to increase on the order of 5-10 times before it became a material concern based
on cost alone by which time the collateral damage to most families and some small businesses would be
catastrophic.

In addition, what is not widely understood is that larger businesses already negotiate lower energy costs
with retailers as a reward to secure their business such that households and small businesses inevitably
carry the majority of rising prices.


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NEET DISCUSSION PAPER RESPONSE                          11                            LEND LEASE CORPORATION
Relying on a price signal to drive energy efficiency is highly inequitable, and far less effective than directly
regulating efficiency itself.

3.1       Market Efficiency

The most important function of any Market Based Instrument is that it allows businesses to respond by
find the most efficient, least cost pathway to achieving the desired outcome.

In the case of an Efficiency Trading Scheme the purpose of the instrument is to drive maximum emissions
abatement at the lowest possible cost to the economy.

The most popular instruments for incentivising energy efficiency in buildings to date have not been truly
effective partly in respect of the fact that they are not true Market Based Instruments.

Bottom-up energy efficiency programmes such as those prescribed under Clean Development
Mechanisms and Tradable White Certificates projects are limited in that they prescribe a finite set of
eligible abatement projects through a set of approved methodologies. To varying degrees these limit both
opportunity and innovation by business in achieving the desired outcome.

A true Market Based Instrument is top-down, providing an overarching means of valuing an outcome and
allowing the market to operate to maximise returns. Emissions Trading Schemes as exampled by the EU
ETS represent true Market Based Instruments, with the exception of caveats specifically implemented for
the sake of including energy efficiency such as the capping of eligibility of offsets (CERs) within the
scheme in an annually revised National Abatement Plans (NAPs).

The need for a project-based approval process not only drastically increases participation costs for both
participants and administrators, but also creates delays in approval processes and adds a premium to
innovation.

Direct inclusion of the building sector in an Emissions and Efficiency Trading Scheme (EETS)’ avoids the
complexity of identifying eligible technologies and practices in advance of their implementation and will
have profound implications for market liquidity.

3.1.1     Market Based Instruments

Market Based Instruments first emerged during the 1980s as a means of administering environmental
requirements, initially in pollution control, via the Clean Air Act Amendments of 1990 for sulfur emissions,
and in other areas such as fisheries. They have since found widespread use around the world in virtually
all areas of environmental management including forestry and land-clearing, permitting water use and
other resources. The widespread of acceptance of Market Based Instruments is based on their superiority
over regulations for managing complex relationships between business and the environment. The
principal advantage of an Emissions Trading Scheme over other instruments such as grants, feed-in
tariffs, transmission guarantees, product standards, etc. are those of any effective Market Based
Instrument which are:

      -   improving price signals, giving a value to the external costs and benefits of economic activities
          so that economic actors take them into account and change their behaviour to reduce negative –
          and increase positive - environmental and other impacts;
      -   allowing industry greater flexibility in meeting objectives and thus lower overall compliance costs;
      -   giving firms an incentive, in the longer term, to pursue technological innovation to further reduce
          adverse impacts on the environment;
      -   supporting employment when used in the context of environmental tax or fiscal reform; and
      -   high acceptability to business.


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NEET DISCUSSION PAPER RESPONSE                       12                        LEND LEASE CORPORATION
These benefits are described in detail in the European Commission’s “Green Paper on Market-Based
Instruments For Environment And Related Policy Purposes” published in March 2007.

3.1.1.1 ‘Quantity Based’ Type Instrument

As described in the seminal work ‘Prices versus Quantities’4 in 1974 by economist M. L. Weitzman, when
a regulation controls price in the form of taxes the marginal cost of compliance is set, leading to uncertain
levels of compliance. Meanwhile quantity controls — in the form of tradable permits or quotas — that fix
the level of compliance result in uncertain marginal costs.

It is for this reason ‘quantity based’ instruments are used to manage national emissions as it is the most
effective means of guiding an economy toward a national abatement target, or level of compliance.
Similarly, any regulation of energy efficiency through a Market Based Instrument will be most effective by
defining a quantity control. No other form of regulation other than a cap-and-trade system of managing
energy efficiency (the proposed Emissions and Efficiency Trading Scheme), will allow Australia to as
effectively achieve a desired efficiency target.

Dilution of a pure quantity-based instrument – such as operating without a cap, and trading efficiency as
offsets – while reducing marginal costs will also reduce the instruments effectiveness in guaranteeing
compliance. Since many energy efficiency opportunities are cost negative over the life of the building, the
situation is ideal for a pure quantity-based instrument designed to promote maximum compliance. It is the
dilution of ‘quantity based’ instruments in other markets which have substituted cap-and-trade systems
with Tradable White Certificates, that has lead to the failure of these other systems to deliver demand side
abatement and transform the building sector to design, deliver and operate zero (or low) emission
buildings.

An Efficiency Trading Scheme can be a ‘quantity based’ type of Market Based Instrument if it includes a
full cap-and-trade mechanism. Any other means of regulating efficiency is inferior, including acting
through a one-way, voluntary permit scheme with partial market coverage.

4.0         Why Should the Building Sector be Covered?

An effective energy efficiency strategy must have as its primary focus the abatement opportunities
provided by buildings for the following reasons:

       o    The building sector is a significant emitter of greenhouse gas emissions. If upstream emissions
            from heat and electricity are included, emissions from buildings total 40% of global greenhouse
            gas emissions5;
       o    The building sector provides more potential for quick, deep and cost effective greenhouse gas
            mitigation than any other industry6;
       o    The building sector’s potential for quick, deep and cost-effective greenhouse gas mitigation is
            best realised through an Efficiency Trading Scheme;
       o    Including the building sector will deliver a raft of co-benefits, including skills, jobs and technology
            innovation growth, as well as improved health and productivity of Australia’s householders and
            office workers; and
       o    Transparent and accurate methods for measuring, reporting and verifying greenhouse gas
            reductions in the building sector are already available.



4
    ‘Prices versus Quantities’ (M. L. Weitzman, Review of Economic Studies Vol. 41, No. 4, p477–491, 1974)
5 Stern Review on the Economics of Climate Change – Annex 7e (2006)
6 Intergovernmental Panel on Climate Change (IPCC) “Working Group III contribution to the IPCC Fourth Assessment Report” (2007)

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The proportion of Australia’s total greenhouse gas emissions which are emitted by buildings is an
important starting point to any discussion about mitigating greenhouse gas emissions in buildings.

According to the OECD7 and the United Nations Sustainable Buildings & Construction Initiative8, among
others, if upstream emissions from heat and electricity are included, emissions from buildings total 40% of
global greenhouse gas emissions9.

In its report ‘Green Buildings: Why Build Green?’ published in 2005 the U.S. Environmental Protection
Agency stated that buildings account for 39% of total energy use, 38% of greenhouse gas emissions, and
68% of total electricity consumption .

President Bill Clinton and others note that in our cities and towns, the percentage can be as high as
80%10 of total greenhouse gas emissions. (The Clinton Climate Initiative’s Energy Efficiency Building
Retrofit Program is currently working to improve the energy efficiency of millions of municipal buildings
with the express aim of cutting greenhouse gas emissions, with funding from five of the world’s leading
banks who have each committed $1 billion towards the program11.)

According to the Council of the City of Sydney, the city was responsible for 3,589,000 tonnes of
greenhouse gas emissions (tCO2-e) in 2006,12 with the largest contributor being commercial office
buildings at 48%:


                                                         Waste
                                             Transport    3%
                                                12%
                                                                                                      Commercial            48%

                                  Residential
                                                                                                      Industrial            23%
                                                                               Commercial
                                     14%                                                              Residential           14%
                                                                                  48%

                                                                                                      Transport             12%
                                                                                                      Waste                 3%
                                            Industrial                                                 LGA 2006 Emissions
                                               23%
                                                                                                       (3,589,000 tCO2-e)




As such a significant contributor to Australian and global greenhouse gas emissions, the building sector
must not be overlooked.

4.1          Abatement Potential

With an effective Efficiency Trading Scheme, the building sector could achieve greenhouse gas emission
cuts of 60% or more today, using existing technology. Including energy efficiency improvements from the
building sector in Australia’s Emissions Trading Scheme would effectively kick-start Australia’s progress
towards meeting its Kyoto targets.

Buildings can provide deep and rapid cuts in greenhouse gas emissions through design, technology
systems and generation using today’s technology, and the potential of the entire industry to deliver
globally significant reductions is important and powerful.



7 'Environmentally Sustainable Buildings: Challenges and Policies. A report by the OECD' (Organisation for Economic Cooperation and Development, 2003
8 'BUILDINGS AND CLIMATE CHANGE, Status, Challenges and Opportunities' (United Nations Environment Programme, 2007)
9 Stern Review on the Economics of Climate Change – Annex 7e (2006)
10 Cities & Climate Change http://www.c40cities.org
11 President Bill Clinton launched the Energy Efficiency Building Retrofit Program, a project of the Clinton Climate Initiative (CCI), on May 16, 2007.
12 http://www.cityofsydney.nsw.gov.au/environment/GreenhouseAndAirQuality/CurrentStatus/GreenhouseGasEmissions.asp

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According to our analysis, under a properly designed and implemented Efficiency Trading Scheme which
fully recognises energy efficiency in buildings as outlined in this Paper 60% emissions cuts in the building
sector are achievable right now using today’s technology, with no need to wait until 2050.

Further, high value carbon credits of AUD $34 per ton of carbon dioxide equivalent (tCO2-e) could
realistically achieve a carbon zero position in commercial office buildings at nil cost.

The Intergovernmental Panel on Climate Change (IPCC) has investigated global opportunities for
emissions reductions. The graph below, from their ‘Working Group III contribution to the IPCC Fourth
Assessment Report’, highlights the potential for greenhouse gas mitigation across sectors.

                 Highest total abatement
          7      and smallest margin of
                   error in projections                                                        Other
          6                                                                                    Transition Economies
                                                                                               OECD
          5                                                                                    World total

          4

          3

          2

          1

          0
              <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100          <20 <50 <100 <20 <50 <100
                Energy         Transport     Buildings      Industry     Agriculture      Forestry       Waste
                Supply
                                            Total Sectoral Potential at <US$100/tCO2e
                                                            GtCO2e/yr
                            Source: Greenhouse gas mitigation opportunities by cost (IPCC, 2007)

Significantly, not only does this show substantial abatement potential but it clearly shows that the global
building sector provides more cost-effective greenhouse gas mitigation opportunities than any other
industry or sector.

Low-cost greenhouse gas emission abatement opportunities in the building sector clearly exceed all other
sectors. The total abatement available in the building sector in OECD countries at less than USD$20 per
tCO2-e exceeds Energy, Transport and Industry combined, and is equivalent to approximately 80% of the
opportunities in all other sectors combined.

In its report ‘An Australian Cost Curve for Greenhouse Gas Reduction’ released 15 February 2008,
McKinsey stated:

      ‘By 2030, a total of 60 Mt of carbon-reduction opportunities can be found in the building
      sector, all at low or negative cost. Most of these opportunities (~50 Mt) will be available by
      2020 and many can be implemented today.’

Of these building efficiency abatement opportunities more than half represent a net profit to the economy
of more than $150 per tonne of CO2e, or approximately $5.2 billion.




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                                                                                       Industrial CCS
                                                                     Coal-to-Gas shifts, New Builds
150
                                                     Energy Efficiency, Basic Materials Production
                                                                               Reforestation                                                                     60
                                                                    Coal CCS New
100                                                      On-shore Wind
                                          Forest Management
                              Afforestation, Pasture
 50
                    Agriculture - Soils
               Agriculture - Livestock
  0
                                                                                                     Solar PV

-50                                                                                           Coal CCS Retrofit
                                    Conservation Tillage                                                           Geothermal
                                 Residential Heating/Ventilation Efficiency                                       Avoided Deforestation
                                Refrigeration Efficiency                                                                              Soil CO2
-100
                              Residential Lighting Efficiency                                                               Afforestation, Cropland
                             Biofuels                                                                                                                 Biomass
-150                        Residential Stand-by Savings
                           Commercial Lighting Efficiency
                           Residential Water Heating Efficiency                                                                             60 1990 Emission Levels
-200                   Car Fuel Economy
                                                                                                                                                 Buildings
                  Commercial Air Handling
           Motor Systems

       0                          100                          200                           300                          400                         500             600
       Note: Abatement opportunities are not additive to those of previous years
       Source: McKinsey Climate Change Initiative
                                            Source: McKinsey & Company, A cost curve for greenhouse gas reduction


The measures below the horizontal line have a negative abatement cost. In other words, by carrying them
out, people and companies could both cut emissions and save money. They are the most effective ways
of reducing emissions at least cost.

The area shown in diagonal lines in the diagram above identify abatement opportunities in the building
sector. Once again it has been recognised that almost two-thirds of all cost negative abatement
opportunities exist in the building sector.

4.1.1         NSW DWE Modeling

Economic modelling by Walter Gerardi of McLennan Magasanik Associates for the NSW Efficiency
Trading Scheme while promising and somewhat in line with the McKinsey modelling above, likely
underestimates the abatement potential of both residential and non-residential (commercial) buildings by
only selectively addressing 10 scenarios each.

One of the flaws of a methodology-based approach to incentivising energy efficiency is that it restricts
participants to a set of activities and does not encourage real innovation.

4.2           Least Cost Abatement

Finding the least cost abatement pathway is essential to achieving any material success in avoided
serious climate change. The more cost effective the solutions that are developed the faster and more
comprehensively greenhouse gas emissions can be stopped.

In addition, under future multinational agreements there are strong economic benefits for Australia if we
are able to achieve any given abatement target at least cost to the economy.

4.2.1         Minimising Administration, Compliance and Transaction Costs

There are well established means of determining administration, compliance and transaction costs
established by several international energy efficiency programs with similar overhead impacts for
business.
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Two examples are provided below demonstrating the relatively low cost of participation and transactions
for medium to large businesses.

Based on these example transactions costs are anticipated to total less than $25/tCO2-e. In addition,
given the complex methodologies required to model emissions abatements under Kyoto instruments
analysed below it is anticipated costs will be even lower under the comparatively simple methodology
proposed.

In addition, the application of a cap-and-trade mechanism to building efficiency means that the avoided
permit obligation costs derived from outperforming an energy intensity benchmark (cap) act as an
additional incentive. At a hypothetical permit price of $30 an energy efficiency building derives

                   Outperforming Asset                              Underperforming Asset
                                      $/tCO2-e                                           $/tCO2-e
            Transaction                  (25)                Transaction                    (25)
            Permit allocation             30                 Permit allocation              (30)
            Energy cost                   0                  Energy cost                 (69-172)*
                         Total:           5                             Total:          (124-227)

* Energy cost based on the Australian average industrial price13 of 6 cents per kWh and the average small-business
price14 of 15 cents per kWh.

If the avoided cost of permit obligation and energy consumption are factored into the net benefit of out
performing the energy intensity threshold, this provides a strong incentive of $129 to $232 per tonne of
green house gas avoided.


