The New Carbon Cycle

Senate Introduces Bill to Promote Natural Gas in Vehicles

On July 8, 2009, a new bill to promote the use of natural gas in vehicles was introduced in the U.S. Senate by Robert Menendez (D-NJ) and co-sponsored by Majority Leader Harry Reid (D-NV) and Senators Orrin Hatch (R-UT).   The New  Advanced Transportation to Give Americans Solutions Act (the NAT GAS Act), introduced by Menendez and co-sponsored by Reid and Hatch, would extend and increase tax credits for natural gas vehicles and refueling stations.  A companion bill was introduced in the House of Representatives in April 2009 by Congressmen John Larson (D-CN), Dan Boren (D-OK) and John Sullivan (R-OK).

The NAT GAS Act would accomplish the following:

• Expand and modify the alternative fueled vehicle and refueling property tax credits as follows:
  • Make all dedicated natural gas-fueled vehicles eligible for a credit equal to 80% of the vehicle’s incremental cost. Only some dedicated natural gas vehicles currently can qualify for an 80% federal tax credit.
  •  Make all bi-fuel natural gas-fueled vehicles eligible for a credit equal to 50% of the vehicle’s incremental cost. This is the first time bi-fuel vehicles would be eligible for a federal tax credit.
• Increase the allowable incremental cost limits to more accurately reflect the cost of producing or converting natural gas vehicles:
  • For light-duty vehicle, the purchase tax credit cap would be increased by to $12,500 (currently $5,000).
  •  For all other vehicle weight classes, the purchase tax credit cap would be doubled.
• Increase the refueling property tax credit from $50,000 to $100,000 per station
• Allow the natural gas vehicle and natural gas fueling infrastructure credits to be transferred by the taxpayer back to the seller or to the lessor
• Allow state and local governmental entities to issue tax exempt bonds in order to finance natural gas vehicle projects
• Allow 100% of the cost of a natural gas vehicle manufacturing facility that is placed in service before January 1, 2015 to be expensed and to be treated as a deduction in the taxable year in which the facility was placed in service.

The bill would create new markets for natural gas in the United States, and take advantage of the new discoveries in this country and the abundant natural gas reserves they contain.  Switching from diesel or gasoline to natural gas also reduces the emission of greenhouse gases.  These emission reductions can be monetized in the form of carbon credits (as a voluntary credit today, and potentially a compliance credit in the future), providing another incentive and revenue stream to move vehicles to the use of natural gas as a transportation fuel.

The Impact of New Energy Legislation on Your Business

Dallas Regional Chamber hosts Former U.S. Secretary of State James A. Baker, III and Texas Comptroller of Public Accounts Susan Combs

DALLAS, June 11 /PRNewswire/ -- With new energy legislation rapidly making its way through Congress, the Dallas Regional Chamber will hold an Energy Forum on June 18, 2009 to provide information on how such proposals could impact chamber members, North Texas businesses and all energy consumers.

The event will feature James A. Baker, III, the nation's 61st Secretary of State, and Texas Comptroller Susan Combs. It will be held Thursday, at the Hyatt Regency Dallas. Mr. Baker, a partner with Baker Botts L.L.P. and advisory chairman to Energy Future Holdings will discuss the implications of changing energy policy. Comptroller Combs will discuss the direct impact of the energy legislation on businesses in Texas.

Additionally, two panel discussions will focus in more detail on the proposed energy policies and solutions to reducing emissions of greenhouse gases. Panel members include: Scott Deatherage, Partner, Thompson & Knight LLP (Cap & Trade); Kevin Hassett, Director of Economic Policy Studies, American Enterprise Institute (Carbon Tax); Luke Bellsnyder, Executive Director, Texas Association of Manufacturers (Impact on Manufacturers); H.B. (Trip) Doggett, Senior Vice President and Chief Operating Officer, Electric Reliability Council of Texas (ERCOT) (Renewable Energy/Competitive Renewable Energy Zone) and Bob Shapard, Chairman and CEO of Oncor (Smart Grid/Energy Efficiency).

