CMI Sofassstware Tool Manual20140909

Carbon Decision Making and Risk
Management:
TOOL MANUAL
Version 2.0
www.climateworksaustralia.org +61 3 9902 0741

1
Contents
Disclaimer .................................................................................................................................... 3
Getting started ........................................................................................................................ 6
Summary.................................................................................................................................. 7
Manual..................................................................................................................................... 9
Inputs ....................................................................................................................................... 9
1.
Company Characteristics.............................................................................................. 9
2.
Liability Calculation .................................................................................................... 11
3.
Make Options ............................................................................................................. 13
4.
Buy Options ................................................................................................................ 15
Scenario testing ..................................................................................................................... 19

5.
Parameter Definitions ................................................................................................ 19
6.
Scenario Definition ..................................................................................................... 22
Scenario testing application .................................................................................................. 24

Outputs .................................................................................................................................. 27
7.
Exposure Summary .................................................................................................... 27
8.
Project Evaluation ...................................................................................................... 29
9.
Portfolio selection ...................................................................................................... 32
10. Portfolio Visualisation ................................................................................................ 34

11. Portfolio Evaluation ................................................................................................... 36
12. Summary .................................................................................................................... 41
Acknowledgements ................................................................................................................... 43

2
Disclaimer
This Carbon Decision Making and Risk Management Tool (Tool) and the accompanying report
Carbon Decision Making and Risk Management: A Guide for Business (Guide) has been
prepared by Baker & McKenzie, ClimateWorks Australia, Climate Mundial (AFSL No 428196)
and Seed Advisory (the Authors) for the Carbon Market Institute (CMI) as an informational
tool only and is not an offer to sell or solicitation to buy any financial product nor the
provision of financial services or financial advice. While this Tool and Guide may make
reference to various financial products no such reference should be taken to be an
endorsement of such product by CMI, the Authors or any other person.
The Authors attempt to provide accurate and complete information obtained from reliable
sources, however, they make no warranties or representations, express or implied, as to
whether information provided in this Guide is accurate, complete or up-to-date. In particular,
users should be aware of the following key limitations:
The Tool assists users to identify the optimum emission unit portfolio based on
economic selection criteria. It therefore relies upon forward curve information - on
emission unit and energy prices - for its accuracy, which are all inputs added by the
user.
The portfolio of make and/or buy options is only considered with respect to economic
considerations and the Tool does not adjust the results according to other criteria,
such as risk. The main risks to be considered are discussed qualitatively in this Guide.
The user should therefore be fully aware of these limitations and, where further accuracy is
required, the user shall seek its own professional advice.
CMI, and the Authors where relevant, retain all rights (including copyrights, trademarks,
patents as well as any other intellectual property rights) in relation to all information
provided in this Tool (including all texts, graphics and logos). You may not copy, download,
publish, distribute or reproduce any of the information contained in this Tool and Guide in
any form without the prior written consent of CMI or the appropriate consent of the owner.
CMI and the Authors make no representation and give no advice in respect of any financial,
investment, tax, legal or accounting matters in any jurisdiction including the suitability of the
financial products to investors. Neither CMI, the Authors nor any of their agents or
subcontractors shall be liable for any direct, indirect, special, incidental, consequential,
punitive, or exemplary damages, including lost profits (even if CMI or the Authors are advised
of the possibility thereof) arising in any way from, including but not limited to: (i) the
information provided in this Tool; (ii) the modification or misuse of information in this Tool; or
(iii) claims of third parties in connection with the use of this Tool. This exclusion of liability is
also made for the benefit of directors and employees of CMI or the Authors.

3
The Tool and Guide have been prepared without taking account of your objectives, financial
situation or needs. Consequently, before acting on the information in the Tool and Guide,
you should consider the appropriateness of the information in view of your own objectives,
financial situation and needs.
As noted above, the Tool and Guide Tool do not constitute legal advice. CMI and the Authors
encourage you to seek your own professional advice to find out how the Clean Energy Act
2011 and other applicable laws apply to you, as it is your responsibility to determine your
obligations.
The user should be aware of the following assumptions and limitations when using the Tool:
A company is able to aggregate the total liability across facilities up to five facilities
but it is not designed to accommodate complex group structures and scenarios.
Where a company has multiple facilities and has altered its liability arrangements
through JVs, OTNs, LTCs or establishing a separate entity to hold all liability either:
(i) substitute total corporate liability into facility box; or (ii) need to seek specialist
legal/commercial advice.
All liability and expenses are worked on a number of tonnes liability converted to
permit numbers and financial estimates in AUD.
All amounts are in nominal pre-tax Australian dollars.
The tax effectiveness of various options and models is beyond the scope of this advice
and users of this Tool should refer to the Guide on Tax and Accounting Treatment and
seek professional advice.
Focus is on direct (scope 1) emissions re: liability and where this liability exists at
law. Added to this is then additional exposure through carbon cost pass through
arrangements.
Liability is analysed over a 10 year assessment period from the year entered at the
start of the Tool.
The Authors will not advise in any detail on the tax, transfer pricing and financial risk
issues that arise.
The Tool assists users to identify the optimum emission unit portfolio based on
economic selection criteria. It therefore relies upon forward curve information - on
emission unit and energy prices - for its accuracy, which are all inputs added by the
user.
The portfolio of make and/or buy options is only considered with respect to economic
considerations and the Tool does not adjust the results according to other criteria,
such as risk. The main risks to be considered are discussed qualitatively in this Guide.
The Guide is based on the regulatory and policy framework in force at the time of
preparing the Guide. However, the regulatory and policy framework is constantly
evolving and those matters that must be taken into account in making any decision
will change from time to time.