4.2.1.1.1      EXAMPLE 1: Administration Costs for the DEFRA Carbon Reduction Commitment

The Department for Environment, Food and Rural Affairs in the United Kingdom describes its ‘Carbon
Reduction Commitment’ (CRC) scheme as “mandatory emissions trading to cut carbon emissions
from large commercial and public sector organisations15.”

While not fully fungible with an emissions trading scheme it applies a business level point of obligation,
includes Scope 2 emissions and will apply a cap to offsets traded as of 2013.

Table 7.1.1: ‘Average Management Commitment Due To Scheme Participation’ in the ’Partial Regulatory
Impact Assessment’ for the Carbon Reduction Commitment below included an analysis of total cost of
participation in the Carbon Reduction Commitment as follows:

Table 7.1.1: Average Management Commitment Due To Scheme Participation
Number of sites operated
by organisation                   1        2        3           4        5       6-10     11-50      50+
Understanding the rules           3        3        3           3        4          4         4        4
Initial collection and
analysis of energy data           3        3        4           4        4         4          7       13
Developing a compliance
strategy                          1        1        1           1        1         1          3        5
Understand and take part          2        2        2           3        3         4          5        6

13
   ‘OECD Energy Prices and Taxes, 1st Quarter 2007’ (International Energy Agency)
14
   ‘Average Electricity Prices for Small Business Customers, Australian States, 2006’ (NSW Department of State
and Regional Development)
15 http://www.defra.gov.uk/Environment/climatechange/uk/business/crc/index.htm
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in Auction
Trading activities                                             2           2      2                2              2             3           4               5
Submitting data to
coordinator                                                    1           1      1                2              2             3           4               5
Verifying data
(external costs)                                                3        4         5          6                7            10            14         19
Total person-days                                              14       15        18         20               22            27            40         57
Co-ordination cost / site                                     120      120       110        110              100           100            80         80
Total costs of participation                                6,995    7,907     9,177     10,468           11,708        14,485        21,741     55,736

A detailed methodology for these calculations is included in Annex 1 of the ‘Partial Regulatory Impact
Assessment’.

To calculate the cost versus benefit of the scheme DEFRA combined these costs, for 2500-3000
companies participating in the scheme at the highest proposed threshold, added opportunity costs and
government administrative costs which were estimated based on those for three existing schemes: EU
ETS, Climate Change Agreements, and Energy Performance Certificate. Net Present Values for the
scheme were then calculated based on:

       o     Savings on energy bills at 10% and 3.5% demand reduction;
       o     Monetised carbon saved at 3.5% demand reduction; and
       o     Monetised air quality benefits at 3.5% demand reduction.

The result was an overall Net Present Value of £2.8-4.1 billion (AUD$6-8.9 billion).

If the scheme were integrated with an Emissions Trading Scheme coordination costs for government
would be significantly lower.

4.2.1.1.2              EXAMPLE 2: Transaction Costs of Clean Development Mechanisms

In 2003 Michaelowa et al. analysed transaction costs for projects under the flexible mechanisms of the
Kyoto Protocol for addressing energy efficiency opportunities between 1994-98 and found that the burden
related to technical assistance and administration cost was on average 20.5% of total project costs,
however this decreased exponentially relating to the size of the abatement opportunity.

                                                250
                                                                                              Abatement           Projects       Transaction Costs
             Transaction Cost Per Credit




                                                                                             (tCO2e/year)          (No.)            (US$/tCO2e)
                                                200                                          2,500 - 5,000           1                   2.7
                                                                                             1,000 – 2,500           6                3.0 – 9.7
                                                                                              500 – 1,000            3               17.8 – 40.4
                                                150
                                    US$/tCO2e




                                                                                               100 – 500             9               29.1 – 61.2
                                                                                                 < 100               2              80.8 – 123.9
                                                                                            Source: Michaelowa et al. (2003, p.266)
                                                100

                                                50

                                                 0
                                                      100           1000          2000                    3000                  4000                 5000
                                                                                  Size of Abatement
                                                                                             (tCO2e/yr)

This is also in line with other estimates in the EU White Certificate Report ‘Transaction costs of energy
efficiency projects: A review of quantitative estimations, Contribution to work package 3’ published in April
2006.

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4.3           Economic and Social Benefits of Abatement in the Building Sector

Significantly, properly addressing the building sector in an Efficiency Trading Scheme will also drive a
range of economic and social ‘co-benefits’ – at no cost to the Australian taxpayer. By contrast, all other
policy measures will be less effective and will cost the Australian taxpayer – without the additional
economic benefits.

A number of benefits that flow from cutting greenhouse gas emissions in the building sector – including
delivering cost savings for occupants and owners through reduced energy bills - have been well
documented elsewhere16.

The Intergovernmental Panel on Climate Change (IPCC) ‘Working Group III contribution to the IPCC
Fourth Assessment Report’ referred to “a wide range of co-benefits” being associated with implementing
carbon mitigation options in buildings, noting in part that:

          ‘(…) it is estimated that their overall value may be higher than those of the energy
          savings benefits’17

According to the IPCC:

          ‘Economic co-benefits include the creation of jobs and business opportunities,
          increased economic competitiveness and energy security. Other co-benefits include
          social welfare benefits for low-income households, increased access to energy
          services, improved indoor and outdoor air quality, as well as increased comfort,
          health and quality of life.’18

But two broader benefits of driving greenhouse gas emissions reductions in the building sector deserve
particular consideration:

o      Increased health, wellbeing and productivity of occupants; and
o      Skills, technology and jobs.

This Paper documents recent Australian studies which show productivity increases of around 10% and
decreased sick days of around 40% in buildings which have been measured at producing less
greenhouse gas emissions. The push at the top end of the Australian non-residential sector to cut
greenhouse gas emissions through energy efficiency improvements is already driving skills, jobs and
technology growth in Australia.

Providing financial incentive by including energy efficiency from the building sector in Australia’s
Emissions Trading Scheme (Emissions and Efficiency Trading Scheme (EETS)) would inevitably drive
more growth in skills, jobs and technology innovation.

And in the current global push for reducing greenhouse gas emissions through improving energy
efficiency in buildings, this potentially positions growth in exportable Australian skills and technology.

This paper also details other benefits including:
    o Reducing air pollution related illness and death;
    o Reducing infrastructure costs;

16 The dollars & sense of green buildings (Building the Business Case for Green Commercial Buildings in Australia), Green Building Council of Australia, February

2006
17 IPCC Fourth Assessment Report, Working Group III Report "Mitigation of Climate Change", Page 389
18 IPCC Fourth Assessment Report, Working Group III Report "Mitigation of Climate Change", Page 389

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        o     Protecting low income households;
        o     Promoting innovation; and
        o     Improving energy security.

4.3.1         Social Benefits

The social benefits of energy efficient buildings are broad and well-documented. They include, but are not
limited to:
     o increased health, well-being and productivity of their occupants;
     o more highly skilled workforce and jobs creation and
     o high social acceptability.

These are described in detail in the following sections.

4.3.2         Increased Health, Wellbeing and Productivity of Occupants

Arguably the most compelling argument for enabling greenhouse gas emissions reductions in the building
sector is the increased health, wellbeing and productivity of occupants which such cuts deliver.

According to the IPCC:

            ‘There is increasing evidence that well-designed, energy efficient buildings often have the
            co-benefits of improving occupant productivity and health (Leaman and Bordass, 1999; Fisk,
            2000; Fisk, 2002). Assessing these productivity gains is difficult (CIBSE (The Chartered
            Institution of Building Services Engineers), 1999) but in a study of 16 buildings in the UK,
            occupants estimated that their productivity was influenced by the environment by between –
            10% and +11% (Leaman and Bordass, 1999).’19

Two recent studies of Australian buildings present a cogent argument.

4.3.2.1 CASE STUDY 1: 500 Collins Street

500 Collins Street is a 30-year-old 28-level multi-tenanted building in Melbourne’s CBD.

The owners, the Kador Group, wanted to undertake a green refurbishment of the building, to transform it
from a typical 1970s A Grade building – lots of marble, dark timber lifts, black bean panelling, and little
focus on energy consumption – to a modern icon which takes advantage of more natural light and views,
and is ‘air-conditioned’ using an active chilled beam system. The installation of active chilled beams
immediately reduced energy consumption by about 15% and additional initiatives have further reduced
greenhouse gas emissions from the base building. Bovis Lend Lease project managed the refurbishment.

 ‘Green’ features of the staged refurbishment plans include:

        o     chilled beam air conditioning;
        o     solar panels supply 25% of domestic hot water; and
        o     energy efficient T5 light fittings.

The refurbishment plans for 500 Collins Street, Melbourne were the first refurbishment of a CBD
commercial building to achieve a 5 Star Green Star Certified Rating from the Green Building Council of
Australia.




19   IPCC Fourth Assessment Report, Working Group III Report "Mitigation of Climate Change", Page 417
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In conjunction with Sustainability Victoria, the Kador Group undertook a pre- and post- refurbishment
workplace productivity study following a green fit out of a number of floors, which involved monitoring
existing tenants who had moved into upgraded space. 500 Collins Street presented a unique opportunity
for an Indoor Environment Quality study because tenants in the building were simply moving to
sustainably refurbished space in their existing building. Thus, there were few changes, other than the
improved Indoor Environment Quality, that might affect results.

This Study found that a shift by two companies to sustainable office accommodation has led to
improvements in a broad range of business productivity indicators. Taken in their totality the results
provide a convincing case that the shift delivered business gains that far exceed the cost of upgrading the
Indoor Environment Quality of the offices.

The tenant studied was Oakley Thompson, a small law firm. In the course of the Study, another tenant
agreed to participate in a staff survey after their move. An executive of the company, the stock broking
and research firm Lonsec, had observed that “productivity has gone through the roof.”

The results included:

        o   average sick days per employee per month reduced by 39%;
        o   sick leave costs reduced by 44%;
        o   a 9% improvement in the average typing speed of secretaries and a significant improvement in
            overall accuracy; and
        o   a 7% increase in lawyers' billing ratios, despite a 12% decline in the average monthly hours
            worked by the lawyers.
        o   As well as happier and more productive employees, the refurbishment saved about $15,000 a
            year in energy bills and cut greenhouse gas emissions by more than 1,700 tonnes a year.20[1]

4.3.2.2 CASE STUDY 1: Council House 2 (CH2)

Council House 2 (CH2) is the new administrative office building of Melbourne City Council.

CH2 was conceived, designed and built with a substantial focus on setting a new standard for ecologically
sustainable office buildings.

Lincolne Scott and Advanced Environmental were the building services engineers/ environmental design
consultants on the project.

CH2 has a raft of sustainable technologies and design philosophies incorporated throughout the entire
building, services and fit-out. Key sustainability-related features of CH2 include:

        o   Low energy, passive cooling systems
        o   Low energy, integrated electric lighting and daylighting systems
        o   Co-generation, photo-voltaic cells, and wind-driven turbines
        o   Active louvers on West facade and vertical garden on North façade
        o   Extensive facilities for cyclists

Of particular relevance here, greenhouse gas emissions have been measured at 80% less than an
equivalent Melbourne CBD office building.
A key element of the business case for CH2 was that provision of high levels of Indoor Environment
Quality, along with other design features, would result in significant benefits to City of Melbourne through
improved health, wellbeing and productivity of staff in the building. Key Indoor Environment Quality
features of CH2 include:

   Green Building Productivity (Sustainability Victoria): http://www.sustainability.vic.gov.au/www/html/2575-green-building-
20[1]

productivity.asp
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    o    100% fresh air ventilation is introduced at floor level, and is then exhausted at ceiling height
         using natural convection.
    o    Radiant cooling is provided by the thermal mass of concrete ceiling panels, and also through
         chilled panels which use a mechanical chiller in combination with phase change material stored
         in the basement, to charge the coolant. Night purging of the building is used to store the night
         ‘coolth’ in the concrete ceiling which is then released during the day. Evaporative cooling
         through shower towers on south face is used to cool the retail areas on the ground floor, and to
         remove some heat from the coolant used in the chilled ceiling panels.
    o    Lighting is provided through a mix of high-efficiency recessed luminaries in the ceiling,
         suspended strip lighting, daylight penetration, and extensive task lighting.

Melbourne City Council commissioned a post-occupancy evaluation study on Indoor Environment Quality
and occupant health, wellbeing and productivity in the CH2 building. Evaluation of Indoor Environment
Quality and productivity is based on a program of physical Indoor Environment Quality measurements,
occupant questionnaires, focus group interviews, and sick leave and staff turnover data. A three page
modified ‘Building Use Studies’ occupant questionnaire was conducted in both CH2 and in a ‘baseline’
City of Melbourne building located next door (CH1).

Based on occupants’ perceptions of the building’s impact on their productivity, it is clear that CH2
represents a significant productivity improvement when compared to the CH1 baseline. As shown in
Figure 11, three quarters of CH2 occupants rate the building as having a positive or neutral effect on
productivity, compared with just 39% in CH1. When the data is converted to productivity loss or gain, as
shown in Figure 12, it is estimated that this could represent a greater than 10% productivity improvement,
based on the nine-point scale and assessment method used in the Building Use Studies questionnaire.

                         Productivity                                          Productivity
         Satisfaction                          CH1   CH2
                                                                 Loss/Gain                             CH1   CH2
          100%                                                    6%
                                                                  4%                          +4.43%
           80%
                                         75%
                                                                  2%
           60%                                                    0%
           40%                                                   -2%
                              39%
                                                                 -4%              -6.44%
           20%
                                                                 -6%
            0%                                                   -8%
                 Figure 11: Proportion of occupants                    Figure 12: Estimated perceived
                 rating the building as positive or                    productivity loss or gain for CH1
                 neutral for their perceived productivity              and CH2


Perceived Productivity ratings show that CH2 represents a significant productivity improvement when
compared to the CH1 baseline. Three quarters of CH2 occupants rate the building as having a positive or
neutral effect on productivity, compared with just 39% in CH1. CH2 is rated in the top 20% of Australian
buildings for perceived productivity when compared against the BUS benchmark dataset. This can be
expressed as a 10% perceived productivity enhancement compared to CH1, based on the scale and
assessment method in the Building Use Studies questionnaire.

Given that a typical office tenant’s wages bill equates to more than 100 times their energy bill even a
small increase in productivity provides significant value.

4.3.3    Skills, Technology and Jobs




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NEET DISCUSSION PAPER RESPONSE                              22                         LEND LEASE CORPORATION
The other compelling argument for driving greenhouse gas emissions reductions through an Efficiency
Trading Scheme, is that it will also drive skills, technology and jobs growth and, through involvement in
construction in developing countries with massive urban development needs, such as China, the Middle
East and India, it would also have flow-on effects in terms of assisting those countries in reducing their
predicted emissions.