James C. Oberwetter, President of the Dallas Regional Chamber said, "We are delighted that former Secretary Baker and Comptroller Combs will be with us. We are holding this forum because every energy user and every energy producer will be affected by the passage of new energy legislation. There are serious costs that are involved with the prospect of changing the energy mix and we all need to understand the implications from a cost and benefit standpoint. The conference should provide those attending with the information they need to let Congress know what works best for their companies, for their customers and consumers, and for the country."

James A. Baker, III, of Houston, a Partner, Baker Botts L.L.P. and Advisory Chairman to Energy Future Holdings, will deliver the luncheon keynote. Mr. Baker served in senior government positions under three United States Presidents. He was Secretary of State under President George H.W. Bush, Secretary of the Treasury under President Ronald Reagan, and White House Chief of Staff to Presidents Reagan and George H.W. Bush. Mr. Baker's record of public service began in 1975 as Under Secretary of Commerce to President Gerald Ford.

Susan Combs, of Austin, was elected Texas Comptroller of Public Accounts in November 2006 and immediately set an innovative course of action to transform state government and prepare Texas for the future beginning her first day in office on Jan. 1, 2007. As Comptroller, Combs is the state's chief financial officer. She manages the state's treasury operations, monitors Texas' fiscal health, guides legislative decision makers by estimating state revenues and ensures state taxes are collected fairly and efficiently to fund vital programs and services for the people of Texas.

Sponsored by Hunt Consolidated, Inc. and Atmos Energy the event will be held at the Hyatt Regency Dallas (300 Reunion Blvd, Dallas TX, 75201) from 8:00 AM - 1:15 PM. Individual tickets are available: $75 for Chamber Members, and $100 for non-members. The ticket cost includes lunch and breakfast. Reservations may be made on line at www.DallasChamber.org or by calling 214-746-6612.

Luncheon tables are available for purchase. FOR INFORMATION ON SPONSORING THIS EVENT contact Meredith Armstrong at 214-746-6612 or marmstrong@dallaschamber.org.

The Dallas Regional Chamber promotes regional prosperity through public policy, economic development and member service.

Resources for the Future Website and Research on Forest Carbon

Resources for the Future, a think tank that has contributed significantly to scholarship and analysis on climate change and energy issues, has developed a research program on forest carbon markets and policy and a website.  The Forest Carbon Initiative  of Resources of the Future is a site to watch to review scholarship on this vital topic to address global climate change issues.

Texas Solar Bill Dies on Procedural Motion

The potential for a Texas solar industry took a huge blow as procedural motions killed the solar bill that was discussed in a prior post.  It is incomprehensible how the legislature let this bill die.  It was supported by environmentalists and some rural Republicans.  The Wall Street Journal Environmental Capital blog discussed this unfortunate development.  This result could put the solar business behind two years, as the Texas legislature only meets for a few months every two years.  The solar industry could take off just as the wind energy business in Texas has grown to the largest in the United States.

The major problem at the end of the Texas legislative session was over voter identification, which is not a critical issue at this time.  However, the political wrangling between Republicans and Democrats over this issue led to the failure to pass not only the solar bill, but funding for highways and various other important legislation.  If is unfortunate that this issue could not have been set aside to allow the other bills to be voted out of the Legislature.

As a citizen of the State of Texas, the last legislative session is disappointing  Hopefully, in the future important legislation will not be held up over issues that are largely political in nature.  We need to find way of addressing important economic and energy issues and move beyond politics.

Harvard Project Proposes New Approach to Reducing Greenhouse Gas Emissions in Developing Countries

David Victor, a professor at Stanford University and Stanford Law School, has proposed an alternative approach in the negotiations with developing countries for a post-Kyoto treaty to address climate change and greenhouse gas emissions.  Mr. Victor submitted his paper to the  Harvard Project on International Climate Agreements.  This project explores potential agreements that could follow the Kyoto Protocol and the economic and policy analysis of different options.

Mr. Victor has proposed Climate Accession Deals, which are agreements with developing countries to reduce their greenhouse gas emissions in certain sectors.  Mr. Victor's paper suggests a new strategy for engaging developing countries, focusing on the concept of Climate Accession Deals (CADs). These deals would take advantage of the fact that there are many large policy shifts that are in these countries' interests and which also, fortuitously, reduce greenhouse gases. Each CAD would include a set of policies that are tailored to gain maximum leverage on a single developing country's emissions, while also aligning with its interests and capabilities so that the initial investments are easily expanded with few incentives for developing countries to abandon the effort once under way. Industrialized countries would support each CAD by providing specific benefits such as financial resources, technology, administrative training, or security guarantees.