4
With the linking of Australia's Carbon Pricing Mechanism to other schemes there is an
increase in the influence that the rules and regulations of those schemes have on
meeting liabilities under the Australian scheme. For example, while Australian entities
can purchase European Union Allowances (EUAs) for compliance purposes in 2015,
there are a range of regulatory restrictions that affect their use which need to be
considered external to the model.
The user should therefore be fully aware of these limitations and, where further accuracy is
required the user shall seek their own professional advice.

5
Getting started
System requirements:
PC with CD Rom drive
Microsoft Excel version 2007 or later
Setup:
The tool will open in Microsoft Excel 2007 or later.
Open Microsoft Excel and ensure that Macros are enabled

File > Options>Trust Centre > Macro Settings > Enable All Macros

6
Summary
This Tool is designed to assist organisations manage the costs, risks and uncertainties of
participating in the carbon market. Using the framework of the Tool, users define their
liability under the Carbon Pricing Mechanism (CPM) and identify key make options (in house
emission reduction projects) and buy options (purchase of permits) towards managing that
liability. The tool uses this information to evaluate all options against common assessment
criteria and presents a risk management analysis to inform the decision making process.
The Tool allows users to evaluate their carbon management options to develop an optimal
portfolio of actions to manage their exposure by:
analysing single projects or the entire portfolio of actions against key evaluation
criteria
providing outputs such as abatement composition, compliance cost curve, exposure,

capital expenditure and annual cash flows
assessing risk through flexible scenarios defined by the user
The performance of a companys carbon management strategy will be dependent on a

number of variables that may be highly uncertain at the time of assessment. Variables such as
the price of different carbon units, price of energy fuels, the delivery and cost of different
abatement options and the companys emissions profile will all affect the cost of the
management strategy but are subject to many risks and uncertainties detailed in step 3 of the
Guide. To allow the user to better understand the risks of carbon management, the Tool
allows users to group these parameters into three different scenarios. The Tool will then
present project and portfolio assessment data in each of these scenarios for the user to
investigate performance under various conditions.
The Tool allows users to enter emissions and make options data at a facility level. However,
all buy option strategies and portfolio assessment are presented at a whole of company level,
so that strategies will be evaluated on their ability to manage cost and risk across the
company.
This Manual references 3 types of cells within the Tool which have been colour coded for ease
of reference as follows:
Data entry cells: e.g. cell D16
Automated entry cells: e.g. cell D16
Pick from dropdown menu: e.g. cell D16
A summary of how data flows within the Tool is presented on the following page.

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Company Data
Liability Calculation
Make Options
Buy Options
Input of main financial data to

contextualise the outputs of the
Tool
Input or calculation of
emissions from energy use data
and fugitive/process emissions
Identification of projects to
reduce the entitys overall
liability
Identification of options to
purchase permits to cover
remaining liability
Legend
Input sheets
Scenario sheets
Scenario Parameters
Scenario Definition
Define potential future movements in the

parameters affecting project and portfolio
performance
Assigning parameters defined in Scenario

Parameters to investigate the impact of
uncertainties on projects and the portfolio
Output sheets
Exposure Summary
Project Evaluation
Portfolio Selection
Portfolio Visualisation
Calculation of total liability,

gross exposure and net
exposure
Analyse key assessment metrics

over time for each make and
buy option identified
Selection of preferred make and

buy options to manage the cost
and risk of the liability
Graphs all selected make and

buy options on a cost curve for
easy comparison and analysis
Portfolio evaluation
Assessment of key financial impacts and risk
from implementing the selected portfolio
Summary
Key findings of the analysis for management
reporting

8
Manual
Inputs
Input tabs
1. Company Characteristics
Company
Characteristics
Liability
calculation
Make
options
Buy
options
Parameter
Definition
Scenario
Definition
As a first step, users will enter the key company attributes that will lay the foundation for the
analysis throughout the tool.
The Company Characteristics tab allows users to enter the names and locations of up to five
facilities. The entry of basic financial benchmarks will enable the comparison of an entitys
carbon price exposure alongside key financial metrics required for effective decision making.
INPUT STEPS:
I.
Analysis definition Enter the first year of analysis. This date will flow through to all
sheets within the tool and set the primary year of the assessment period (10 years).
You can test this by altering the date in cell D12 and observing how the tool
automatically changes the assessment period in the Financial Benchmarks section
below (cell D30 to M30).
Now enter the companys discount rate in cell D14. This sets a default discount rate
which affects all subsequent tool calculations where a project specific discount rate is
not specified.
II.
Facility definition Enter the names of up to five facilities and select their locations
from the drop down menu.
III.
Financial Benchmarks users have the option of entering the companys key financial
data such as gross profit ($), gross margin (%), annual capital expenditure ($), and
annual operating expenditure ($). By entering this data, users will be able to
benchmark the impact of carbon exposure on some of the key indicators of company
performance. Although these fields are not mandatory, if left uncompleted, some
analysis functions of the tools outputs will be limited.