According to the IPCC:

        ‘Most studies agree that energy-efficiency investments will have positive effects on
        employment, directly by creating new business opportunities and indirectly through the
        economic multiplier effects of spending the money saved on energy costs in other ways
        (Laitner et al., 1998; Jochem and Madlener, 2003). Providing energy-efficiency services has
        proven to be a lucrative business opportunity. Experts estimate a market opportunity of € 5–
        10 billion in energy service markets in Europe (Butson, 1998).’21

And further:

        ‘The European Commission (2005) estimates that a 20% reduction in EU energy
        consumption by 2020 can potentially create (directly or indirectly) as many as one million
        new jobs in Europe, especially in the area of semi-skilled labour in the buildings trades
        (Jeeninga et al., 1999; European Commission, 2003).’22

The push at the top end of the Australian non-residential sector to cut greenhouse gas emissions through
energy efficiency improvements is already driving skills, jobs and technology growth in Australia.

Providing financial incentive by including energy efficiency from the building sector in Australia’s
Emissions Trading Scheme (Emissions and Efficiency Trading Scheme (EETS)) would inevitably drive
more growth in skills, jobs and technology innovation.

And in the current global push for reducing greenhouse gas emissions through improving energy
efficiency in buildings, this potentially positions growth in exportable Australian skills and technology.

The Australian property industry is already internationally respected as a leader in green buildings – a
reputation which positions the industry to take advantage of the global push for reducing greenhouse gas
emissions.

4.3.3.1 Green Collar Job Creation in the Built Environment

In June 2008 the Australian Conservation Foundation and Dusseldorp Skills Forum published a report
prepared by the CSIRO titled ‘Growing the Green Collar Economy: Skills and labour challenges’23.

The report found that more than half the new jobs created in industry and manufacturing in a carbon
constrained economy occurred in the construction industry, indicating that incentivisation of green
buildings, their construction and refurbishment will be a strong driver of new, ‘green collar’ employment.

4.3.4      Social Acceptability

Energy efficiency abatements present a lower risk than new experimental generation methods which have
unknown environmental impacts and maintenance costs. For example, the long-term sustainability of high
volume carbon capture and storage (CCS) is not well understood.


21 IPCC Fourth Assessment Report, Working Group III Report "Mitigation of Climate Change", Page 417
22 IPCC Fourth Assessment Report, Working Group III Report "Mitigation of Climate Change", Page 417
23 http://www.dsf.org.au/papers/204.htm
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Evaluation of greenhouse gas emissions abatement opportunities based on a combination of cost, scale,
social acceptability, impacts, risk and timeliness all rank efficiency in the building sector above all
stationary energy abatement opportunities.

In its document ‘Climate Solutions: The WWF Vision for 2050’ referred to above, WWF ranked 24
available greenhouse gas emission abatement opportunities according to 3 criteria, being; environmental
impact; social acceptability; and cost.

              Industrial Energy Efficiency & Conservation
                                                 Geothermal
                                         Repowering Hydro
                                       Solar Thermal Power
                                      Agricultural Emissions
                                        Efficient Buildings
                                           Efficient Vehicles
                             Aviation & Shipping Efficiency
                                        Solar Thermal Heat
                                                 Small Hydro
                          Industrial Non-energy Processes
                             Biomass Fuels – Sustainable
                                                 Wind Power
                                                    Solar PV
                                  Reduced Use of Vehicles
                Natural Gas instead of Coal for Baseload
                                      Renewable Hydrogen
               Reforestation, via Monoculture Plantations
                 Reforestation, with Quality Native Mixes
                                     Reduced Deforestation
                                                 Large hydro                                          Environmental Impact/Risk
                                Carbon Capture & Storage
                                                                                                      Social Acceptability
                 Biomass Fuels – unsustainable Sources
                                                      Nuclear                                         Cost

                                                                0   5   10   15   20 25 30             35     40      45     50
                                                                                  Score (out of 45)


In this exercise, ‘efficient buildings’ ranked 5th overall, ahead of abatement opportunities in transport, solar,
wind, hydro, reforestation, carbon capture and storage and nuclear.

When the size of the abatement opportunity was also considered buildings moved to 2nd place, ranking 3rd
in overall size or 12% of the abatement opportunities identified.

Having higher social acceptability will accelerate the uptake of energy efficiency opportunities
over other abatement opportunities.

4.4      Leveraging Australian Building Sector Leadership

Australian building sector companies are among the best in the world with regard to sustainability.

                            Company                                      Country
                            SAM Bronze Class
                            British Land Plc                             United Kingdom
                            Commonwealth Property Office Fund            Australia
                            Land Securities Group Plc                    United Kingdom
                            Lend Lease Corporation                       Australia
                            CFS Retail Property Trust                    Australia
                            GPT Group                                    Australia
                            Klepierre                                    France
                            Mitsubishi Estate Co Ltd                     Japan
                            Slough Estates Plc                           United Kingdom
                            Stockland                                    Australia
                            Wereldhave NV                                Netherlands
                            Source: ‘The Sustainability Yearbook 2008’, SAM Assessment, 2008




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NEET DISCUSSION PAPER RESPONSE                                          24                            LEND LEASE CORPORATION
Five of the 11 companies listed in the Dow Jones Sustainability Index ‘Real Estate Holding and
Development’ category are Australian companies. Two of the 4 companies ranked as ‘Global Sector
Leaders’ are also Australian.

The Australian building sector is well-place to deliver world best practice in the quality and efficiency of
the built environment locally and internationally.



4.5       Global Leadership

It is widely understood that climate change is a global issue requiring global solutions. For Australia to
avoid disastrous climate change it must have a positive influence on other nations, in particular big
emitters such as China and the USA.

The challenge of successfully linking energy efficiency to other policy responses for climate change such
as Emissions Trading Schemes is global. Various governments around the world have recognized the
scale of the opportunity in building efficiency and therefore created specific instruments to address them,
or included them in broader instruments such as Emissions Trading Schemes or Tradable White
Certificate systems. Examples include:

      o   United Kingdom Energy Efficiency Commitment (2002)
      o   NSW Greenhouse Gas Abatement Scheme (2003)
      o   Tradable White Certificates, Italy (2005)
      o   Voluntary Emissions Trading Scheme, Japan (2005)
      o   Tradable White Certificates, France (2006)
      o   Energy Efficiency Portfolio Standards and Renewable/Alternative Energy Portfolio Standards
          including efficiency in California (2004), Colorado (2006), Connecticut (2007), Hawaii (2005),
          Illinois (2006), New Jersey (2005), Nevada (2005), Pennsylvania (2005), Texas (2004), and
          Vermont (2000)

A number of other schemes are also currently under development or in consultation phase:

      o   Carbon Reduction Commitment, United Kingdom
      o   Energy Efficiency Portfolio Standard, New York
      o   Emissions Trading Scheme, Switzerland
      o   Tradable White Certificates, Netherlands
      o   Voluntary Emissions Trading Scheme, South Korea

In addition, various forums and working groups have been conducted to review efficiency incentives in an
attempt to identify methods of improvement.

For example, in 2005 the Intelligent Energy for Europe (EIE) Programme of the European community
launched the EuroWhiteCert project with the objective of evaluating the possibility a European Tradable
White Certificate system integrated with other existing and planned tradable certificate and permit
systems as well as with the EU Emissions Trading Scheme. However, governments worldwide are still
grappling with the issue of how best to address energy efficiency.

By taking global leadership and implementing the world’s first fully fungible cap-and-trade system for
energy efficiency in the building sector Australia will not only demonstrate the best means of unlocking
captive efficiency opportunities in buildings, but create a prototype for similar efficiency trading schemes
which may be implement in other sectors with high indirect, Scope 2 emissions such as industrial facilities
where similarly large abatement opportunities exist.


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Demonstrable success of Australia implementing an integrated Emissions and Efficiency Trading Scheme
(EETS) would influence emerging economies, that are rapidly urbanising, to use such a similar scheme to
ensure the most efficient buildings are being built.

5.0       Residential and Non-Residential Buildings
Buildings must be addressed in two categories, with two different abatement strategies, owing to the
differing barriers to change, occupancy and ownership patterns and building attributes.
These two categories are residential and non-residential (commercial).
While both categories can be addressed by an Energy Efficiency Trading Scheme, each will require a
slightly different approach. For example, due to the fragmentation of the residential market and relatively
small individual footprints mean high transaction cost relative to carbon abatement make direct
participation in the market difficult, with minimal economic benefit. Opportunities must be found to
aggregate residential properties under trading entities operated by local councils, large portfolio mortgage
lenders, or according to their energy utility.

Inversely, Australia’s commercial property market is one of the most securitised commercial real estate
sectors in the world. An estimated 68% of core commercial real estate is owned by institutional investors24,
with the proportion rising from 38% in the case of the industrial sector to 64% of the office market and
around 90% in the case of shopping centres. This means that greater opportunities exist in non-residential
buildings for owners and managers to reduce transaction costs and balance efficiency permit obligations
across multiple assets.

6.0       An Error in the National Greenhouse Gas Inventory
Current estimates in Australia cited in various studies and report place energy use by residential buildings
higher than non-residential. These estimates are based on a flawed assumption in the allocation of
emissions by ANZSIC subdivision in Federal government data made in 2002 when a report by George
Wilkenfeld to the AGO: 'Australia's National Greenhouse Gas Inventory, 1990, 1995 and 1999, End Use
Allocation of Emissions, Volume 1.' purported to categorise emissions by industry sector. In short a
decision was made to allocate emissions from property services, along with other service industries, to a
'commercial and services' category, which has since been taken to represent wholly and exclusively the
occupation of buildings, while other categories do not. The result of this decision is that companies
categorised under 'manufacturing', including businesses in the food, beverages, tobacco, textiles, clothing,
footwear, machinery and equipment, other manufacturing, wood, paper, printing, chemical, rubber, plastic
products, iron, steel, aluminium smelting, other non-metallic mineral products including petroleum and
natural gas sectors, were assumed to not occupy buildings.
Based on ABARE and ABS data, and the flawed categorisation adopted by the Federal Government
Departments including the Australian Greenhouse Office, the Centre for International Economics then
produced a report which cited emissions from buildings at 23% of Australia’s emissions - a figure which
has since been repeated in other reports, including most recently the Draft Report by the Garnaut Climate
Change Review.
The real figure for the relative share of emissions attributable to buildings, in particular non-residential
buildings, is higher for several reasons including:
      •   Businesses in the sectors excluded under ‘commercial and services’ employ 29% of Australians,
          therefore the energy consumed by business accommodation for a third of all Australian
          businesses by employment are not included in Australian modelling;
      •   Industrial processes primarily consume low emission energy such as natural gas whereas the
          lighting and cooling of buildings uses high emission energy, namely electricity. A larger

24
  Higgins D, 2006, Positioning Commercial Property in the Australian Investment Market, Pacific Rim Property
Conference, Auckland, January.
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          proportion of emissions by end-use for manufacturers and other industry are generated by their
          buildings; and
      •   A higher proportion of the energy consumed by commercial buildings is by the base building (i.e.:
          heating, cooling and lighting) than by appliances when compared to residential buildings.
          Wilkenfeld’s 2002 assessment of 1999 commercial sector greenhouse gas emissions from
          commercial buildings concluded that 79% of emissions related to heating, cooling and lighting.
          This compares to around 60% of the emissions from residential building being attributable to
          appliance use. Therefore, in addition to wrongly showing residential buildings as consuming
          more energy than commercial buildings, the error is exaggerated when appliances are removed
          from the totals.
It is almost certain based on these that commercial buildings in Australia are responsible for a greater
share of total greenhouse gas emissions than residential buildings. Our estimate is that energy use by
commercial base buildings alone - through heating, cooling and lighting - is as high as an additional
16,000,000 tCO2e, or an additional 10% of total Australian greenhouse gas emissions above that
currently attributed to the sector.
Until Australia has a more accurate understanding of the total greenhouse has emissions by buildings on
which to base an assessment of effective low cost abatement opportunities, the focus of abatement
strategies is missing the least cost abatement opportunity available from buildings and energy efficiency.
We also note that it is unclear from information published with the economic modelling by Walter Gerardi
of McLennan Magasanik Associates for the NSW Efficiency Trading Scheme was also based on the
above assumption.

7.0       Split Incentives or Principal-Agent Barriers
An energy efficiency strategy for buildings must address the split-incentives or as professor Garnaut
refers to it ‘Principal-Agent’, barriers between investors, owners, developers, builders, managers and
occupants.
A significant market failure that has occurred in building energy efficiency wherein almost all residential
and non-residential buildings waste significant amounts of energy with no real correlation to geography,
quality or value is a product of the fact that operational energy savings are generally not incentives for
asset investors, owners, developers and builders. Owing to this developer/builder/owner and
occupant/tenant divisions known as split incentives, the benefits of energy efficiency or improved
performance rarely accrues to the party that implemented them.
Split incentives in energy efficiency does not require bounded rationality of information asymmetry to act
as a barrier. All parties may be aware of costs and benefits of energy-efficient investments, but since the
developer designs the building, the owner pays for equipment upgrades and maintenance, and the tenant
pays the energy bills, necessary investments will not be made. There is also little incentive for the tenant
to make a capital efficiency investment with a payback time of several years and which time ownership of
equipment might revert to the owner, or the benefits may pass to subsequent tenants.
These split-incentives are the main barrier to the diffusion of efficient technologies.
The only means of addressing this split incentive market failure is by creating adequate incentives for
owners, developers and builders in combination with adequate penalties for inaction.
Obligating a building owner to acquit permits for poor energy efficiency and allocating permits for sale for
good performance is the best way to address this. Not only does it directly correct the split incentive but
also acts indirectly by influencing asset value as described below.

7.1       In-Built Asset Depreciation
In addition to the above, another way in which the solution outlined in this Paper addresses the split
incentives in buildings is through in-built asset depreciation.

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An ongoing obligation to acquit permits for inefficient buildings according to a sliding cap under a cap-and-
trade mechanism for energy efficiency – when factored into the building’s net present value calculation –
has the effect of decelerating the building’s value over time. Inversely, an efficient building increases in
value according to its level of efficiency. This will further incentivise owners and developers to build more
efficient buildings.

8.0      Operational Efficiency, Passive Design and Onsite Generation
An energy efficiency strategy for buildings must not only address operational efficiency, but also passive
design on onsite generation as these provide higher volume opportunities for carbon abatement.

While a certain level of energy efficiency is possible through changes to building management practices
or equipment replacement, the advent over recent years of green building ratings tools, and
improvements in green building practices and technologies, it is now known that the majority of the
efficiency potential of a building must be either captured during design and construction, or through
significant refurbishment.
The NSW Efficiency Trading Scheme Discussion Paper makes specific reference to a number of
initiatives to improve the operational efficiency of buildings, including light bulb replacement and ABGR
(now NABERS Energy). However it is now widely known that building energy efficiency is more
significantly improved through building design.

8.1      Building Rating Tools

The adoption of design ratings for building such as the Green Building Council’s Green Star Office Design
Certification have also shown that it is possible to accurately model a range for the operational
performance of a building during design.