Examples of potential Climate Accession Deals that Mr. Victor has proposed would include:

• A CAD for China should focus on carbon emissions from coal, which accounts for 69% of its primary energy system. Recent energy shortages and higher energy prices have caused Chinese officials to initiate programs to decouple economic growth from energy consumption. A CAD could encourage this goal by making new power plants more efficient, encouraging greater use of natural gas and nuclear fuel, improving the efficiency of the electric power grid, and funding research projects on new systems for electric supply. Improved efficiency of the power supply system could save more than 200 million tons of CO₂ annually.
• A CAD for India should also seek ways to use coal more efficiently and supplant coal. The greatest opportunity for leverage on India's emissions lies in boosting the efficiency of converting coal to electricity. Other energy sources, include hydro, wind, gas, and nuclear power, could also make a difference at the margin. Improving the country's weak system for power delivery would reduce greenhouse gas emissions, as would expanding access to electricity to reduce particulate emissions from traditional biomass usage.
• In South Africa, a CAD supporting deployment of advanced power plants might save 50–100 million tons of CO₂ annually by 2025. A carbon storage scheme might increase that amount another 20 million tons.
• CADs for Brazil and Indonesia should focus on preventing and reversing deforestation. One area of assistance could be the provision of surveillance radar, drones, and helicopters for a much larger police force. Such systems would allow these countries to better use existing personnel to monitor deforestation and regulate illegal logging.
• A CAD for Russia should target flaring of natural gas. Flaring at Russian oil operations releases the equivalent of 175 million tons of CO₂ annually.

Mr. Victor may have found a potential policy option as innovation and imagination must be used to break through the developing world's resistance to reducing their greenhouse gases emissions.

Texas Senate Reportedly Passed Solar Bill That Allows Net Metering

Apparently, the Texas Senate unanimously passed through a net metering bill, HB 1243, and SB 545 as amended as well.  HB 1243 will ensure that owners of solar installations, small wind turbines, or biogas generators are paid a higher price for the excess power they produce, than paid under prior legislation or Public Utility Commission (PUC) rules. SB 545 increases incentives for distributed solar power generation by creating a pool of $500 million in solar rebates over the next 5 years. It also creates a pilot program with a minimum funding of $4 million for installation of solar panels on schools (reportedly the State Energy Conservation Office could potentially spend considerably more of their pending stimulus funds to further these projects).

Another amendment to the bill added on SB 2349. This provision would allow oil wells that create natural gas, but not enough to justify paying for collection of the gas, to install a generator to produce  electricity, and sell it into the grid. The bill would limit production to 2 MW.  The gas apparently is currently being flared.

Reportedly, the amended HB 1243 also:

• Requires home builders to offer solar as a standard option in developments with 50 homes or more;

• Prevents homeowners associations from blocking solar panel installations;

• Allows up to 70% of incentive funds to be used for utility-scale solar projects;

• Allows the PUC to extend the program for an additional five years and another $500 million if it determines that a "substantial" amount of manufacturing of solar generation products has occurred in factories located in Texas after the initial five-year program;

• Requires electric co-ops to allow consumers to interconnect solar production facilities to the grid;

• Clarifies that consumers will not have to register as a utility and that third party ownership of solar panels is allowed;

• For the next two years, requires retail electric providers to pay at least five cents per kilowatt hour for surplus solar and four cents for other renewable technologies and directs the PUC to determine a fair market price that will become a new "floor" following the initial two-year period;

• Creates a "Made in Texas" program to certify and encourage Texans to buy locally manufactured solar panels and other energy products. As a result, locally produced products qualify for a 20% larger rebate than imports;

HB 1243 still has to go through the conference committeee, where bill authors from both sides will have to try to address the differences between the bills from the two houses. If the bill emerges from the conference committee, Governor Perry would have to sign the bill.

Group of Companies and Environmental Groups Endorse Forest Preservation as Climate Solution

A group of CEO's of top companies, environmental groups, and conservation groups endorsed forest preservation and regrowth of previously destroyed forests as a critical part of reducing greenhouse gas emissions and addressing climate change concerns.  As in a previous post, I think industry should recognize trees as being one of their best friends in developing solutions to climate change issues.