9
Figure 1: (Company Characteristics Tab, Cells B9 E38) The Company Characteristics tab
Set the first year of the

assessment period
Enter the names of

the facilities for
analysis
(Optional) Enter key

financial metrics to
benchmark carbon
exposure against
company performance

10
Input tabs
2. Liability Calculation
Company
Characteristics
Liability
calculation
Make
options
Buy
options
Parameter
Definition
Scenario
Definition
On the second tab, users will enter their emissions data to calculate both direct and indirect
liabilities. Direct emissions are those covered by the CPM that will incur a carbon liability
under the scheme (refer to page 17 of the Guide for a discussion of direct liability). Indirect
emissions are those that are not covered by the scheme but nonetheless will effectively incur
a cost of carbon passed through from a supplier (e.g. electricity use where the carbon price is
paid by the generator but passed through to the consumer). For a detailed explanation of the
determination of liability, see page 10 of the Guide.
Important: For each facility, users have the option of entering emissions data in either one of
two ways:
Option 1
For users who have a detailed understanding
of the direct and indirect emissions, users can
simply enter aggregate emissions data (both
direct and indirect liability)
OR
Option 2
For users requiring a more detailed view of
theirs emissions profile, users can enter data
describing their energy use (by each fuel type),
fugitive process emissions data and other
emissions data.
INPUT STEPS:
1. Enter company emissions data through one of two options
i.
Option 1 enter aggregate expected emissions data into the Emissions A section of
the tab for each facility (separating direct and indirect1 emissions) for each year of the
assessment period. Repeat this process for each facility.
OR
ii.
Option 2 enter energy use into section B1, fugitive & process emissions into section
B2 and other emissions into section B3 at each facility.
a. For energy use data, enter fuel use in GJ and select any one of seven fuel
types and select the relevant emissions factor from the drop down menu (the
tool will automatically calculate emissions for this energy use). Entry of
indirect liability data is optional but will allow analysis of the indirect impacts
of the carbon price on energy that is not directly covered by the scheme.
b. Enter any data for fugitive and process emissions in tCO2e
Indirect emissions data is optional.

11
c. Enter any other emissions that are not captured in the above categories. This
is a catch all group for irregular emissions sources.
2. Enter EITE assistance (if applicable) if you are an entity that undertakes an emissionsintensive trade-exposed (EITE) activity as prescribed under the Regulations and receive
free carbon units under the Jobs and Competitiveness Program, enter the number of
permits (in tCO2e) in the green shaded cells of section 3 of the tab for each facility. For a
detailed explanation of the eligibility under the EITE scheme, see page 20 of the Guide.
3. Summary this table provides a liability snap shot of the entered data for each facility (no
data entry required)
Figure 2: (Liability Tab, Cells B11 to I33) The Liability Calculation tab
Option 1: Enter aggregate total
Scope 1 and Scope 2 emissions
here
or enter direct and

indirect emission by fuel
type here (Option 2)
Choose energy types and

emissions factors from
the drop down menus

12
Input tabs
3. Make Options
Company
Characteristics
Liability
calculation
Make
options
Buy
options
Parameter
Definition
Scenario
Definition
In meeting their carbon liability, companies can either reduce their internal emissions
through make options or source permits from outside the company through buy options. In
the Make options tab, users enter the project costs and abatement volume under the
following categories:
Energy efficiency
Cleaner Energy
Fugitive/process emissions
Other projects
Up to twenty projects can be entered in each of the four categories. These can be assigned to
any of the five facilities defined earlier in the tool.
INPUT STEPS:
I.
Select the facility where this project is located from the drop down menu.
II.
Give the project a unique name for reference within the Tool
III.
Enter the project lifespan in years (this is typically from project commencement until
it is decommissioned or until the date in which the impacts of the projects are no
longer material to business decisions).
IV.
Enter capital amortisation in years. This will change the number of years over which
capital is spread across the project. This may be the same period as the project
lifespan although it may change depending on company policies.
V.
Enter the cost of capital for each project. This may vary from project to project
depending on the different financing options and risk level of each project.
VI.
From the drop down, select whether the project reduces direct or indirect emissions.
In the case of energy efficiency, the fuel type saved is selected from the list from one
of the seven options, alongside the emissions intensity (from the NGERS guidelines).
Operation and capital expenditure data can be entered alongside other cost data to
fully characterise the project reference case2.
VII.
Enter uncertainty parameters these parameters allow users to investigate the

performance of the project if the project cost or the amount of emissions reductions
(called project delivery in the tool) is uncertain. Users enter the percentage
The reference case refers to the most likely outcome for the project under consideration; variability in
these outcomes can be tested using the scenario analysis feature.
13
variation above or below the reference case for testing in the scenario analysis to
reflect the projects individual risk characteristics.
After entering this key data for each make option project, the tool will automatically generate
key financial assessment metrics in the Project evaluation tab. In this tab, the tool will
calculate project NPV and IRR enabling the user to evaluate the viability of the projects (see
page 26).
Figure 3: (Make Options, B14 to K49) The Make Options Tab
Make options
categories:
Energy Efficiency,
Cleaner Energy,
Fugitive/Process
emissions and Other
Setting these parameters allows

testing of uncertainty of cost and
abatement in different scenarios
(for each year in the assessment
period)

14
Input tabs
4. Buy Options
Company
Characteristics
Liability
calculation
Make
options
Buy
options
Parameter
Definition
Scenario
Definition
Buy Options refers to the purchase of eligible permits accepted under the CPM to meet the
companys liability. The tool accommodates two purchasing strategies the spot purchase of
permits and the contracted purchase of permits.
Spot purchase of permits By buying on the spot market the company pays the going market
rate at the time the decision to purchase permits is made. In this strategy the company is
exposed to market risks, such as the risk of the price changing. The tool allows the analysis of
spot purchase of the following four permit types:
Australian Carbon Units bought through either government auction or secondary