Because the majority of the most significant and lowest cost abatement opportunities in buildings require
implementation during design or through major refurbishment it is essential that design efficiency
abatements are addressed as a priority by the NSW Energy Efficiency Trading Scheme.

There are many precedents for methodologies for the deeming of abatements through design efficiency,
in other schemes around the world. These methods are described in detail in the paper “Tradable
Certificates for Energy Savings, Theory and Practice” By Paolo Bertoldi et al.

8.2      Net Exporters of Electricity

As shown below in Section 8.3, ‘Distributed Power Generation and On-site Renewables’ buildings may
meet their energy needs using a combination of metered inputs including purchased electricity, natural
gas and other fuels, combined with on-site generation and use of renewables.

Where a building generates more energy than it consumes it may begin to export electricity to the grid.

By addressing buildings under a cap-and-trade approach wherein efficiency permits are traded based on
performance relative to a benchmark, it is possible to award permits even where generation exceeds
consumption, thereby also facilitating coverage of diffuse suppliers in an energy market.

8.3      Distributed Power Generation and On-site Renewables

In both developed and transitioning economies around the world distributed energy is rapidly increasing
as a means of supplementing existing energy infrastructure


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The International Energy Agency has for some time forecast growth in the uptake of distributed
generation. In its 2003 World Energy Investment Outlook25 it was stated that distributed generation would
save USD$130 billion in investment in transmission infrastructure worldwide in the period 2001-2030.

Distributed energy offers a range of benefits over current centralised energy supply models, including:

o                           Lower distribution losses, generation requirements and emissions;
o                           Use of renewable energy; and
o                           Thermal efficiency through use of waste heat.

As cities, precincts and buildings increasingly move toward on-site alternative energy generation the
energy market will change significantly with a greater proportion of supply met by micro-utilities.

As shown below a building can meet its energy need using a combination of natural gas (including co-
generation of electricity and heating), purchased electricity and onsite renewables such as PV solar.

                                   Total Energy Consumed

                                                                                                                         ‘Behind the Meter’
                                                                                               Onsite                   energy savings using
                                                                                             Renewables               on-site generation from
                                                                                                                      renewables (e.g: wind,
                                                                                                                       solar, etc.) and output
Total Energy Consumption




                                                                                                   Gas Cogen             from co-generation
                                   Metered Energy Use = Benchmarked Performance                  (Elec. Output)
                           (MJ)




                                                                                                                       Purchased electricity
                                                                                             Purchased                 resulting in Scope 2
                                                                                             Electricity                     emissions




                                                                                                                      Natural gas for heating,
                                                                                             Natural Gas             cogeneration, etc. resulting
                                                                                                                         in Scope 1 emissions
                                                                                                                     Other Fuels (e.g. heating
                                                                                                 Other Fuels         oil) with Scope 1 emissions
                                                                                    Sept


                                                                                           Oct
                                                    Apr
                                             Marc




                                                           May




                                                                                                     Nov


                                                                                                               Dec
                                                                       Jul
                             Jan


                                      Feb




                                                                 Jun




                                                                              Aug




The distributed power generation component of a building consist of those items ‘above the line’, or the
‘Behind the Meter’ savings.

By implementing a cap-and-trade on building energy efficiency based on a benchmark of their metered
energy consumption this serves to:

o                           directly incentivises increased on-site use of renewables, and distributed power generation; and
o                           facilitates coverage by the Emissions Trading Scheme of these small and medium size emitters.

Note, as more and more buildings increase the amount of electricity generated on-site (or ‘above the line’)
to exceed their total demands they become net exporters of energy.

8.4                                Proportional Increase in Renewable Energy Use


25
              http://www.iea.org/textbase/work/2004/distgen/Birol.pdf
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In addition to incentivising the on-site use of renewable energy, which offsets demand for new energy
infrastructure in addition to increased energy efficiency gains, the capacity of new renewable energy
projects to increase relative share of total energy supply in also improved.

Properly addressing buildings in the NSW Energy Efficiency Trading Scheme will result in innovative
solutions for the application of renewable energy to buildings and is therefore likely to result in the greater
uptake of renewable energy than Minimum Renewable Targets.

8.5         Technical Line Losses

Technical line losses, also called transmission and distribution losses, are losses in energy occurring
between the point of generation and metering by the consumer.

These losses are caused by:

      o     Step-up transformers & EHV transmission system (0.5-1%)
      o     Transformation to intermediate voltage level, transmission system & step down to sub-
            transmission voltage level (1.5-3%)
      o     Sub-transmission system & step-down to distribution voltage level (2-4.5%)
      o     Distribution lines and service connections (3-7%)

In most developed countries these losses vary between 7-15% and apply to all forms of stationary energy
supply.

Another benefit in incentivising energy efficiency in the building sector and encouraging distributed power
generation is the resulting reduction in distribution losses which create an additional reduction by
generators over and above the corresponding reduction in consumption.

Distribution losses, also called ‘technical line losses’ are currently not included in CDM calculations
relating to Scope 2 abatements. This is addressed in the UNFCCC Small Scale Methodology query titled
‘Proposed amendment to include technical line loss’, reference number: ‘F-CDM-SSCwg ver 01
SSC_115’, which states:

          ‘It is to be noted that the methodologies for CDM project activities provide
          conservative methods for calculation of project and baseline emissions. One way of
          making conservative estimation of emission reductions is by including technical
          losses in the calculation of project emissions, while excluding the line losses from
          baseline emission calculations.’

The Board of the UNFCCC Small-Scale Working Group has mandated the working group undertake a
revision of type II methodologies and make recommendations (see paragraph 25 of EB 34 and paragraph
54 of EB 33), including as part of this revision a procedure to account for technical losses in type II
methodologies related to electrical energy efficiency. This commitment was reiterated in the “Report Of
The Twelfth Meeting Of The Small-Scale Working Group” in September 2007.

For all the above reasons building energy efficiency must be regulated based solely on at-the-meter net
energy consumption.

9.0         Existing Buildings
Less than 2% of building stock is replaced or upgraded each year, and 80% of the buildings in 2020 have
already been built. Improved energy performance through the Australian Building Code does not impact
existing buildings which are 98% of todays energy efficiency performance issues.


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An energy efficiency strategy for buildings must therefore not only address new building, but must also
incentivise building refurbishment and retrofitting of existing buildings. To do this the NEET Scheme must:

    •    Include all buildings;
    •    Ensure a premium carbon price for energy efficiency, similar to that attached to greenhouse gas
         emission permits or credits under the Australian Governments proposed ‘Carbon Pollution
         Reduction Scheme’;
    •    Penalise owners of inefficient buildings for ongoing inaction using a cap-and-trade and trajectory
         for future performance mechanism; and
    •    Benchmark buildings performance against an average for their type and climatic conditions.

Failure to include the above features in an will create only small scale, incremental change that will take
decades to have any significant impact on Australian and international greenhouse gas emissions and
climate change.

10.0     Mandatory Coverage of All Non-Residential Buildings
An energy efficiency strategy for buildings must be mandatory, as every voluntary energy efficiency
schemes worldwide have shown less than 2% uptake by the sector.
In addition, disincentives for inaction described below, are only effective if all buildings are obligated to
participate in the scheme.

A number of differing instruments around the world and in Australian states have already failed to
successfully unlock the significant energy efficiency opportunities known to be in buildings (new and
existing). These include, Clean Development Mechanisms – of which less than 1% of projects have
applied to building efficiency, Tradable White Certificates schemes such as the NSW Government’s
Greenhouse Gas Abatement Scheme (GGAS) which itself has had less than 1% of its total Greenhouse
Gas Abatement Certificates (GGAC) from non-residential buildings (refer below).

 GGAC Generation Through Energy Efficiency Projects Under DSA Rule

                                                               2003          2004           2005          2006   2007
 Energy Efficiency: Commercial                                22720         40429          47924         70082    N/A
 Energy Efficiency: Industrial                                35572         32867          36814         67079    N/A
 Energy Efficiency: Residential                                8387        315425         953879       8325861    N/A

 Total EE GGACS                                               66679        388721       1038617        8463022    N/A
 Total GGACS                                                6662976       7648315      10102118       19907003    N/A

 Proportion of GGACS generated by EE (%)               1.000739009    5.082439727    10.28118064   42.51278809   N/A


 Source: IPART 2007. Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2006 (page 42)

The basic principle of these instruments is that energy efficiency from the building sector as achieved on a
‘project’ basis whereby a certain amount of energy is saved compared to a reference baseline (electricity
bill) and the Demand Side Abatement is purchased by non-voluntary market participants to offset their
own emissions. These instruments have demonstrated a number of weaknesses, not the least of which is
that demand for energy is more inelastic as a response to operational electricity price. In other words,
regulations or incentives which are designed to influence price have a negligible effect on energy
efficiency.

The methodology for including the building sector in an Energy Efficiency Trading Scheme described in
this Paper ensures administrative and monitoring costs (“transaction costs”) are not disproportionate and
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that as many parties as possible be allowed to participate. The result is enhanced diversity in marginal
energy saving costs and reduced risk of monopoly market power.

This Paper proposes an annual cap on energy efficiency as a mechanism that allows for benchmarking
greenhouse gas emissions savings. The applicant of permits has to prove that the project reduces
greenhouse gas emissions beyond the baseline situation. A system for acceptance of baseline
methodologies is also proposed.

Finally, this submission draws on local and international experience that many of the energy efficiency
projects in the building sector will be initiated at the design and implemented during the construction of
new or the refurbishment of existing buildings and therefore would not be metered. The methodology
proposed responds to this - proposing a verification methodology for the greenhouse gas emissions
savings having been implemented.

Although metering energy efficiency savings is seen by many as a simpler process it greatly limits the
energy efficiency to the building occupant – this is the difference of 25% greenhouse gas emissions
savings versus the proposition in this Paper for 60 to 100% greenhouse gas emission cuts to be realised
if building design and construction initiatives are recognised and generate permits.

The methodology proposed in this Paper references the ‘Standard Savings Formula (Deemed Savings)
Approach’ using standards formulas for energy efficiency measures, and references the Kyoto Protocol’s
flexible mechanisms which can be applied to energy efficiency from the building sector credit certificates.

In addition as a means of monitoring of ongoing operational efficiency of buildings, and informing annual
revisions to efficiency caps, a methodology is also included for the introduction of Mandatory Disclosure of
Building Efficiency. This will compare the building’s design potential with its annual operational rating and
provide the proposed solution with important feedback and impact monitoring. Details of this are provided
in Section 13.5.1.2, ‘Mandatory Disclosure of Building Energy Efficiency’.

For efficiency, liquidity and stability this Paper also demonstrates why buildings must be properly
addressed by an Energy Efficiency Trading Scheme.

11.0     Penalties for Inaction
An energy efficiency strategy for buildings must not only provide a ‘carrot’ or incentive for action, but must
also include a ‘stick’, or penalty for inaction.
This is also essential for the Energy Efficiency Trading Scheme to maintain a high enough carbon
price and eventually become fully fungible with the Carbon Pollution Reduction Scheme.

12.0     Interaction with the Federal Carbon Pollution Reduction Scheme

It has been discussed that subsequent to the implementation of the Federal government’s Carbon
Pollution Reduction Scheme the various state-based energy efficiency trading schemes now proposed or
in place including NEET, VEET and the proposed South Australian scheme could be merged to form a
national energy efficiency trading scheme.

Interaction between a national Energy Efficiency Trading Scheme and an Emissions Trading (Carbon
Pollution Reduction) Scheme are significant, and are described in detail below.

12.1     Creating an Unconstrained Carbon Market

It is stated in the Garnaut Climate Change Review Discussion Paper regarding the principle of integration
- page 13:

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         ‘An ETS must be able to coexist and integrate with international emissions markets as well
         as other financial, commodity and product markets in the domestic and international
         economies. This requires that there be no barriers to the appropriate transmission of
         information within and between markets.’

For the purpose of minimising barriers to transmission of information procedures and methodologies for
benchmarking energy efficiency should be made transparent to participants in all carbon markets.

12.2        Disaggregation of Abatement Opportunities

The principle means of reducing permit price volatility is through the disaggregation of market participants.

Undue volatility in an Emissions Trading Scheme permit 26 price has the disadvantage that long-term
investment decisions become risky and more complex as volatility is priced into investment calculations.
In addition, drastic changes in price undermine general confidence in the market.

Main drivers for volatility in the EU Emissions Trading Scheme have been identified as:

o      Uncertainty around total available certificates;
o      Weather, resulting in demand shocks;
o      Fuel prices including oil, gas and coal; and
o      Discrepant economic growth scenarios.

Uncertainty around available credit certificates can arise for a number of reasons, including policy
changes and general uncertainty around future interaction between markets.

As described in the report ‘Local and Global Benefits of Including LULUCF Credits in the EU ETS’ by
O’Sullivan et al in March 2006 rising oil and gas prices were the single most important factor for a sharp
increase in EU allowances prices, which jumped from EUR 6 to a high of EUR 30 during 2005.

This is also confirmed by Mansanet-Bataller et al in their paper ‘CO2 Prices, Energy and Weather’
published in The Energy Journal, Volume 28, Number 3 in which they compared EU Emissions Trading
Scheme permit prices with weather and non-weather variables including energy prices for Brent and
Natural Gas prices traded at the International Petroleum Exchange, and TFS API2 coal prices. This stated
conclusively “the prices of CO2 emission allowances increase with the energy prices.”

The high concentration of participants in the EU Emissions Trading Scheme in the stationary energy
sector means that a rise in fuel prices deal a double-blow to participants in that permit prices rise
simultaneously with primary overheads. The inclusion of other abatement opportunities in addition to
stationary energy supply in an Emissions and Efficiency Trading Scheme (EETS) is an attractive solution
in that other sectors not exposed to the same economic influences, especially where the permits are
being generated at a lower cost than those within the stationary energy sector, reduce the overall cost of
compliance for utilities when other operational costs are highest.

As also described by O’Sullivan et al the inclusion of diversified credits will also “increase the volume of
eligible credits and introduce a new type of compliance credit into the market. This will reduce compliance
costs, improve market liquidity, and promote long-term emission reduction planning and market
efficiency.”

These sources of volatility can only be addressed through administration of specific scenarios. However,
the remaining sources of volatility being demand shocks, fuel prices, and economic growth are all
mitigated by full fungibility of energy efficiency with emissions permits in the Carbon Pollution Reduction
Scheme as described below.

26
     Refer to ‘Glossary of Terms’
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The only means of making energy efficiency fully fungible with emissions permits is through the
establishment of a cap-and-trade mechanism for building efficiency.

Longevity, foresight, or forward planning is essential in that participants must be able to make long-term
investment decisions with some degree of certainty. In addition, unforeseen changes to a scheme part-
way through its implementation, as demonstrated in several instances with existing schemes around the
world, have the effect of increased volatility in permits prices.

12.3       Downward Pressure on Excessive Fuel and Energy Prices

Another means of reducing volatility in a carbon market is also by directly linking it to an efficiency
trajectory. Higher permit prices which result in higher energy prices thereby result in greater incentives for
energy efficiency, thus minimising sustained increases in credit certificate prices.