The participants in the agreement were American Electric Power, Conservation International, Duke Energy, Environmental Defense Fund, El Paso Corporation, National Wildlife Federation, Marriott International, Mercy Corps, Natural Resources Defense Council, PG&E Corporation, Sierra Club, Starbucks Coffee Company, The Nature Conservancy, Union of Concerned Scientists, The Walt Disney Company, Wildlife Conservation Society, and the Woods Hole Research Center.

The group signed a Avoided Deforestation Partners Unity Agreement that contains Consensus Principles on International Forests for U.S. Climate Legislation.  These principles are:

1. Include International Forests
2. No Substitute for Domestic Action
3. Leverage Cap-and-Trade Allowance Funds
4. Harness the Power of U.S. Carbon Markets
5. Encourage Forest Countries to Adopt National Strategies
6. Create Flexible Rules for Small Emitter Countries
7. Require Baselines for Major Emitter Countries
8. Establish a Timetable for National Baselines
9. Impose Quantity Limits
10. Support Early Action
11. Make International Forest Assets Fully Fungible
12. Create Strong Environmental Safeguards
13. Protect Forest Dependent Communities
14. Help Developing Nations Prepare

The details of these principles can be found in the Unity Agreement.

This is a bold statement of principles with hopefully some clout to convince congressmen and senators to include a strong forest component in any climate change legislation adopted by the United States.

House Energy and Commerce Committee Approves Climate Change Bill

The House Energy and Commerce Committee approved a climate change bill on Thursday.  The vote was largely along partisan lines.  The bill will now be considered by the full House of Representatives, but the approval by the Energy and Commerce Committee is a landmark step toward regulating greenhouse gas emissions.  Amendments on the House floor are likely, and if approved by the House, further amendments are likely in the Senate.

At almost 1000 pages, the bill is actually much broader than a climate or cap-and-trade bill alone.  It endeavors to redesign the energy policy and economy in the United States.  The bill is divided into four titles: “Clean Energy,” “Energy Efficiency,” “Global Warming,” and “Transitioning.” Each title addresses a different nuance of an economy-wide energy policy.  The Clean Energy title promotes renewable sources of energy at the retail electricity level through RPS.  It further promotes development of and investment in carbon capture and sequestration technologies, low-carbon fuels, clean electric vehicles, the “smart grid,” and modernization of electricity transmission systems.  The Energy Efficiency title  targets broad sectors of the economy in which energy efficiency standards and programs will be implemented.  Sectors affected include buildings, appliances, transportation, utilities, and industry.  The Global Warming title is the focus of this Alert.  At its core, it focuses on limiting emissions of heat-trapping pollutants.  The Transitioning title aims to protect U.S. consumers and industry and also promotes green jobs during the transition to a clean energy economy.  For instance, the draft creates a program to allow each state energy office to establish a State Energy and Environment Development (SEED) Fund to serve as a common repository for federal financial assistance for clean energy and energy efficiency projects.

The bill would impose a 17 percent cut of greenhouse gas emissions from the emissions that occurred in 2005.  The process to accomplish this would be through a cap-and-trade system by which greenhouse gas emitters would be allowed to trade emission allowances provided by the government or to purchase greenhouse gas offsets.

Offsets are produced by sources that reduce greenhouse gas emissions where they are not legally bound to do so.  The developers of these projects and those who buy and re-trade them through a secondary market can sell them to emitters to meet their emissions requirements.  >As the bill has evolved, free allowances have been given to various industries such as manufacturing, coal-based electrical production, oil refineries, and various other sectors in an effort to reduce the impact on these entities and to garner votes from representatives in those states that may be affected.

The bill is very complex and may undergo further change if it makes it through the House and Senate.  The outlines of a potential statute are in place and it appears to at least have a reasonable chance of coming into law.