market. This is the default credit purchase in the tool. Quantitative limits can be
placed on the other 3 permit types available.
ACCUs Australian Carbon Credit Units (generated through the Carbon Farming
Initiative)
Permits from linked trading schemes EUAs from the European Union trading
scheme or
Kyoto units (which include Certified Emissions Reduction units (CERs), Assigned
Amount Units (AAUs) and Removal Units (RMUs)).
For further discussion on these permit types, please refer to page 28 of the Guide.
INPUT STEPS (spot purchases):
I.
Enter the maximum percentage of liability (after the make options) that can be
covered through the purchase of ACCUs in each year of the assessment period. This
will be limited by legislative limits and company policies. Note: the spot purchase
timeline has 20 years for analysis which will recognise annual constraints in each year
while allowing for flexibility around the analysis start date. It is not necessary to
enter data years outside of the tools 10 year analysis period. The user should
understand the limitations of these markets as they may take time to mature. It may
take some years of scheme operation before a secondary market for ACCUs becomes
functional.
II.
Enter the percentage of liability that will be covered through the purchase of
international permits in each year of the assessment period. The tool automatically
recognises the regulatory constraints on the use of these units. For instance, the use
of international units is limited to 50% of the total liability during the first five years of
the floating price period of the CPM.
15
Spot purchase calculation: The tool will automatically select the lowest cost permits for each
year based on the permit prices set out in the parameter definition tab. The tool will then
buy the lowest cost units up to the maximum buying and regulatory limits set out above
until the entire liability is covered.
Contracted purchase of permits defines fixed forward price contracts where the permit
price is negotiated in advance as opposed to a spot price that is variable over time. The
contracted delivery of permits can be entered over the time series, alongside upfront and
annual payments as per the contractual arrangements. Similar to the Make options tab,
scenario testing allows fluctuations in the delivery of units or costs to be included in the
analysis over the assessment period. Users can, for example, include the risk of default or
under delivery of permits from the project developer as well as foreign currency fluctuations
affecting contract price.
INPUT STEPS (contract purchases):
I.
Enter the contract name and select the permit type (from the drop down menu),
contract life (years) and cost of capital (%).
II.
Enter the contracted delivery of permits over the assessment period in cells I43 to
R43.
III.
Enter upfront and annual payments as per the contractual arrangements over the
time series. Year 1 is the first year of the contract as defined on the portfolio
selection tab.
IV.
Set up the uncertainty parameters and include estimates of the high case and low
case values as a percentage of the reference case. These parameters allow the user
to investigate the performance of the project subject to uncertainty in the contracts
cost or delivery of emissions reductions.
V.
Repeat the above process for each purchase contract.

16
Figure 4: (Buy Options, Cells B4 M29) Spot purchase of permits in the Buy Option Tab
Purchase of units from government auction
is automatically calculated based on other
inputs
Maximum use of
international permits
defined by legislative
limits and user
preferences
Figure 4b: (Buy Options, Cells B30-L52) Contracted purchase of permits in the Buy Option
Tab
Enter the costs associated with

each purchase option for the
calculation of key assessment
metrics
Enter the potential variation in the

number of units delivered and contract
costs over the assessment period for risk
assessment

17

18
Scenario testing
Input tabs
5. Parameter Definitions
Company
Characteristics
Liability
calculation
Make
options
Buy
options
Parameter
Definition
Scenario
Definition
There are multiple parameters that will influence the performance of the carbon
management strategy, many of which are highly uncertain. The risks and uncertainties
associated with these parameters are discussed further in Step 3 of the Guide. These are in
addition to inherent uncertainties associated with projects listed as make options and any
contracted buy options. The tool allows users to examine the performance of the strategy
under different scenarios by defining three combinations of these parameters into scenarios.
The scenario testing is an important step in understanding the risks and uncertainties
affecting the carbon management strategy. Accordingly, the tool allows the user to
investigate the impacts of different parameter values on each of the make or buy options
over the analysis period.
This approach to setting the variables can be used across the following parameters:
Direct emissions
Indirect emissions
EITE Assistance
Changes to Australian Carbon Unit price
CFI ACCU price
EUA Price
Kyoto price
Price of all seven energy types at each facility
INPUT STEPS:
The reference case for direct emissions, indirect emissions and EITE assistance are calculated
based on inputs in the liability calculation.
I.
The user is required to enter reference case estimates for the price of various carbon
permits and the cost of the different energy prices. For guidance on likely future
carbon prices, please refer to carbonmarketinstitute.org.
II.
The user then enters estimations of variance around the central estimate (or
reference case) using either of two methods:

19
Method 1: % Variation
Where the variable is a fixed % above or
below the central estimate across the
assessment time frame
Method 2: Tailored
Where data can be manually entered in a point
in time (for instance, to describe the closure of
a particular facility during a particular year)
OR
III.
Enter the percentage variation on the reference case for the parameter of interest.
This can be used to model parameter variations against the central estimate over the
assessment period. This approach is appropriate where variance is likely to be
uniform throughout the analysis period. For the % variation cases, variation below
the reference case should be entered as a negative e.g. -10% and variation above the
reference case should be entered as a positive e.g. 10%
IV.
Repeat for other parameters of interest
OR
V.
Enter the tailored case data for the parameter of interest. This approach might be
useful to describe a particular event, for instance the closure of a particular facility.
VI.
Repeat for other parameters of interest
Figure 5: (Parameter Definitions, Cells C20- P47) The Parameter Definitions tab
Enter default high and low