                                              Generator’s coal/          Permit price also
                                               gas prices rise         rises as generators
                                                with demand                exceed caps




                                   Energy     Fuel        Fuel      CO2e          Permit       Energy
                                   Demand    Demand       Price    Emissions       Price        Price


The eventual fungibility of national energy efficiency from buildings with the Federal Government’s Carbon
Pollution Reduction Scheme will have the effect of addressing this “lagged and lumpy”27 adoption while
further improving abatement, restraining energy price and mitigating the linkage between carbon price
and stationary energy costs:

                                                       High energy costs
                                                      increase returns for                 Demand reduction
                                                       efficiency projects                 restores fuel price
                                                                                                                          Injection of low-cost
                                                                                                                            Permits restores
                                                                                                                              energy price




      Energy    Fuel    Fuel     CO2e       Permit    Energy      Efficiency CO2e  Energy               Fuel Efficiency     Permit     Energy
      Demand   Demand   Price   Emissions    Price     Price         ROI Emissions Demand               Price Permits       Price       Price


In the absence of the additional reduction in greenhouse gas emissions, a reduction in carbon price and
energy price might be seen as a negative impact. However, given that energy efficiency creates an
increase in abatement simultaneous to the downward pressure on fuel, permit and energy prices, it has
the overall effect of highly increasing the efficiency of the market in incentivising greenhouse gas emission
reductions.

In simple terms the additional value created by this system represents the unlocking of value through
reduction of waste in the current economy, being energy unnecessarily generated, sold and consumed.
This is discussed further in the following section on Market Efficiency.




27
     Garnaut Climate Change Review Discussion Paper (2008), p25
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NEET DISCUSSION PAPER RESPONSE                                    34                                    LEND LEASE CORPORATION
12.3.1 Driving Energy Market Efficiency

The supply and demand curve below demonstrates the additional effect of including energy efficiency in
the building sector being fully fungible with emissions permits as described in the previous section.

  Supply-Side Carbon Constraint Only                                                           Efficiency Trading Mechanism
 Pelec. ($)                                     S2 = S1 + MCCarbon Credits                     Pabat. ($) / tCO2
                                                     MCCarbon Credits                                                                                         Cost of Abatement


                                                                  S1


          P2
          P1




                                                                    D1
                                        Q2      Q1
                                                                    Qelec. (kWh) ∝ QCO2                                                            A1   A2    Abatement
                                                                                                                              Transmission Gains
                             Obligation Point
                                                                                                                                          S2
                                                                                               Pelec. ($)


                                                                                                                                                        S1


                                                                                                        P2

                                                                                                        P3



                                                                                                                                                   D2    D1
                                                                                                                                     Q2   Q1
                                                                                                                                                         Qelec. (kWh) ∝ QCO2
                                                                                                                                     Q3
                                                                                                                          ETS Threshold



                                                                                                        Consumption Permanent Demand Reduction = A2 – A1 (↓)
               Temporary Change in Emissions = Q1 – Q2 (↓)                                              Production Permanent Demand Reduction = D1 – D2               (↓)
               Wholesale Price Change = P2 – P1                          (↑)                            Additional Emission Reduction = Q2 – Q3                      (↓)
                                                                                                        Wholesale Price Change = P2 – P3                             (↓)


Notes:
1) The energy supply curve reflect that shown in ‘Mid-Atlantic States Cost Curve Analysis’ by William B. Marcus,
Principal Economist, and Greg Ruszovan, Senior Energy Analyst for JBS Energy, with the addition of a carbon
permit price.
2) The ‘Cost of Abatement’ curve represents the increasing cost for high efficiency abatements.

The change in abatement indicated by the star (‘ ’) represents the additional emissions reduction
delivered at a net saving to the emissions market.

The two scenarios modelled above compare an increase in energy price due to a demand increase or
supply reduction (Q2) and the resulting effect of including efficiency in the Emissions Trading Scheme,
thereby pulling price back down while further increasing abatement thus reducing the overall cost to the
economy of achieving a national emissions reduction target.

In addition, by addressing permanent abatement opportunities through the deeming of permits for design
efficiency as discussed in Section 13.5.1.4, ‘Standard Savings Formula Approach’, it is possible for
temporary supply shocks to lead to a permanent abatement.

12.4           Correction of Perverse Incentives



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Perverse incentives are extremely dangerous in undermining the credibility of a carbon market, in
particular with non-participants including non-government organizations, consumers, and proprietors of
schemes in other markets.

Because the EU Emissions Trading Scheme currently only applies to direct emissions through on-site
combustion of fossil fuels and not purchased electricity this incentivises industry wherever possible to
switch from diesel or other fuel powered machinery to electric motors/drives, thus generating credit for
emissions abatement where consumption has merely been transferred to a remote stationary energy
supplier often with a higher net greenhouse gas emissions.

In addition, the switch to electric drives reduces the capacity – and disincentivises – use of excess heat
from industrial processes to offset energy consumption in other areas.

This same reverse incentive applies to large buildings (non-residential) included in the Emissions Trading
Scheme. Where a large shopping centre or hospital exceeds the threshold for participation, as do several
Lend Lease facilities in the UK, because the EU Emissions Trading Scheme only accounts for on-site
combustion of primary energy, it is possible to receive credits for emission abatement simply by switching
heating systems over from natural gas to electricity, thereby actually creating an increase in greenhouse
gas emissions, or leakage in the emissions market. It is recommended that including energy efficiency
from the building sector while also including reductions in onsite combustion, resolves this negative
incentive.

At the same time additional incentive is also created for utilisation of waste heat.

The model for the Carbon Pollution Reduction Scheme currently proposed by the Federal government
creates a reverse incentive like the one in the EU Emissions Trading Scheme by not including purchased
energy, will actually serve undermine the ability of business to unlock this value.

The McKinsey report ’An Australian Cost Curve for Greenhouse Gas Reduction’ described above
ranked the most cost-negative abatement opportunity in Australia as industrial motor systems with an
average $200 return for every tCO2-e abated, or around AUD$1.4 billion, and the WWF report (referenced
above), ranked Industry Efficiency as having the 2nd highest abatement potential by 2050. It is therefore
practicable that similar fully fungible, cap-and-trade permitting for efficiency as proposed in this Paper
would be practical and beneficial for highly energy intensive industrial sectors.

12.5     Correction of Rebound Effect

A principal issue with energy efficiency incentives is the rebound effect. As energy efficiency reduces
overall energy costs for a facility there is a reduced incentive for energy efficiency and a potential increase
(or rebound) in consumption.

If however energy efficiency is directly linked to emissions permit price and capped according to a defined
trajectory this issue is also resolved.

While a rebound effect may also occur where cost savings are reflected in lower priced goods or services
creating higher demand for the same service (elasticity) this only occurs where a business achieves
materially higher efficiency than its competitors and – as a result of lower prices achieves increased
market share – the net abatement benefit to the market as a whole is still improved since a greater share
of the market is occupied by the more efficient operator.

12.6 Overlap between Concurrent Emissions Trading Scheme and Energy Efficiency
Trading Schemes

There are additional risks in operating concurrent Emissions Trading and Energy Efficiency Trading
Schemes without proper integration through coordinated national registries.
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NEET DISCUSSION PAPER RESPONSE                       36                        LEND LEASE CORPORATION
For example, in its report ‘Work package 3.1, White Certificate Schemes and European Emissions
Trading System’ released on April 2006, EuroWhiteCert also stated:

“As concerns the import of ERUs and CERs into the EU ETS, a major overlap has been identified in the
linking directive: it consists in the issuance of ERUs or CERs from JI or CDM project activities concerning
installations falling within the EU ETS.”

Because Clean Development Mechanisms already recognise building efficiency EuroWhiteCert’s concern
was that project already receiving these certificates might also fall within a White Certificate scheme, thus
resulting in double counting and/or ‘leakage’.

Overlap occurs when large facilities such as retail centres or hospitals with significant Scope 1 emissions
through heating by on-site combustion of natural gas, as per buildings currently trading under the EU
Emissions Trading Scheme are also included in a separate Tradeable White Certificates scheme.

The eventually integration of the Federal Carbon Pollution Reduction Scheme and a single national
Energy Efficiency Trading Scheme with coordinated registries resolves this issue.

12.6.1 On-Site Emissions by Buildings

Lend Lease Corporation operates a number of facilities trading in the EU Emissions Trading Scheme
based on their Scope 1 emissions exceeding the 20mWh threshold.

A number of facilities have over the past two years exited the scheme based on energy efficiency
initiatives taking them below the inclusion threshold. Similarly, a number of large facilities such as
hospitals and shopping centres will likely be included in an Australian Emissions Trading Scheme based
on Scope 1, on-site combustion of fossil fuels primarily for heating.

Where a large, energy-intensive building is already addressed by an the emissions trading side of an
Emissions and Efficiency Trading Scheme (EETS) there are benefits to its additional inclusion on the
efficiency side being relative reduction in administration costs and correction for negative incentive,
described in Section 12.4, ‘Correction of Perverse Incentives’.

13.0     Design Features of an Efficiency Trading Scheme

The methodology proposed in the following sections of this Paper describes the best solution for fully and
effectively addressing buildings in an Energy Efficiency Trading Scheme.

Simply put 1 tCO2-e that is not emitted because energy is not used by efficient buildings will be treated in
the same way that the Discussion Paper treats 1 tCO2-e that is not emitted due to a change in energy
generation.

Inversely, 1 tCO2-e that is emitted because energy is used by an inefficient building is treated in the same
way that the Discussion Paper treats 1 tCO2-e emitted during energy generation. The issue of double-
counting is also addressed.

This Paper proposes an annual cap on energy intensity according to a predetermined downward
trajectory that allows greenhouse gas emissions savings to be accelerated over time. Emissions incurred
or avoided as a result of a level of efficiency relative to the trajectory will result in an obligation to
purchase, or an allocation for sale or use, respectively, of fully-fungible permits of identical value to the
permits in the proposed Emissions Trading Scheme. That is, they are not risk-adjusted offsets which trade
at a lower price as in the EU Emissions Trading Scheme.


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In addition, in line with the concept of inter-temporality proposed, this Paper also proposes deeming - or a
'Standard Savings Formula Approach' - for permits from energy efficiency projects where an applicant
proves the project reduces greenhouse gas emissions beyond the baseline situation. A system for
acceptance of baseline methodologies is also proposed.

This Paper draws on local and international experience that shows that many of the energy efficiency
projects in the building sector are initiated at the design stage and implemented during the construction of
new buildings or the refurbishment of existing buildings and therefore would not be metered. On the basis
that the energy efficiency of all buildings can be accounted on an annual basis through simple calculation
from utility bills, it proposes a verification methodology for the greenhouse gas emissions savings having
been implemented.

In addition, as a means of monitoring ongoing operational efficiency of buildings, and informing periodic
revisions to efficiency caps, the same methodology facilitates the introduction of Mandatory Disclosure of
Building Efficiency. This will compare the building's design potential with its annual operational
performance and provide the proposed Emissions and Efficiency Trading Scheme (EETS) with an
important feedback and impact monitoring.

Internationally several methods already exist for addressing energy efficiency and/or Scope 2 emissions
under Emissions Trading Schemes or similar instruments.

The following diagram shows global voluntary and mandatory Emissions Trading Schemes and
associated supporting systems (e.g.: JI/CDM, NGER) including details of their coverage of various types
Scope 1, Scope 2 and Scope 3 emissions:

                         SCOPE 1:                                                        SCOPE 2:      SCOPE 3:
                         Direct Emissions                                                Indirect      Other
                                                                                         Emissions     Indirect
                                                                                         (Elec.)       Emissions
                         Combustion   Emissions    Emissions   Transport-   Fugitive     Emissions     Emissions
                         of fossil    from other   from land   ation of     emissions    from          from other
                         fuels        physical/    use and     materials,   from waste   generating    sources not
                                      chemical     forestry    products,                 purchased     owned/
                                      processes    (LULUCF)    staff etc.                electricity   controlled
                                                                                         consumed
             EU ETS                                                                         CDM,
                                                                                                       some CERs
          (Phase 1-2)                                                                       below
             EU ETS                                                                         CDM,
                                                                Aviation                               some CERs
            (Phase 3)                                                                       below
              Kyoto
                                                                                          AMS-II.E     some CERs
              JI/CDM
             UK ETS
             (Closed)
          DEFRA CRC
            (Pending)
             Chicago
              ERMS
               RGGI
            (Pending)
               CCX
           (Voluntary)
              JVETS
           (Voluntary)
             NZ ETS
            (Pending)
                                                                                                          Waste
           NSW GGAS                                                                                     diversion,
                                                                                                          CFLs

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NEET DISCUSSION PAPER RESPONSE                      38                       LEND LEASE CORPORATION
               AETS
            (Proposed)
               EETS                                                                                   Exclude due
           (Lend Lease                                                                                 to double-
             Proposal)                                                                                  counting
               NGER
                                                                                                       Voluntary
             (Pending)


As shown several existing emissions trading schemes address buildings and/or energy efficiency in
Scope 2 emissions to varying degrees, including:

     o   Kyoto Protocol CDMs, methodology AMS-II.E;
     o   proposed DEFRA CRC, recently complete consultation phase;
     o   Japanese Voluntary Emissions Trading Scheme; and
     o   NSW Greenhouse Gas Abatement Scheme.

A simple methodology for addressing reductions in Scope 2 emissions is described in the under the
UNFCCC Clean Development Methodology titled: “AMS-II.E.: Energy efficiency and fuel switching
measures for buildings”. Examples of projects certified under this methodology include:

     o   ‘Pao de Acucar - Demand Side Electricity Management’ – Reduction in energy consumption at
         10 retail centres in Brazil28
     o   ‘Kuyasa Low-Cost Urban Housing Energy Upgrade Project, Khayelitsha (Cape Town; South
         Africa)’ – Improvement of insulation, lighting and water heating efficiency in 2309 low-cost urban
         homes in Cape Town29
     o   ‘Yantai Coal-Fired Boiler Energy Efficiency Project’ – Replacement of 10 heating boilers in 6
         facilities in China30

With the additional improvement of CO2-e/kWh coefficients to improve accuracy, and the pending SSC
Working Group review of “technical line losses” the accuracy of this methodology would be further
improved.

Based on a review of the above systems, and other available resources (e.g.: EuroWhiteCert ) the
following section describes features of the Emissions Trading Scheme and associated methodologies for
addressing with Scope 2 emissions necessary to preserving simplicity and accuracy.

13.1.1 Development of an Energy Intensity Cap

Only by implementing a cap for building efficiency above which buildings must purchase permits can an
abatement trajectory be defined for building efficiency.

As shown above this cap operates in precisely the same manner as a cap on emissions for stationary
energy suppliers with the additional feature of rewarding participants who outperform the cap by allocating
full-fungible efficiency permits to them for use or sale.