ERCOT Releases Study on Effect of Cap and Trade on Texas Electricity Prices

The Electric Reliability Council of Texas has issued a study of the potential impact on electricity prices in Texas if a cap-and-trade system were imposed through federal legislation.  The study assumes that a price for carbon (cost per ton of carbon dioxide emitted) from electric utilities would have to be between $40 to $60 in order to incentivize reductions in C02 emissions.  At that price, the impact to consumers was estimated to be about $27 per month if no change in electrical usage occurs.  (The equivalent of about 10 stops at Starbucks.)  The system-wide effect was estimated to be about $10 billion dollars.  ( A substantial sum of money, but perhaps small in comparison to the 2008 Texas "gross state product" of $1.245 trillion).  The question is to what extent energy efficiency steps could reduce this cost impact by reducing the amount of electricity used.  If one invested in compact florescent bulbs, there could be a net break even or savings over time to the average consumer.  For industry, adapting to higher electricity costs is not as simple.  Some industries may be able to find inexpensive means of reducing electrical usage, others may find that it is very difficult.  Thus, the impact will vary across industries.

The other question to keep in mind is that Congress may impose price caps or "safety valves" to keep the price of carbon from reaching $40 to $60, so this level of impact may never occur, at least over the next five to ten years. 

The conclusions of the study were as follows:

In the reference case, with $7/MMBtu natural gas prices, expected load levels and the existing and committed level of wind and other generation, the carbon allowance costs must rise to between $40 and $60 per ton in order to reduce carbon emissions from electric generation in ERCOT to 2005 levels by 2013. This  level of allowance costs would result in an annual increase in wholesale power  costs of approximately $10 billion and would increase a typical consumer’s  monthly bill by $27;   

At higher natural gas prices, brought about by increased demand for natural gas  due to carbon dioxide emission limitations or other reasons, allowances would rise  to a higher cost (well over $60/ton in the case of $10/MMBtu natural gas prices) in  order to achieve the desired reductions. At this higher gas price, the annual  increase in wholesale power costs to meet the 2005 level of emissions through  reductions by generators in the ERCOT region would be in the range of $20  billion;     

Increases in wholesale power costs due to carbon emissions limits may result in lower energy demand. These reductions in system energy use have the potential to allow the emission reduction targets to be met at a lower allowance cost. Total CO2 emissions are reduced below 2005 levels at a carbon allowance price between $40 and $60 per ton for expected load levels at $7/MMBtu natural gas, but fall below 2005 levels between $25 and $40 per ton if total energy use was reduced by 10%. This level of allowance costs would result in an annual increase in wholesale power costs of approximately $7 billion, a savings of $3 billion over the cost of meeting the 2005 levels of CO2 emissions in the reference case. At this allowance cost, a typical consumer’s monthly bill would increase by $17, a monthly savings of $10 over the reference case;     

The additional wind generation envisioned by the CREZ plan (up to a total of  18,456 MW) reduces carbon emissions by 17.6 million tons above the reduction  due to existing and committed wind generation even with no carbon emissions  limits imposed by climate-change legislation;     

The additional CREZ wind generation allows the targeted emissions reductions to be met at a lower allowance cost. At $7/MMBtu gas, the 2005 carbon emissions levels are met at an increase in annual wholesale power costs of approximately $7 billion, which is a $3 billion savings compared to the reference case. At this allowance cost, the increase in a typical consumer’s monthly bill would be $22;     

The combination of additional CREZ wind and lower energy usage results in  smaller increases due to CO2 emissions limits in both wholesale power costs and  the typical consumer’s monthly bill at a $7/MMBtu gas price, as compared to the  reference case;     

The combination of additional CREZ wind generation and 2% lower energy usage  does not offset the impact of an increase of natural gas prices from $7/MMBtu to $10/MMBtu on the level of allowance costs at which emissions reductions targets would be met.

Should Trees Be Industry's Best Friends in a New Climate Change Regime?

The suggestion that trees should be industry's best friends under a new climate change or cap and trade program being considered by Congress, seems absurd at first.  Forests do not initially appear to most people to be a source of the problem when it comes to anthropogenic greenhouse gas emissions.  We generally think of planting trees as a local, individualized step to attempt to remove emissions from the atmosphere.  Often we think of tree planting as a symbolic rather than a substantive or significant action to reduce climate change.  Forests, however, are in fact a significant storing house for carbon and when burned, release a large amount of carbon dioxide and other greenhouse gases into the atmosphere. 