case scenarios using %
variation or
enter tailored data to describe

fluctuations over the assessment
period

20

21
Input tabs
6. Scenario Definition
Company
Characteristics
Liability
calculation
Make
options
Buy
options
Parameter
Definition
Scenario
Definition
In the second scenario testing tab, the user will define two scenarios to compare the
performance of make and buy options against the reference case.
The reference case scenario is automatically pre-filled based on the parameters entered into
the parameter definition tab. This scenario represents the most likely scenario based on
the data entered by the user. For the two additional scenarios, the tool also allows for the
selection of a group of parameters (for instance to describe a pessimistic or optimistic case)
or the selection of just one parameter to allow for sensitivity (for instance, the movement of
the Australian Carbon Unit price).
All parameters defined in the parameter definition tab are presented in Column C.
Different scenario testing objectives will direct the combination of these parameters included
in each scenario. See page 20 of this manual for three examples of scenario testing.
INPUT STEPS:
I.
Review your objectives for scenario testing and select an appropriate case for each
parameter to include in the scenario.
II.
Under Scenario 2 (column G) on the Scenario Definition tab, select a case for each
parameters from the drop down menu.
III.
Repeat this process for Scenario 3 (in column I).
IV.
The Parameter Visualisation tool on this tab allows for easy review of the cases
selected for each parameter to ensure that these meet scenario testing objectives.
V.
The selection of cases for scenario testing will be automatically applied to the results
tabs.

22
Figure 6: (Scenario Definition, A1 I42) The Scenario Definition tab
Select combinations of
parameters (entered in
the previous tab) from
the drop down menus

23
Scenario testing application

There are many risks and uncertainties that will affect a companys carbon exposure, as
detailed in step 3 of the Guide. Many of these uncertainties, such as future policy changes to
the scheme will be difficult to predict, however these may have significant impacts on the
overall cost of the carbon management strategy. In order to understand these risks and
uncertainties the scenario testing feature of the Tool allows the user to investigate and
quantify their potential impacts to assess the need for further risk management.
Three examples of scenario testing that may help liable entities understand their liabilities are
detailed below.
Scenario Testing Example 1: Sensitivity of projects and contracts to changes in the carbon
price.
The scenario testing feature of the Tool can focus on the impact of one specific parameter on
individual projects or contracts.
One example of this application is to test the performance of an individual project or contract
under different carbon price scenarios.
1. Enter cost, emissions reductions and permit delivery into the relevant Make option
or Buy option tab.
2. In the Parameter definition tab, enter the most likely carbon price for the
Australian Carbon Unit price parameters - Reference case
3. Use either Cost of Australian Carbon Unit - High case or one of the tailored cases to
define a high carbon price.
4. Use either Cost of Australian Carbon Unit - Low case or one of the tailored cases to
define a low carbon price.
5. In the Scenario definition tab, set all parameters in Scenario 2 apart from
Australian Carbon Unit price to Reference Case. Set the Australian Carbon Unit
price to the high price defined in step 3.
6. Set all parameters in Scenario 3 apart from Australian Carbon Unit price to
Reference Case. Set the Australian Carbon Unit price to the high price defined in
step 3.
7. In the Project evaluation tab, select the project for analysis. The tool will calculate
the NPV, IRR, Payback period, Payoff, Cash flow and capital requirement in each
scenario.
Scenario Testing Example 2: Upper and Lower Limits of Carbon Exposure
For some companies, while carbon exposure may not pose a material risk to operations under
reference case assumptions, it could have severe impacts if worst case scenarios eventuate.
Users can use the scenario testing feature to examine potential downside case and
investigate the potential financial impacts if these scenarios eventuate.
An example of a worst case scenario analysis is presented below.
1. Enter financial, liability, make option and buy option data into the Tool as described
in steps 1 to 4 of this manual
2. Enter base case assumptions for carbon unit prices and energy prices throughout the
10 year analysis period for the Reference case in the Parameter definition tab

24
3. Use one of the four other cases to describe a pessimistic case for each parameter.
This can be achieved by selecting a % above or below the reference case or by
entering data into one of the Tailored Cases.
4. Use another case to describe an optimistic scenario.
5. In the Scenario definition tab of the tool, group all pessimistic cases into "Scenario
2" and all Optimistic cases into Scenario 3 as shown in the figure below. Reference
cases are automatically grouped in the Reference Case Scenario.
6. Analyse the impacts of these risks and uncertainties on the overall cost of carbon
management and on individual projects in the results tabs. These tabs are described
further in steps 7 to 12 of this Manual.
If the upper limit of carbon exposure exceeds the companys capacity to manage this cost
effectively, the carbon management strategy should be reviewed for improved mitigation of
these risks.
Note: Many parameters entered into the Parameter definition tab will be interdependent,
for example different carbon permit prices which are linked through various domestic and
international markets. These dependencies should be considered when setting scenarios for
analysis.
Scenario Testing Example 3: The Impact of Scheme Repeal on Individual Projects or

Contracts
The Tool can be used to analyse the potential impact of repeal risk discussed on page 53 of
the Guide on a single project or the whole portfolio of options in a companys carbon
management strategy.
1. To investigate the impact of scheme repeal on the carbon management strategy
follow steps 1- 2 of Example 2 above.
2. To simulate scheme repeal, use a tailored case in the Parameter definition tab for
Direct emissions parameters. Direct emissions (Emissions covered by the scheme)
would drop to 0 after the scheme is repealed.
3. Use another tailored case for Australian Carbon Unit price parameters to simulate
the drop in the carbon price after the scheme is repealed. Refer to Figure 7 below for
examples of direct liability and carbon price cases where the scheme is repealed in
2015.
4. In the Scenario definition tab select the Reference case for all parameters in
Scenario 2 apart from your tailored cases for Direct emissions and Australian
Carbon Unit price. Select the Tailored cases from steps 2 and 3 of this example to
describe the repeal scenario.
5. Analyse the impacts of scheme repeal on the overall cost of carbon management and
on individual projects in the results tabs. These tabs are described further in steps 7
to 12 of this Manual.