28
   UNFCCC project description at
http://cdm.unfccc.int/UserManagement/FileStorage/FRQ7V1OO8PZOZZH1Z6RTSNSXCXJY3A
29
   UNFCCC project description at http://cdm.unfccc.int/UserManagement/FileStorage/FS_292989657
30
   UNFCCC project description at http://www.dnv.com/focus/climate_change/Upload/SSCPDD_enYANTAI_20070330.pdf
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NEET DISCUSSION PAPER RESPONSE                      39                        LEND LEASE CORPORATION
                                                                     Operational efficiency
                                                                     improvements traded
                                                                         year-on year
                                       -      -     -
                                                                +
                                                                              +
            Total Emissions

                                                                                          +               Ab
                                                                                                         Tra ateme
                                                                                                            jec nt
                                                                                                                tory
                                                                                                    +
                          (tCO2e)




                                    2010   2011   2012        2013          2014        2015      2016



Wherever possible benchmarks for future years should be developed as far in advance as possible to
allow the sector to anticipate costs.

It is recommended that forward annual benchmarks be published for an advance period corresponding to
the proposed announcement for the Carbon Pollution Reduction Scheme, being a set value for five years
in advance and a range (i.e.: minimum and maximum values) for a following 5 years.

In the absence of forward transparency, especially in the lead up to the beginning of such a scheme,
participants will be disincentivised to act until such time as risk is diminished. Inversely, announcing a
trajectory in advance of the launch of the scheme will incentivise the sector to achieve a relative level of
efficiency in advance of incurring an acquittal cost.

Deeming of permits is described below under the heading ‘Standard Savings Formula Approach’.

Work is already underway in several forums to develop energy efficiency caps for buildings which might
be adopted, or used as guides, under the Energy Efficiency Trading Scheme.

13.1.1.1 United Nations Environment Programme Sustainability Building and Construction
Initiative Benchmarking

The United Nations Sustainability Building and Construction Initiative (UN SBCI) have already identified
the need for building efficiency benchmarks to facilitate their inclusion in trading schemes.

In their 07/08 work programme it is stated that its proposed national benchmarks for building energy
efficiency will:

       ‘serve as a “business-as-usual” reference for any work carried out under international and
      national climate change mechanisms:
      - for baseline methodology development in CDM/JI projects
      - for defining building projects eligible to participate in carbon credit markets’

Given this work is already underway, the opportunity exist to work co-operatively with the SBCI to refine
these benchmarks for Australia. In addition, given the diverse climate state-based benchmarks should be
considered to avoid penalising buildings in more extreme climate.




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13.1.1.2 Utilisation of the Building Code of Australia

The fundamental principles and approach for developing benchmarks for energy efficiency in buildings
nationally already exist.

The Building Code of Australia is produced and maintained by the Australian Building Codes Board on
behalf of the Australian Government and State and Territory Governments.

Section J of the Building Code of Australia relates to Energy Efficiency. Section J Assessment and
Compliance reports are required for commercial buildings as part of the Development Application process
to demonstrate a designs ability to comply with the Building Code of Australia.

Section J mandates levels of minimum building energy efficiency for certain building types which can also
be used to inform the selection of benchmarks, shown in MJ per annum per m2. The code also includes
voluntary best practice measures.

Benchmarks for energy efficiency can be based on a line between mandatory minimum performance
leading to achievement of best-practice; however the benefit of a cap-and-trade mechanism for
incentivising building efficiency is that the only theoretical limit to efficiency is that the building or portfolio
consumes no energy whatsoever.

13.1.2 Abatement Certainty

For Australia to achieve any future national emissions reduction target its policy response must include
tools which allow for the direct setting of abatement trajectories.

Without a cap-and-trade approach to efficiency any other solution is not a true Quantity Based, Market
Based Instrument. For more detail see Section 3.1.1, ‘Market Based Instrument’ and Section 3.1.1.1,
‘Quantity Based’ Type Instrument’

Only by implementing a cap-and-trade system for efficiency identical to that applied to emissions can an
abatement trajectory be assured.

                            Stationary Energy                                                              Buildings
                           (Emissions Trading)                                                       (Efficiency Trading)

                                                    Abat
                                                         em
                                                    Traje ent
                                                         ctory    Fully
  Total Emissions




                                                                            Total Emissions




                                                                                                                                Ab
      (tCO2e)




                                                                                (tCO2e)




                                                                 Fungible                                                          a
                                                                                                                              Tra tem
                                                                                                                                 jec ent
                                                                 Permits                                                             tor
                                                                                                                                        y




                    2010    2011   2012   2013   2014    2015                                 2010    2011   2012   2013   2014     2015




Since buildings which do not meet the efficiency cap are required to purchase permits from those which
exceed it, the net abatement is achieved as predicted by the trajectory.

More detail on the setting of this trajectory is provided below in Section 13.1.1, ‘Development of an
Energy Intensity Cap’.



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13.1.3 Coverage

The building sector has been called a ‘covered sector’ by those who wrongly believe in the effectiveness
of the price signal resulting from an Emissions Trading Scheme. The inverse is in fact true. Only by
properly addressing buildings in an Energy Efficiency Trading Scheme are all other sectors ‘covered’.
Every business, every individual, every household, occupies buildings and in doing so consumes energy.
Proper coverage of buildings in a carbon market is the only means of ‘covering’ all aspects of society,
including the emissions of stationary generators, as well as the on-site Scope 1 (direct) emissions by
buildings themselves.

Greater coverage is achieved by trading building efficiency, than by trading the emissions of stationary
generators.

Coverage of both Scope 1 and Scope 2 emissions – including emissions from stationary energy and
efficiency of buildings – serves to indirectly address impacts of businesses in all sectors through the
energy they consume, and the buildings they occupy.

Regardless of the point of obligation implemented for an Energy Efficiency Trading Scheme the scheme
will always have the effect of providing increased coverage of Scope 1 emissions, in addition to the
extended coverage of Scope 2 emissions it provides.

13.2     Assignment of an Abator

The ability to assign an abator on behalf of a building or port-folio of buildings wherein a building operator
can contract responsibility for its participation in the proposed Energy Efficiency Trading Scheme to a
third party provides the following benefits:

    o    Facilitation of aggregation of large numbers of buildings under trading port-folios eligible for
         participation in the market to permit greater coverage of smaller assets and achieve economies
         of scale; and
    o    Cultivation of an energy efficiency marketplace wherein service offerings are created that are
         exportable to other countries.

13.3     Facility and Portfolio Level Thresholds

To avoid the mandatory inclusion of small facilities and undue impost on small and medium sized
business, a threshold must be develop to limit inclusion in the Emissions Trading Scheme to large
facilities and property portfolios.

Significant work has been done by the Department of Environment, Forestry and Rural Affairs in the UK
on establishing a suitable threshold for participation in their Carbon Reduction Commitment (CRC) to
balancing minimisation of impost on small business with maximum coverage of the economy. More
information is available in their “Partial Regulatory Impact Assessment”.

 In addition, the Department of Climate Change in Australia has conducted a similar exercise to devise
thresholds for inclusion in its National Greenhouse and Energy Reporting System (NGERS).

It would make a great deal of sense to adopt the same threshold for inclusion of facilities as NGERS
thresholds since:

o compliance activities for NGERS and an Emissions and Efficiency Trading Scheme (EETS) overlap
o data collected under National Greenhouse and Energy Reporting System may be used to efficiency
caps in the lead up to the implementation

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In addition, as per the NGERS, individual facility thresholds a portfolio threshold should also be developed
allowing owners and managers of a number of facilities to aggregate multiple building for participation in
the Emissions Trading Scheme. These portfolio thresholds could reflect current NGERS group company
thresholds, thus ensuring baseline data is also available through this System for the purpose of gearing
the Emissions Trading Scheme.

13.3.1 Residential and Non-Residential Thresholds

A point of obligation for an integrated Emissions and Efficiency Trading Scheme (EETS) also requires
separate points of obligation for different building types, as per Section J of the Building Code of Australia.
In particular, treatment of homes and commercial buildings must differ.

The ability to contractually assign an abator to an asset or portfolio of assets as described in Section 13.2,
‘
Assignment of an Abator’ allows an entity to voluntarily adopt or purchase the right to trade on behalf of
a large number of households such that it exceed the point of obligation.

This activity could be beneficial for an energy retailer wishing to derive income from the generation of
permits by assisting its customer to become more energy efficient, reducing their overall bill while
increasing the energy retailer’s margins.

For this reasons a point of obligation might be established for large energy retailers, mandating such an
activity. This is similar to the ‘Energy Efficiency Commitment’ (EEC) scheme implemented by the
Department for Environment, Food and Rural Affairs in the United Kingdom which had its point of
obligation set at 50,000 customers. Such a scheme would also include its own predefined efficiency
trajectory either side of which energy retailers would buy and sell permits.

The ‘Energy Efficiency Commitment’ (EEC) in the United Kingdom was superseded by the ‘Carbon
Emissions Reduction Target31’ (CERT) which came into effect on April 1, 2008. This program is projected
to deliver equivalent to annual net savings of 4.2MtCO2-e by 2010, or the equivalent emissions of 700,000
homes per year while stimulating about £2.8 billion of investment by energy suppliers in carbon reduction
measures. Suppliers are also required to direct at least 40% of efficiency savings to low-income and
elderly consumers.

13.4        Permit Design

It is essential to the design of an integrated Emissions and Efficiency Trading Scheme (EETS) that permit
design address fungibility and therein accuracy. Key issues with regard to these considerations are
described below.

Offset Price as a Risk-adjusted Permit Price

One of the weaknesses of both voluntary and methodology-based carbon markets as proposed in the
NSW Energy Efficiency Discussion Paper is the lower carbon price assigned to those credits.

The following diagram shows the comparative pricing of Certified Emissions Reductions, or CERs
(offsets) and European Allocation Units, or EAUs (permits) under the EU Emissions Trading Scheme from
January 2005 to July 2007.




31   http://www.defra.gov.uk/environment/climatechange/uk/household/supplier/cert.htm
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NEET DISCUSSION PAPER RESPONSE                          43                        LEND LEASE CORPORATION
                35
                                                                                                                                                                                                                                         EUA (permit) price
                30                                                                                                                                                                                                                       CER (offset) price


                25
                                                                                                                                                                                                                         Peak Δ 35%
                20
                                                                                                                                                                                                                                                                                                       Av. Δ 20%
     €/tCO2e




                15

                10
                                    Correlation ~ 90%
                 5

                 0
                     03/10/2005
                                  03/11/2005
                                               06/12/2005
                                                            10/01/2006
                                                                         10/02/2006
                                                                                      15/03/2006
                                                                                                   19/04/2006
                                                                                                                22/05/2006
                                                                                                                              23/06/2006
                                                                                                                                           26/07/2006
                                                                                                                                                        29/08/2006
                                                                                                                                                                     29/09/2006
                                                                                                                                                                                  01/11/2006
                                                                                                                                                                                               04/12/2006
                                                                                                                                                                                                            09/01/2007
                                                                                                                                                                                                                         09/02/2007
                                                                                                                                                                                                                                      14/03/2007
                                                                                                                                                                                                                                                   17/04/2007
                                                                                                                                                                                                                                                                18/05/2007
                                                                                                                                                                                                                                                                             01/06/2007
                                                                                                                                                                                                                                                                                          03/07/2007
                                                                                                                             Source: Credit Suisse32

As shown, while offsets remain approximately 20% lower than permits in price there is a 90% correlation.
This is due to a number of reasons including but not exclusive to:

     o         where permits are approximately balanced on supply/demand by the cap (benchmark) offsets
               are supply only, adding no additional demand to the market;
     o         offsets which fail to deliver deemed abatements based on ongoing monitoring are cancelled and
               must be re-purchased and so contain risk;
     o         the total percentage of offsets which can be purchased; and
     o         uncertainty regarding rulings for the long-term treatment of offsets, especially post –Kyoto (2012)
               undermines their value.

Combined with the proven correlation between the EU ETS permit price and key factors such as weather
and fuel prices (described above in Section 12.2, ‘Disaggregation of Abatement Opportunities’) the
relatively constant (90%) relationship between offsets and permits in the EU Emissions Trading Scheme
suggests that the offset price is merely a risk-adjusted permit price.

In its work to estimate offset prices in the EU ETS for the purpose of recording the Kyoto related liability
on the Crown Balance Sheet, the New Zealand Government Treasury33 came to the same conclusion -
that offset price is primarily a risk-adjusted permit price.

More importantly, even while these risk adjustments vary between Clean Development Mechanisms
based on the level to which an abator can guarantee its offsets, the relative mix of these offsets has little
bearing on the overall risk-adjustment made by the market.

This has important consequences, since offset prices in the EU ETS do not reflect:

     o         the quality (or reliability) of the offsets being delivered
     o         the supply of offsets available under Clean Development Mechanism




32
   ‘2007 Market Perspective’, IETA / IEA / EPRI 7th Annual Workshop on Greenhouse Gas Emission Trading, Credit
Suisse
33
   ‘Price Estimation of Kyoto Compliant Emission Units’ (The Treasury, New Zealand Government, June 2007)
http://www.treasury.govt.nz/government/liabilities/kyoto/carbonprice/kp-price-est-jun07.pdf
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Ignoring the fact that this not only places lesser economic return on efficiency than emissions, in spite of
the fact that the former is of higher net value to society, there is an even greater issue.

This therefore means that the proposed Energy Efficiency Trading Scheme – which does not cap-and-
trade efficiency, nor generate efficiency permits which are fully fungible with emissions permits – will be
highly ineffective at driving efficiency since an effective market must link price to supply (abatement below
a cap), demand (emissions above a cap) and quality (volume of real abatement).

An Energy Efficiency Trading Scheme which treats efficiency as fully fungible and trades according to an
efficiency cap is the only way to operate such a market or it will be ineffective.

13.4.1 Fungibility

For an efficiency permit to be fully fungible with an emissions permit it must be of identical value and fully
transferable.

In other words, an efficiency permit issued must equate to exactly one tonne of greenhouse gas
emissions (1 tCO2-e) avoided through reduced energy consumption.

Inversely, an efficiency permit required to be purchased must equate to exactly one tonne of greenhouse
gas emissions (1 tCO2-e) which might otherwise have been avoided through reduced energy
consumption.

For efficiency permits to have value in tonnes of tCO2-e, while determinations of obligation and trading
caps will be calculated in units of energy consumed per unit of size of an asset, a two step process must
take place. This calculation is described in detail in the following section.

13.4.2 Prevention of Double-Counting

Double-counting occurs where an end-user of electricity receives a permit allocation for a net reduction in
total greenhouse gas emissions achieved at a supplier level.

The main criticism levelled at creating interaction between an Energy Efficiency Trading Scheme and an
Emissions Trading Scheme is that it runs the risk of leading to ‘double counting’ of emissions reductions.

A methodology for trading energy efficiency from the building sector must address the issue of double-
counting - that is the inclusion in building efficiency of abatement achieved at a supplier level.