Forests provide the low-cost approach for the first tranche in anthropogenic greenhouse gas reductions as we seek the "low hanging fruit" of these reductions.  Forest preservation and regrowth provide the potential for the larger-volume and lower-cost source of greenhouse gas reductions and offsets for greenhouse gas emissions.  As carbon capture and storage by which CO2 from coal-fired power plants and other sources is injected underground for long-term storage takes several years to bring on line, Reduced Emission from Deforestation and Degradation (REDD) can serve to make a significant step toward emissions to be achieved by 2020 being discussed in Congress for a US climate change and cap and trade program, and in terms of international negotiations for a tray to follow the Kyoto Protocol.

The size of the emissions from forest destruction usually is startling.  It is in gross and relative terms rather astounding.  The destruction of forests actually accounts for somewhere between 17 and 22 percent of human greenhouse gas emissions.    Thus, controlling the greenhouse gas emissions from deforestation is critical to any global plan to reduce climate change, particularly in the first few years as costlier reductions can be developed over the next decade, and perhaps ways to reduce those costs.

A second aspect of deforestation relates to the areas that have already been lost or significantly degraded.  For example, farmland that was previously what we call “primary forest” or forest that existed in its natural state prior to being deforested or degraded.   In these areas, opportunities exist for reforesting the land through tree planting.  Two types of reforestation are possible.  First, the forest can be replanted with native species that would have been present prior to the destruction of the forests.  The second involves the planting of non-native species or otherwise planting for the purpose of harvesting some or all of the trees.  The second approach has the goal of using trees to absorb or sequester CO2 , and then using the harvested wood in ways that maintain the carbon in building or other products for a long time.

In understanding the challenges of private development of forest carbon projects, it is important to comprehend the issues of these projects.  First let us consider avoided deforestation projects.  One of the first issues is simply measuring the amount of carbon in the forests that would be released if destroyed.  There are certain protocols that can be used now developed by the Voluntary Carbon Standard (VCS), which has become the main standard setting organization for forest-related offset projects. 

Another issue is the question of permanence.  For growing forests a significant risk is permanence, that is, to what extent will the forest will be preserved over a very long period, as opposed to short term preservation with destruction to follow.  If the forest is logged or it burns or dies from disease, then the carbon sequestered in the trees, plant life, and soil, will be largely emitted to the atmosphere and future sequestration of carbon dioxide will not occur.  The carbon credits that are generated would be without substance if after five years the forest is destroyed.  Forestry projects are largely long-term projects, lasting 20 to 100 years in most cases.  Parties must show the registration entity and the verifiers that review the Project Design Document that the forest will not be cut down, burned, or harvested within the relevant project period.  One approach used by the VCS to address permanence concerns is to hold back a percentage of the verified credits and to release them back over time, say the 30-year life of the project, to the project developer.

One of the other major concern for forest projects is leakage.  For forest projects, leakage involves the question of whether the reduction in deforestation or degradation in one are simply moves that activity to a nearby property or a significant distance away.  As an illustration, burning forests for soy bean farming, which is such a significant problem in Brazil, moves from one part of a state in a country where actions have been taken to stop such burning to another area in that state or to an altogether different state.  Measuring and addressing these issues is required by the VCS.

Though the real game right now for REDD and reforestation projects lies with the VCS and voluntary carbon credits, it appears fairly clear that forest carbon projects will play a role and be large part of future US federal legislation and already has been accepted as an offset mechanisms in the California climate change regulatory system and will likely be part of the three multi-state climate change regulatory programs that are evolving and will go into effect even if Congress does not act to pass climate change legislation.  The discussions at the international level appear to be moving toward accepting forest-based offset credits.

The greenhouse gas emissions from forest destruction are so massive, that we cannot avoid taking on the need to reduce this destruction dramatically.  More and more major greenhouse gas emitters in the United States are beginning to review this opportunity and to look at investing in project-based REDD opportunities.  The thinking is that investment in a project or entering into emission reduction purchase agreements that allow a company to have a right to purchase REDD credits once approved and verified, provides a good hedging mechanism for future offset prices.  More and more of our clients are looking at both domestic and international forest carbon projects either as project developers or as investors to ensure that they take advantage of the opportunities that forest carbon projects provide.  Ironically, utilities and oil and gas companies may find that trees are truly their best friends when it comes to addressing the first few years of a cap and trade system in the United States.