Frank Topham Government Affairs & Strategic Communications Manager Caltex Australia Limited

1. Australian Environment Business Network Industry and Greenhouse ConferenceSydney, 27 February 2008Alternative arrangements for carbon abatement and associated issues from a petroleum company’s perspective Frank TophamGovernment Affairs & Strategic Communications ManagerCaltex Australia Limited

2. Caltex profile • Australian company - ASX listed • Chevron 50% shareholder – but all decisions by Aust management and board • No overseas operations, no exploration or production • Refining and marketing only • 2 refineries – Kurnell NSW and Lytton Qld • 1750 branded service stations (Caltex, Caltex Woolworths, Ampol) of which 511 owned or leased • #1 convenience retailer • 3200 employees

3. Caltex climate change policy • Accept conclusions of IPCC on science • Recognise climate change presents a significant risk to economies, societies and the environment • Support long term aspirational goal for reduction of greenhouse gas emissions but experts to determine reduction % • Support carbon pricing – carbon tax better for liquid fuels

4. Australian greenhouse gas emissions • Total Australian GHG emissions 559 Mt CO2eq • Contribution of petroleum products Petrol (motorists) Diesel (transport/industry) Jet/other fuels Total Refinery emissions 47 Mt 44 Mt 22 Mt 113 Mt 5 Mt 8% 8% 4% 20% 1% Source : Australia's National Greenhouse Accounts, National Greenhouse Gas Inventory 2005

5. Customer emissions are 20 times Caltex emissions

6. Caltex key policies on carbon pricing • Emission trading supported for refining - but must not reduce international competitiveness • energy intensive trade exposed industries require protection • issue free allocation of permits • Carbon tax should apply to liquid fuels - not emission trading • Caltex proposes carbon tax be set equal to ET permit price • 40 A$/t CO2 is about 10 cpl petrol

7. Carbon tax for liquid fuels more environmentally effective than emission trading • Carbon tax more visible so stronger consumer influence • emission trading cost “lost” in fuel price volatility • How much would carbon price reduce emissions? • A$40/tonne CO2 is 10 cpl petrol • price elasticity of demand about -0.1 (short run), -0.5 (long run) • 7% price increase reduces petrol emissions by 0.3 Mt (short run) and 3.5 Mt (long run) versus 47 Mt emissions in 2005 • so carbon price ineffective in substantially reducing emissions • Alternative policy instruments may be needed

8. Carbon tax more transparent than emission trading • Carbon tax would operate in similar way to excise • Price monitoring simple as carbon price known • Emission trading carbon price very difficult to monitor

9. Emission trading would cost motorists $200 million pa (1 cpl) more than carbon tax • Under emission trading, fuel suppliers must purchase $5 billion of emission permits annually • Caltex $1.4 billion v debt of $600 million/EBIT $675 million • so unable to significantly participate in permit auctions • Financial middleman working capital cost/profit $200 million pa • no middleman with carbon tax • Carbon tax allows more precise revenue recycling

10. Other issues • Emission trading for liquid fuels would not assist carbon price discovery as fuel suppliers can’t make technology choices • End user liability would be very complex under emission trading, simple under carbon tax • Emission trading for liquid fuels creates inequitable financial risks for fuel suppliers • no capacity to absorb carbon costs • but exposed to competitive risk of permit price under-recovery

11. What are the policy options for 2010? • Omit all liquid fuels from carbon pricing • Omit all liquid fuels from carbon pricing except those within emission reporting threshold (eg 25,000 kt for facility) • Apply emission trading to all liquid fuels • Apply a carbon tax to all liquid fuels • with end user acquittal likely from 2011