The eventual fungibility of the two schemes proposed here avoid double counting by operating on the
basis of two parallel schemes with complementary registers – one for emissions, a second for efficiency.

While the price for both classes of permits would be set by the current trading price of the emissions class,
and the permits would be fully fungible, they would not be able to be freely traded. However, should a
class of permit have a shortfall or surplus in a given year, the registries could exchange permits at the
registry level with the adjustment to the accounts of the national emissions inventory being made by the
registry at the point of transfer.

Finally, only emissions permits would be accountable to the national inventory for the purposes of meeting
commitments under the Kyoto Protocol.

13.4.2.1 Double-Counting NABERS Energy (ABGR)

Some double-counting will already occur in the proposed NSW Energy Efficiency Trading Scheme as
described by including NABERS Energy (ABGR) as a measure of eligible abatement. Because NABERS
Energy awards up to half a star to a building for purchasing 20% Green Power, a building can be awarded
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carbon credits under NEET for the use of renewable energy which is also covered under the Carbon
Pollution Reduction Scheme.


13.5     How it Would Work

If a facility calculates its Scope 1 and Scope 2 emissions, and then claims the net changes in greenhouse
gas emissions, double-counting will inevitably occur due to changes in greenhouse gas coefficients per
kWh of energy consumed. Double-counting is therefore only an issue if permits are allocated to total
greenhouse gas emissions calculations.

The Energy Efficiency Trading Scheme should address this by allocating permits to greenhouse gas
emission abatement below an energy intensity trajectory. By definition, any level of efficiency achieved
below this trajectory, or cap, is defined as avoiding energy use. Any lag in efficiency behind this cap is
defined as being consumption of electricity that could be avoided.

In other words, permits are only traded for reductions in Scope 2 emissions from avoided electricity
consumption and /or onsite electricity generation initiatives (Scope 1 emissions) below a predefined
cap.

The methodology can be broken down into two steps:

STEP 1: Total combined Scope 1 and Scope 2 emissions are calculated on a per square metre basis to
determine the building’s efficiency in relation to the efficiency cap for that year.

                 total scope 1 + scope 2 emission
                                                                     = energy intensity
                              total floor space


Note that total Scope 2 emissions are calculated based on a sector-wide state or national greenhouse gas
coefficient published by the administrating body.

STEP 2: The number of permits for which the facility is eligible or obligated is calculated as a product of
the difference between building’s efficiency (tCO2-e/m2) and the efficiency cap for that year, and its area
(m2):

             (energy intensity cap – building efficiency) x floor space =
                                EETS permit allocation*

                               *EETS = Energy Efficiency Trading Scheme


The result is a permit representing a tonne of greenhouse gas emissions avoided.

Expressed as a single formula, permits allocated/obligated each year for a particular building can be
expressed as:

                                           p = [c – (t/f)] x f
Where:
c = Energy intensity cap (tCO2-e/m2)
t = Total Scope 1 and Scope 2 greenhouse gas emissions
f = Building total floor space
p = EETS Permit allocation/obligation

By plotting the above equation on a graph we can see clearly the interaction between the cap, permits
and emissions.

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                            Static Emissions with a Declining Trajectory
                           p, c, e, f




                             0                                                  t

                                        permits
                                        cap
                                        emissions
                                        floor space



In the above model in which both floor space and total emissions remain static, but the energy intensity
cap declines over time, the number of permits allocated – while initially positive – eventually declines into
arrears as no improvement in emissions has been made. It is also important to note that once an asset is
in arrears the trajectory has the effect of increasing over time the volume of the number of permits
required to be acquitted. As shown in Section 4.2.1, ‘Minimising Administration, Compliance and
Transaction Costs’, moving into arrears greatly increases the incentive to improve performance.


                                              Declining Emissions
                           p, c, e, f




                             0                                                   t

                                        permits
                                        cap
                                        emissions
                                        floor space



In the above model a building with steadily declining emissions derives a short term increase in the
number of permits allocated, however over time this also declines.




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                         Significant Short-Term Decrease in Emissions
                          p, c, e, f




                            0                                                 t

                                       permits
                                       cap
                                       emissions
                                       floor space



As shown in the above model a marked reduction in total emissions has an inverse effect on permits
allocated.

13.5.1.1.1 Setting the Starting Point

Since the energy intensity cap, or benchmark, is simply the product of a total energy consumption divided
by total floor space it can be set in year one according to a sector-wide average and not necessarily tied
to buildings exceeding the obligation point.

As such, the starting point for the abatement trajectory is simply the average total energy consumption by
commercial buildings divided by total floor space.



13.5.1.1.2 Energy Intensity as a Driver of Efficiency

As shown in the following diagram, in each commitment period the number of permits allocated and
required to be acquitted will vary slightly owing to movements in the mean level of efficiency achieved.




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                                                                                                    A ba
               Efficiency
                                                                                                   Tra temen
                        (tCO2e/m2)
                                                                                                       ject t
                                                                                                           or y




                                                                        Permits Acquitted
                                                                        Permits Allocated

                                     2010   2011   2012        2013   2014       2015       2016



These movements in supply and demand will over time have the effect of propelling the mean energy
intensity of buildings at or below the trajectory, with peaks and troughs mitigated through the proposed
inter-temporality, or banking and borrowing of permits.

When we analyse this more closely we see that the effect of a simple energy intensity benchmark defines
as the objective achieving the lowest possible net Scope 1 and Scope 2 emissions for each building.




                                                           Scope 2



                                                           Scope 1




This has the effect of promoting the least-cost abatement opportunity whether it is:

o   a reduction in electricity purchased (Scope 1);
o   a reduction in the on-site combustion of fuels (Scope 2); or
o   swapping from electricity to fuel (or vice versa) where there is a net reduction in CO2-e

The accuracy of this methodology will by the implementation of mandatory disclosure of annual
greenhouse gas emissions from buildings and the mandatory disclosure of energy utility product
greenhouse gas emissions, described below.

13.5.1.2 Mandatory Disclosure of Building Energy Efficiency




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Mandatory disclosure of both commercial building emissions and energy efficiency in Australia are
inevitable in that they follow the lead of international schemes (e.g.: the UK Energy Performance
Certificates). Furthermore, it contributes to good corporate governance and is a driver to business
efficiency in that it enables assessment of an asset’s (building’s) impact and its potential for improvement,
as well as providing an opportunity to demonstrate that the management is at or better than the asset’s
design potential.

Mandatory disclosure is also an effective means of stimulating improvement in the energy efficiency of
commercial buildings, and thereby reducing greenhouse gas emissions.

An effective mandatory disclosure scheme depends on a robust mechanism that provides credible and
meaningful information. Whole buildings should not be rated, but separate base building and tenancy
ratings are the only basis for a workable scheme – once again in line with the recommendations of the UK
Energy Performance Certificate scheme.

A staged introduction of mandatory disclosure will be necessary for it to be commercially viable.

Despite claims that mandatory disclosure will be costly, research into the costs of similar schemes for
white goods and food labelling suggests suggest there is little evidence to support these claims. The
projected benefits of a uniform national system of energy consumption and associated greenhouse gas
emissions for Australia are expected to exceed the projected monetary costs.

Disclosure in other sectors has proven to enhance competition between suppliers and products, since it
reveals an important aspect of performance that would otherwise be concealed from purchasers and
stakeholders;

In addition, Lend energy consumption measurement delivers monetary benefits to purchasers of
increased energy efficiency, as well as contributes to meeting greenhouse gas reduction objectives;

Stakeholders will also benefit from uniformity and consistency in disclosure.

A mandatory system is often a more effective and cost-effective than a voluntary system.

13.5.1.3 Mandatory Disclosure of Product Footprint by Utilities

Use of nationally averaged tCO2-e/kWh coefficient in the calculation of Scope 2 emissions means that
where efficiency abatements are concentrated with a number of suppliers, total greenhouse gas emission
reductions delivered by a facility or portfolio through efficiency may differ from total permits issued based
on the variance of a supplier from the national average co-efficient.

Equally, if a greenhouse gas coefficient employed by an efficiency abator is not adjusted in line with
abatements made on the supply-side then credit for excess abatement may be claimed. For example, if a
building operator uses a co-efficient of 90 tonnes of greenhouse gas equivalents per kilowatt hour of
purchased electricity, while the energy provider implements abatement methods to reduce their footprint
to 80 tonnes per kilowatt hour, the difference of 10 tCO2-e will be erroneously claimed as efficiency
abatement by both parties.

This error is not currently addressed in any existing carbon market covering Scope 2 emissions, including
Kyoto Protocol CDMs methodology AMS-II.E, the DEFRA CRC, the JVETS, or NSW GGAS. Rather,
calculations contain omissions and factoring to discount abatements and arrive at conservative estimates.

It is recommend that the way to achieve the accuracy sought is through mandatory, periodic disclosure by
all utilities of actual coefficient for tCO2-e per kWh, either annually or on regular electricity bills.


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13.5.1.4 Standard Savings Formula Approach

Various energy efficiency incentive programs around the world utilise a Standard Savings Formula
Approach, otherwise known as ‘Deeming’ to calculate the total abatement value of an efficiency project.
This approach is common under the Kyoto Protocol’s Flexible Mechanisms.

EuroWhiteCert stated in its project fact sheet titled ‘Stepwise Towards Effective European Energy
Efficiency Policy Portfolios Involving White Certificates’ published in March 2006 that:

      ‘Clear consensus emerged that the deemed savings approach should be favoured for the
      design of a European TWC scheme since it reduces costs related to monitoring and
      verification of energy savings achieved and provides certainty to investors through a pre-
      defined evaluation of the eligibility of the energy efficiency project.’

This statement is true in that the ability to forecast in advance the abatement permit value of a project and
the ability to bank those permits in advance improves the incentive to undertake significant energy
efficiency projects, but flawed in that it assumes ‘deemed savings’ do not require monitoring and are
always infallible.

One example is the treatment of energy efficient light bulb distribution projects under NSW GGAS which
required a significant revision to its savings formula part-way through the scheme.

A large portion of the risk priced into Certified Emissions Reduction (CER) offsets under the EU
Emissions Trading Scheme is the uncertainty regarding the ability of some Clean Development
Mechanism (CDM) project to achieve their projected outcomes.

The proposed methodology for deeming of abatement opportunity in large energy efficiency project such
as efficient buildings shown in the diagram below:

A process for allowing new buildings to apply for deeming of avoided energy consumption below the
proposed Emissions and Efficiency Trading Scheme (EETS) trajectory will further incentivise abatement
projects by allowing developers to receive permits for action taken during design and construction.

                                                                       New buildings
                                                                   can apply for deeming
                                                                   of forward abatement
                                                                      below trajectory



                                                      +
              Total Emissions




                                                                                             Aba
                                                               +                             Trajetement
                                                                                                   ctor
                                                                                                       y
                                                                         +
                            (tCO2e)




                                                                                         -
                                                                                                        -




                                      2010   2011   2012    2013      2014        2015           2016



Major refurbishments of existing buildings resulting in abatement should be deemed as shown in the
following diagram:



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                                         -                           Major refurbishment
                                                -                   can apply for deeming
                                                       -
                                                                    of forward abatement
                                                                       below trajectory

              Total Emissions
                                                                                            Aba
                                                                                            Trajetement
                                                                +                                 ctor
                                                                                                       y
                            (tCO2e)



                                                                              +
                                                                                     +




                                      2010   2011   2012     2013      2014        2015          2016



Deeming of permits is also compatible with the concept of banking and borrowing described in the
Discussion Paper on page 16, and below in Section 13.6, ‘Inter-Temporality: Banking and Borrowing’.

13.6     Inter-Temporality: Banking and Borrowing

By increasing liquidity and allowing participants to speculate on future market performance this serves to
reduce volatility in the market, on the condition the scheme maintains a high degree of credibility.

Allowing the bank and borrowing of permits within an Efficiency Trading Scheme is also highly compatible
with the concept of deeming described in Section 13.5.1.4, ‘Standard Savings Formula Approach’ since
the deeming of permits in advance for significant projects to improve a building’s energy efficiency may
also be considered the borrowing of permits against deemed future performance.

Detailed rules must be established for governing the borrowing of permits, similar to those required to
govern any form of financial leverage. These rules must include determining eligibility to borrow permits,
the value to which permits may be borrowed, and the point at which a movement in permit price might
trigger a ‘margin call’ (or ‘maintenance call’).

13.7     Scheme Reviews

Annual reviews of an Energy Efficiency Trading Scheme should include close monitoring of the energy
intensity cap as described in Section 13.1.1, ‘Development of an Energy Intensity Cap’. These reviews
should take into consideration:

    o    variance between permits acquitted and allocated as an indicator on movements in mean energy
         intensity for participating assets
    o    information gathered through the progressive roll-out of mandatory disclosure of building
         efficiency as described in 13.5.1.2, ‘Mandatory Disclosure of Building Energy Efficiency’.

Nevertheless, changes to the design and regulation of the scheme should be kept to a minimum to avoid
impacts on permits price. As witnessed in the EU Emissions Trading Scheme, changes to market
regulation (e.g.: National Allocation Plans) serve to increase permit price volatility, increasing the pricing
of risk in transactions, decreasing market confidence, and can disadvantage long-term investment
decisions.



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Inversely, the more forward disclosure of key elements of the scheme such as the energy intensity cap,
the better participants are able to plan for optimal outcomes.

13.7.1 Governance

In addition to the case described in the Discussion Paper for the establishment of an Independent Carbon
Bank (ICB) to administer Emissions Trading Scheme day to day, and for the enforcement of compliance,
it is imperative that this – or any other administrative body – possess the necessary skills and
understanding of sectors covered by the scheme to fairly and accurately govern various elements of its
operations.

It will be essential for such bodies to consult closely at regular intervals through a structured and
transparent process of review with all stakeholders, but most importantly with market participants and
those companies at or near the point of obligation.

13.7.2 Compliance and Penalties

The Energy Efficiency Trading Scheme should include an enforceable ‘make good’ rule which requires
parties with efficiency in deficit of permit holdings, or mean efficiency for assets above the energy intensity
cap, to acquire and surrender an additional quantity of permits sufficient to cover (‘make good’)
inefficiency, or underperforming assets. This is considered the essential to the credibility and integrity of
the market, however its stringency might be mitigated by the opportunity to borrow permits under the
processes described in Section 13.6, ‘Inter-Temporality: Banking and Borrowing’

13.8      Learning from International Examples

When several EU countries began implementing their own supplementary Tradable White Certificate
systems for building energy efficiency, separate to the EU Emissions Trading Scheme (including Italy,
France, and the United Kingdom) the European Commission implemented the EuroWhiteCert project with
the following objectives:

    o     Study interaction and integration with other trading schemes (e.g. EU Emissions Trading
          Scheme)
    o     Develop a uniform measurement and verification methodology for Tradable White Certificates
    o     Analyse potential perverse effects with regard to other regulations and actions (e.g. the EU
          Energy Performance of buildings Directive 2002)

In its report ’Work package 3.1, White Certificate Schemes and European Emissions Trading System’
released in April 2006, EuroWhiteCert stated:

        ‘In a possible integration of the EU ETS with an EU-wide TWC (Tradable White Certificate)
        scheme, there would be no need to establish additional bodies, but they could eventually
        undertake several roles for the implementation of a hybrid scheme.’