25
Figure 7: Scheme repeal cases in the Scenario

26
Outputs
Output tabs
7. Exposure Summary
Exposure
Summary
Project
Evaluation
Portfolio
Selection
Portfolio
Visualisation
Portfolio
Evaluation
Summary
After the user has completed the (orange) data entry tabs, the tool will populate the yellow
results tabs. The first results tab analyses the companys exposure to the carbon price based
on the data inputs.
First, the gross exposure represents the amount the company will be required to pay to meet
the liability by buying permits at the defined carbon price in each scenario in nominal dollar
terms. The gross exposure represents the cost of carbon management before free permits
and the pass-through if all permits are bought at the spot permit price.
Second, all free EITE permits received through Government assistance are displayed. The
gross exposure after assistance is then calculated as the direct and indirect inherent exposure
less the free permit allocation.
Third, pass through can be set on a year by year basis as a percentage of the gross exposure
for each scenario. These all add up to create the net exposure which is calculated as the gross
direct and indirect exposure less the free permit allocation and the pass through.
OUTPUT STEPS:
I.
Review the Facility threshold summary at the top of this tab. This summary highlights
the emissions over the facility thresholds of the CPM after implementing all make
options identified. Any years where emissions can be reduced below the threshold
are highlighted in green.
II.
Review the Exposure summary of the reference case in the blue shaded cells (F70 to
O73). This table displays the direct and indirect liability in tCO2e and cost in nominal
dollars. Comparing these results to the outputs for the two other scenarios shows
the potential variation in exposure under the conditions defined in the Scenario
Definition tab.
III.
For emission intensive trade exposed business (EITE), review the amount of forecast
assistance (if any) across the assessment period.
IV.
Assess net exposure (gross exposure after free permits and pass through) by setting
the pass-through rate. This can be set to different rate across the assessment time
frame and across scenarios offer a lot of flexibility in analysis.
V.
Review the total exposure under each scenario.

27
Figure 7: (Exposure Summary, Cells B49 - I86) The Exposure Summary tab
Graph of direct and indirect

exposure throughout the
assessment period
Output tables showing the

exposure for each of the three
defined scenarios
Estimation of the ability to pass

through the costs of meeting the
carbon liability

28
8. Project Evaluation
Exposure
Summary
Project
Evaluation
Portfolio
Selection
Portfolio
Visualisation
Portfolio
Evaluation
Summary
Projects (identified in the Make option tab) can be analysed individually, across each of the
three scenarios. The tab includes a summary of the key financial metrics for the selected
project (payback, NPV, internal rate of return) with visualisations of project pay off and net
cash flow over the assessment time frame.
Net project payoff is the difference between the cost of carbon calculated for the project and
the spot carbon price. For example, if the project can reduce liability at a levelised cost of $10
per tCO2e and the spot carbon price is $25 per tCO2e, the project payoff for this year will be
$15 per tCO2e. Users can also investigate the performance of the project in the different
scenarios and calculate a weighted average performance, based on the users assessment of
the likelihood of each scenario. In addition, users can investigate the impact of delaying the
start date of each project on financial performance to determine the optimal timing of
projects. Follow the steps below to investigate the relative value of each project under
consideration.
OUTPUT STEPS:
I.
Select project of interest from the drop down tab in cell D11.
II.
Choose the projects year of implementation. Changing the year of implementation in

this tab will only affect calculations on this page. After deciding on the optimal year of
implementation from the project analysis, enter the desired start year for the project
on the Portfolio Selection tab.
The tool will generate the following outputs to evaluate the performance of the project:
a. Net present value (NPV) - The NPV represents the sum of all cash flows of the project
or contract considering the capital and incremental operating costs, as well as the
benefit in direct carbon emission reductions, priced at the carbon price in each
scenario. These cash flows are discounted at the project or contract specific cost of
capital. The NPV is calculated using all cash flows throughout the 10 year analysis
period and calculates a terminal value to represent all cash flows after this period
until the end of the projects lifespan. The terminal value calculation assumes that the
cash flows in the tenth year are representative of all cash flows from then until the
end of the lifespan. You can choose to remove the terminal value from the NPV
calculation by setting project life to 10 years
b. Internal Rate of Return (IRR) - The IRR refers to the annual rate of return (% p.a.) of
the project and can be used to measure and compare the profitability of projects.

29
The method of calculation for the IRR requires at least one positive and one negative
net annual cash flow from the project. Projects with only negative or positive cash
flows will return NA. If the cash flows change sign more than once throughout the
assessment period technically there is more than one IRR. The tool will only give one
value that is closest to the projects cost of capital
c. Payback Period - The Payback period represents the first year in which cumulative
cash flows become positive. This metric is commonly used to describe the length of
time required for the project to return the initial capital cost of the project. The tool
will calculate the payback period as the first year in which the cumulative cash flows
from the project is greater than 0. Negative cash flows after the initial payback
period will not affect the calculation.
d. Net Project Payoff -Net project payoff is the difference between the cost of carbon
calculated for the project and the spot carbon price. For example, if the project can
reduce liability at a levelised cost of $10 per tCO2e and the spot carbon price is $25,
the project payoff for this year will be $15. The cells turn green when the project
delivers abatement at less than the carbon price and red when it delivers abatement
at greater than the carbon price.
e. Net project cash flow This is the sum of all expenses including capital, operating
and energy costs, excluding the benefits from the carbon price (not considered as a
cash flow). This table is also formatted to provide a quick visual guide to periods with
negative cash flows.
f. Capital Expenditure- This chart shows the total capital expenditure required on the
project in each year.
Figure 8a: (Project Evaluation), Cells A1- P41) The Project Evaluation tab
Analysis of key financial metrics
(IRR, NPV and payback period) for
each project in each scenario

30
Figure 8b: (Project Evaluation, Cells B42-O81) The Project Evaluation tab
Enter the probability of each scenario to evaluate the

weighted average payoff.
Analysis of project payoff, annual cash

flows and capital expenditure in each
scenario over the assessment period

31
9. Portfolio selection
Exposure
Summary
Project
Evaluation
Portfolio
Selection
Portfolio
Visualisation
Portfolio
Evaluation
Summary
After evaluating the projects individually (on the Project Evaluation tab), we can now assess
how the various projects perform in a portfolio context. This process of comparison will assist
in devising and optimising a portfolio strategy to meet the calculated liability.
On this tab, users can define preferences for how projects can be ranked. This prioritises the
most important measures of a projects performance using user defined ranking parameters.
These include:
Net annualised abatement cost ($/tCO2e)

Net annualised pay off ($/tCO2e)
NPV ($)
Capital requirement ($)
Average annual opex ($)
For instance, if an organisation is particularly capital constrained, the user might rank the
capital requirement parameter highest. A companys preference for one over another will
typically reflect its usual approach to financial analysis. The tool will then rank each project in
the portfolio based on its performance against this assessment criteria in a single year snap
shot.
The final section presents a summary of the volume of abatement delivered by the portfolio
across the assessment period.
OUTPUT STEPS:
I.
Select the scenario from the drop down menu (cell K12) and the analysis year (enter
start data into cell K14).
II.
Define your portfolio of projects based on the assessment on the Project evaluation
tab. This is done by choosing which projects are to be implemented (under the drop
down yes/no) and the year of implementation (using the drop down menu in
Column L).
III.
Prioritise the assessment criteria in the five options by allocating a percentage value
in the green shaded cells (note this must add to 100%).
IV.
Review how the ranking of the projects change under the defined conditions and
different scenarios in each analysis year.
V.
Review how this portfolio performs across the ten year assessment time frame in the
section below.

32
VI.
Repeat this process using the other scenarios to evaluate the performance of the
portfolio performance under different parameter forecasts.
Figure 9a: (Portfolio Selection, Cells A1- T118) The Portfolio Selection tab
Users rank projects

based on preferred
criteria
Based on the analysis in the Project Evaluation tab, optimise the portfolio
of options by selecting which projects to include and when to implement
them
Figure 9a: (Portfolio Selection, Cells B131- N251) The Portfolio Selection tab
Assess the performance of the

portfolio over the assessment
period under each scenario

33
10. Portfolio Visualisation
Exposure
Summary
Project
Evaluation
Portfolio
Selection
Portfolio
Visualisation
Portfolio
Evaluation
Summary
The tab provides a visual representation of the various emission reduction options in a
liability cost curve.
Each box on the cost curve represents an individual option to either reduce emissions or
purchase permits to cover the carbon liability. The width of each box represents the liability
abated by the option in tCO2e. Added up, the width of all boxes on the cost curve represents
the total liability that can be met over the assessment time frame.
The height represents the average cost of abating/offsetting one tonne of emissions in the
analysis year from implementing that option. Options that fall below the horizontal axis offer
financial savings even before considering the cost savings from reducing carbon liability. This
tab provides a quick and easy comparison of the annual levelised carbon cost of options in
the selected year and scenario.
This graph groups opportunities by type (e.g. energy efficiency, cleaner energy, fugitive
emissions and the different buy options) through colour coding. This visualisation provides a
succinct graphical representation of the portfolio, in any year, in any scenario.
OUTPUT STEPS:
I.
Select scenario of interest using the drop down menu in cell F5.
II.
Enter the year of assessment.
III.
Hit draw

34
Figure 10: (Portfolio Visualisation, Cells J5-X25) The Portfolio Visualisation tab
The tool generates a

liability cost curve based on
the portfolio of options
selected previously. Each
make and buy option is
represented by a box on
the curve.
The height of each box

represents the cost per
tonne of CO2e.
The width of each box represents

the volume of emissions
reductions (For make options) or
the amount of the liability covered
(for buy options).

35
11. Portfolio Evaluation
Exposure
Summary
Project
Evaluation
Portfolio
Selection
Portfolio
Visualisation
Portfolio
Evaluation
Summary
This tab is used to examine key financial information and performance of the portfolio
defined earlier in the tool. The tab is divided into the following sections:
Portfolio composition - The section contains visualisations of the portfolio composition (make
and buy) over the assessment time frame and how the portfolio performs in meeting the
exposure. The composition table presents a breakdown and the contribution of each project
in meeting the overall exposure. In the output field, the darker the cell is shaded, the greater
that projects contribution is to meeting the overall liability. This figure shows when the
portfolio is highly dependent on a specific project.
The tool will also identify excess purchase of permits that may occur in the analysed
scenarios. This will occur when contract purchase of permits exceeds the buy strategy for the
particular permit type. The tool will highlight cells in yellow when the buy strategy results in
excess purchase of permits.
Risk management provides an overview of the portfolio composition in each project
category and displays the total number of permits that are sourced directly from carbon
markets at a spot price. These permits will be exposed to movements in carbon markets,
increasing the risk to exposure. This visualisation allows the user to quickly identify potential
exposure to market risk.
Cost composition displays the cost of carbon per year in the reference case scenario for all
make and buy options. The table also presents the average cost of carbon for each year of
analysis.
Capital requirement Presents the total capital costs of projects for each year of analysis
allowing users to assess the magnitude of capital expenses and the potential impact on
capital budgeting.
Cash flow analysis Presents operating and capital cash flows from the defined carbon
management strategy for each analysis year.