The EuroWhiteCert report lists several additional benefits to integrating Tradeable White Certificates and
the EU Emissions Trading Scheme as follows:

        ‘Co-ordination between the two schemes may help address these specific issues, and more
        generally improve the performance of the two schemes, through:

        o increase of compliance options, boosting of the liquidity of the carbon market and
        improvement of market stability;
        o improvement in the environmental soundness and equity of the EU ETS;
        o encouragement of over compliance with energy saving targets, thus bringing more
        energy savings;
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      o possible use of domestic energy end-use efficiency as a “safety valve” to contain prices
      for buyers in the EU ETS;
      o additional support to energy efficiency projects in new Member States and new
      accession States, which have been generally overlooked by current JI and CDM project
      activities.’

Participants in EuroWhiteCert such as Paolo Bertoldi of the European Commission, Directorate General,
and Joint Research Centre went as far in early evaluations to state the integration of Tradeable White
Certificates within the Emissions Trading Scheme itself was:

      ‘needed for enhanced static and dynamic efficiency of the EU ETS, improved liquidity and
      stability of the ETS, environmental soundness and equity’

It is only possible now at the outset of both an Energy Efficiency Trading Scheme and the proposed
Federal Carbon Pollution Reduction Scheme to plan what EuroWhiteCert and the European Commission
could not at that late stage in the development of emissions trading in the EU, being the full integration of
building energy efficiency within the Emissions Trading.




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NEET DISCUSSION PAPER RESPONSE                      54                       LEND LEASE CORPORATION
Appendix 1: Lend Lease Corporation

Lend Lease is an international retail and community property group, integrated with investment
management and construction management businesses. Headquartered in Australia, Lend Lease has
10,000 employees and operates in three core markets – UK/CEMEA, USA and Asia Pacific – and more
than 40 countries.

Lend Lease is listed in the 2007 Dow Jones Sustainability Index and is a member of the influential
Goldman Sachs JBWere Climate Disclosure Leadership Index (CDLI) which identifies companies whose
response to the Carbon Disclosure Project most adequately demonstrates governance, strategies and
programs to effectively manage risks and opportunities associated with climate change.

Lend Lease is proud to be a founding member of the Australian, USA, Mexico and UK Green Building
Councils, and is committed to supporting Green Building Councils in all its countries of operation, and to
having all its tenancies certified.


Thanks goes to Lincolne Scott & Advanced Environmental who jointly developed the EETS
proposal with Lend Lease.

Lincolne Scott is an internationally recognised green building services engineering firm, with more than
450 staff in 12 offices across Australia and the Asia Pacific.

Advanced Environmental is a specialist environmental design division of Lincolne Scott.

Lincolne Scott and Advanced Environmental were the engineers behind the environmental features of
Australia’s first 6 Star Green Star office building design, for Melbourne’s CH2, and Australia’s first 5 Star
Green Star building, Lend Lease’s global headquarters 30 The Bond in Sydney. They were also the
engineers on Melbourne’s Southern Cross Station development, which was awarded the prestigious 2007
Lubetkin Prize by the Royal Institute of British Architects.

Lincolne Scott has also been recognised for its broader environmental leadership. In July 2006 Lincolne
Scott became the first Australian business to take its entire Asia Pacific operations climate neutral. In
November 2006, in yet another first, it offered staff the option to offset their own personal greenhouse gas
emissions through salary sacrificing.

Lincolne Scott is a WSP Group company.




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Glossary of Terms

Abatement
Abatement is the reduction in the quantity of greenhouse gas emissions.

Additionality
According to the Kyoto Protocol Articles projects that achieve reductions that are "additional to those that otherwise
would occur" are eligible to earn emission reduction units. Financial additionality means projects will only earn credit
if funds additional to existing commitments are specifically committed to achieve the greenhouse gas reductions.
Environmental additionality requires that emission reductions represent a physical reduction or avoidance of
emissions over what would have occurred under a business as usual scenario.

Afforestation
The process of establishing and growing forests on bare or cultivated land which has not been forested since 1990.

Annex I, or Annex B
The signatory nations to the Kyoto Protocol that are subject to caps on their emissions of greenhouse gases and
committed to reduction targets and are countries with developed economies.

Avoided Emissions
Avoided emissions would have been emitted under a business as usual scenario but were avoided due to the
implementation of an emission reduction project.

Banking
Within the Kyoto Protocol, emission permits not used in one commitment period can be saved for future use in a
subsequent compliance period.

Baseline Scenario
The baseline represents the forecast emissions of a company, business unit or project, using a business as usual
scenario, often referred to as the 'baseline scenario' i.e. expected emissions if the firm did not implement emission
reduction activities.

Business As Usual Scenario (BAU)
Estimate of a company's future and current emissions under normal operating circumstances.

Cap and Trade
The Cap and Trade system involves trading of emission allowances, where the total allowance is strictly limited or
'capped'. Trading occurs when an entity has excess allowances, either through actions taken or improvements
made, and sells them to an entity requiring allowances because of growth in emissions or an inability to make cost-
effective reductions

Carbon Dioxide Equivalent (CO2eq)
The universal unit of measurement used to indicate the global warming potential (GWP) of each of the 6 greenhouse
gases. It is used to evaluate the impacts of releasing (or avoiding the release of) different greenhouse gases.

Carbon Dioxide or CO2
A naturally occurring gas that is a by-product of burning fossil fuels and biomass, land use changes and other
industrial processes and which is the reference gas against which other greenhouse gases are measured.

Carbon neutral
Reducing emissions from all GHG sources produces a carbon neutral result through energy efficiency, renewable
energy purchases and carbon offset purchases.

Carbon Sequestration
Carbon Sequestration refers to projects that capture and store carbon in a manner that prevents it from being
released into the atmosphere. A carbon sink is a reservoir that can absorb or “sequester” carbon dioxide from the
atmosphere. such as forests, soils and oceans.




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Carbon Taxes
A yax on the carbon content of oil, coal, and/or gas to discourage the use of fossil fuels, with the aim of reducing
carbon dioxide emissions.

Clean Development Mechanism (CDM)
A Kyoto Protocol initiative under which projects set up in developing countries to reduce atmospheric carbon
generate tradable credits called CERs. The credits can be used by industrialised nations to offset carbon emissions
at home and meet their Kyoto reduction targets. The projects include afforestation, reforestation and implementation
of clean fuels technology.

CDM Executive Board
The CDM Executive Board is authorized to approve methodologies for baselines, monitoring plans and project
boundaries, accredit operational entities, and develop and maintain the CDM registry.

CERs
Annex I investors in Clean Development Mechanism (CDM) projects can earn Certified emission reduction units
(CERs) for the amount of greenhouse emission reductions achieved by their CDM projects, provided they meet
certain eligibility criteria.

Commitment Period
The five year Kyoto Protocol Commitment Period is scheduled to run from calendar year 2008 to calendar year 2012
inclusive.

Developed Countries
Industrialised countries (identified in Annex I and Annex B of the Kyoto Protocol).

Early Action
The action of reducing emissions before the start of a specific trading scheme.

Emission Cap
A regulatory device that sets a ceiling on emissions that can be released into the atmosphere within a designated
timeframe such as under the Kyoto Protocol or other regional trading scheme.

Emission Reduction Unit (ERU)
Under the Kyoto Protocol, a specified amount of greenhouse gas emissions reductions achieved through a Joint
Implementation project within an Annexe 1 country.

Emissions Trading
Emissions Trading is a market-based system that allows firms the flexibility to select cost-effective solutions to
achieve established environmental goals.

EUA
European Union Allowances. Tradable emission credits from the European Union Emissions Trading Scheme. Each
allowance carries the right to emit one tonne of carbon dioxide.

Flexibility Mechanisms
The Kyoto Protocol has provisions that allow for flexibility in how, where, and when emissions reductions are made
via three mechanisms: the Clean Development Mechanism, International Emission Trading and Joint
Implementation.
Forward Contract (or Spot Forward)
The purchase and sale of a volume of emission reductions at a price determined today for settlement in the future.

Forward Market
A forward market deals in forward contracts which are agreements to buy or sell an asset at a certain time in the
future for a certain price.

Global Warming
The continuous gradual rise of the earth's surface temperature thought to be caused by the greenhouse effect and
responsible for changes in global climate pattern.


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Global Warming Potential (GWP)
The GWP is an index that compares the relative potential of the 6 greenhouse gases to contribute to global warming
ie. the additional heat/energy which is retained in the Earth’s ecosystem through the release of this gas into the
atmosphere. i.e. Carbon dioxide has been designated a GWP of 1, Methane has a GWP of 23.

Grandfathering
Method for issuing emission permits to emitters and firms in a domestic emission trading scheme according to their
historical emissions and which may be combined with auctioning to present a hybrid approach to allocation of
allowances.

Greenhouse Effect
The impact of human activities that cause certain gases to be released and trapped in to the Earth's atmosphere.
They then absorb the sun's energy and cause the earth to warm at a faster rate than usual.

Greenhouse Gases (GHGs)
The greenhouse gases in most contexts are the six gases regulated under the Kyoto Protocol, determined to be the
main contributors to the Greenhouse Effect. The principle gases are
    • carbon dioxide (CO2),
    • methane (CH4),
    • nitrous oxide(N2O),
    • Hydrofluorocarbons (HFC's)
    • Perfluorocarbons (PFC's)
    • Sulphur Hexofluoride (SF6)

Intergovernmental Panel on Climate Change (IPCC)
The IPCC represents the collective work of over 2,000 scientists, principally in the atmospheric sciences, but also
comprising social, economic and other environmental components potentially impacted by climate change.

Joint Implementation (JI)
Joint Implementation (JI) is a project-based mechanism developed under the Kyoto Protocol (KP), designed to assist
Annex 1 countries in meeting their emission reduction targets through joint projects with other Annex 1 countries. JI
projects produce emission reduction units or ERUs.

There are two procedures by which to implement JI projects:

Track 1 - When an Annex 1 country meets all the eligibility and reporting requirements under the KP, it can issue
ERUs to a project, which can then transfer them to the investing entity.

Track 2 - When an Annex 1 country is not in compliance with all the requirements, ERUs generated by a project
must be verified by an external body under a proceedure similar to that of the CDM. The host party must meet
several requirements relating to the establishement of its Assigned Amount and national registry before it can issue
and transfer ERUs.

Kyoto Commitment Period
The Kyoto commitment period is the period in which Annex B countries have committed to reduce their collective
emissions of greenhouse gases by an average of 5.2%. There are currently no emissions targets after the
commitment period specified in the Kyoto Protocol from 2008 to 2012 although debate is underway to determine a
mechanism for post-2012 emission reductions.

Kyoto Protocol
The Kyoto Protocol was signed in Kyoto, Japan in December 1997. It specifies the level of emission reductions, the
deadlines and methodologies that signatory countries are to achieve.

LULUCF
Land use, land use change and forestry. The term given to tree-planting projects, reforestation and afforestation,
designed to remove carbon from the atmosphere.

Marginal Abatement Cost (MAC)
The cost of reducing emissions by one tonne of CO2e. An aggregation of these costs against total tonnes abated
creates a firm's marginal abatement cost curve. The lower the MAC curve, the more effective the firm's emission
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reduction strategies.

Methane (CH4)
Greenhouse gas with a Global Warming Potential of 23. The primary sources of methane are landfills, coal mines,
paddy fields, natural gas systems and livestock (e.g. cows and sheep).

NAPs
National Allocation Plans. These set out the overall emissions cap for countries in the EU Emissions Trading
Scheme, and the allowances that each sector and individual installation within each country receives.

Nitrous Oxide (N2O)
Greenhouse gas with a Global Warming Potential of 296. Results from burning fossil fuels and the manufacture of
fertiliser.

Non-Annex B Countries
Countries not included in Annex B of the Kyoto Protocol and which do not have binding emission reduction targets.

Non-Annex I Countries
Countries not included in Annex I of the United Nations Framework Convention on Climate Change UNFCCC. Non-
Annex I countries do not currently have binding emission reduction targets.

Offset
Offsets are a form of credit-based emissions trading product used by voluntary trading organisations or individuals to
offset the source of their emissions. Offsets are project based credits produced through projects such as energy
efficiency, renewable energy and forestry. It differs from a permit in that it is traded at a lower price due to intrinsic
risk, and is not allocated in relation to a cap. Certified Emissions Reductions (CER) traded on the EU Emissions
Trading Scheme are an example of an offset.

Permit
A permit allows the bearer to emit one tonne of greenhouse gas. A permit may also be allocated to participants in a
cap-and-trade scheme who outperform a predefined cap for use or sale. A European Allocation Unit (EAU) traded
on the EU Emissions Trading Scheme is one example of a permit.

Primary Market
The exchange of emission reductions, offsets, or allowances between buyer and seller where the seller is the
originator of the supply and where the product has not been traded more than once.

PDD
Project Design Document. Produced as part of the CDM registration process to define a CDM project.

Reforestation
This process increases the capacity of the land to sequester carbon by replanting forest biomass in areas where
forests were recently harvested.

Removal Units (RMUs)
RMUs are a new unit created at COP7, representing sinks credits generated in Annex 1 countries, including through
Joint Implementation.

Renewable Energy Certificates (RECs)
A Renewable Energy Certificate represents a unit of electricity generated from renewable energy with low nett
greenhouse gas emissions. One REC represents 1 megawatt-hour and are produced from renewable technology
such as solar and wind power.

Secondary Market
The exchange of emission reductions, offsets, or allowances between buyer and seller where the seller is not the
originator of the supply and represents a secondary trade in teh particular product.

Source
Any process or activity which releases a greenhouse gas.


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tCO2e, MtCO2e
Tonnes of carbon dioxide equivalent, and millions of tonnes of carbon dioxide equivalent.

Unilateral CDM Projects
Unilateral CDM projects are projects which do not have a project investor from abroad.

United Nations Framework Convention on Climate Change (UNFCCC)
The UNFCCC was established in June 1992 at the Rio Earth Summit. with the primary aim of stabilising greenhouse
gas emissions.

Verification
Provides an independent 3rd party assessment of the expected or actual emission reductions of a particular
abatement project.

Verified Emission Reductions
Tradeable units of emission reductions under a voluntary emission trading scheme. VERs are a carbon offset bought
and sold outside a formal trading scheme and which offset a source of emissions.

Voluntary Trading
Actions taken by an entity that reduce emissions outside of regulatory requirements. Transactions occur in verified
emission reductions.




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NEET DISCUSSION PAPER RESPONSE                          60                         LEND LEASE CORPORATION

				
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Description: Submission by LEND LEASE CORPORATION in response to NSW ENERGY ...