36
OUTPUT STEPS:
I.
Review the portfolio composition and assess the contribution of each project in
meeting the overall exposure. Identify those options which are contributing a
significant portion to your portfolio and consider the implications and risks.
II.
Now examine the excess permit visualisation (see figure 11b). Do any of the
scenarios deliver an excess of permits in the first few years of the assessment time
frame?
III.
Examine the risk management visualisation. In the case of example depicted in Figure
11c, the output clearly demonstrates that majority of the exposure come from a
strategy heavily dependent on unhedged EUAs in the floating price period (beyond
2015). An example of this is presented in Figure 11c.
IV.
Review the costs for meeting the liability for each year and assess the trends in the
total net annualised cost of meeting liability over time. See Figure 11d.
Figure 11a: (Portfolio Evaluation, Cell B10 P42) The Portfolio Evaluation tab
Portfolio
composition:
Displays the
relative
contribution of
each project to
meeting
obligations
Periods with proportionally

high cash flow are shaded
darker.
Figure 11b: (Portfolio Evaluation, Cell C150 J171) Examining excess permit options
Indicates excess purchase of

permits above the threshold

37

38
Figure 11c: (Portfolio Evaluation, Cell B172 P219) Examining risk management options
The proportion of the

liability met with
options that are
exposed to
movements in market
prices are presented
in shades of red
(Unhedged)
The proportion of the liability met
with options that are protected from
movements in market prices are
presented in green (Hedged)
Figure 11d: (Portfolio Evaluation, Cell B222 K255) Carbon cost per year assessment
Review the cost of the make and

buy options and assess the trends in
the total net annualised cost of
meeting liability over time
The average cost of carbon across

all options is presented on the line
graph on the secondary axis

39
Figure 11e: (Portfolio Evaluation) Examining capital requirements
The trends in the total

net cost of meeting
liability in each year
(not annualised)
Figure 11f: (Portfolio Evaluation) Examining cash flow
The summary of cash flow

covers both operating and
capital expenditure

40
12. Summary
Exposure
Summary
Project
Evaluation
Portfolio
Selection
Portfolio
Visualisation
Portfolio
Evaluation
Summary
This tab provides the final output and report that can be communicated to stakeholders and
management for decisions making, providing a high level view of the exposure, the portfolio
composition, and the overall costs of implementing the portfolio strategy.
OUTPUT STEPS:
I.
The exposure summary and portfolio composition are automatically prefilled from
earlier sections of the tool. This data is presented in a simple and succinct tabular
format.
II.
Baseline costs these are now benchmarked against company characteristics

entered earlier. This enables the user to see their exposure as a percentage of gross
profit, capital expenditure as a percentage of capital budgeted and the operating
expenditure profile over time. See Figure 13b.
III.
Risk assessment - shows the impact of the selected variables in each scenario on the
costs of the carbon management strategy. The impacts on liability and cash flows are
shown for each year of the analysis period.
Figure 13a: (Summary, Cells A1 M37) The Summary tab
Summarises the strategy

formulated to meet
obligations under the CPM

41
Figure 13b: (Summary, Cells B65 X100) The Summary tab

The exposure, capital costs
and operating costs are all
compared to the entitys
key financial statistics
defined at the beginning of
the process
Figure 13c: (Summary, Cells B121, N157) The Summary tab
The net cost of the strategy

is shown in each scenario as
compared to the reference
case

42
Acknowledgements
The authors would like to acknowledge the following people and organisations for their help in
the production of this tool:
Andrew Grant, CO2 Australia
Brendan Lim, Net Balance
Damien Lockie
John Marsden, Marsden Jacobs
Gujji Muthuswamy and Michael Ward, Monash University
John Tomac, PricewaterhouseCoopers
Kris Viller, City Smart
Andrew Webster, Macquarie Group

43

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Carbon Decision Making and Risk

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Liability Calculation .................................................................................................... 11

Make Options ............................................................................................................. 13

Buy Options ................................................................................................................ 15

Scenario testing ..................................................................................................................... 19

Parameter Definitions ................................................................................................ 19

Scenario Definition ..................................................................................................... 22

Scenario testing application .................................................................................................. 24

Exposure Summary .................................................................................................... 27

Project Evaluation ...................................................................................................... 29

Portfolio selection ...................................................................................................... 32

10. Portfolio Visualisation ................................................................................................ 34

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All amounts are in nominal pre-tax Australian dollars.

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PC with CD Rom drive

Microsoft Excel version 2007 or later

The tool will open in Microsoft Excel 2007 or later.

Open Microsoft Excel and ensure that Macros are enabled

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providing outputs such as abatement composition, compliance cost curve, exposure,

assessing risk through flexible scenarios defined by the user

The performance of a companys carbon management strategy will be dependent on a

Data entry cells: e.g. cell D16

Automated entry cells: e.g. cell D16

Pick from dropdown menu: e.g. cell D16

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Input of main financial data to

Define potential future movements in the

Assigning parameters defined in Scenario

Calculation of total liability,

Analyse key assessment metrics

Selection of preferred make and

Graphs all selected make and

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Set the first year of the

Enter the names of

(Optional) Enter key

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Indirect emissions data is optional.

or enter direct and

Choose energy types and

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Enter uncertainty parameters these parameters allow users to investigate the

Setting these parameters allows

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Australian Carbon Units bought through either government auction or secondary

Repeat the above process for each purchase contract.

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Enter the costs associated with

Enter the potential variation in the

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Changes to Australian Carbon Unit price

CFI ACCU price

Price of all seven energy types at each facility

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Repeat for other parameters of interest

Repeat for other parameters of interest

Enter default high and low