The New Carbon Cycle

Allocation AWOL in Senate Bill

The long-awaited climate bill was released by the Senate Environment and Public Works Committee.  The bill raised the goal for greenhouse gas emission reductions from the Waxman-Markey 17 percent to 20 percent (based on a 2005 baseline) and in most ways follows the Waxman-Markey approach, but the authors Senators Barbara Boxer and John Kerry left the key issue of allocation versus auction for further debate in the Senate Finance Committee.  That committee is of course working on the health care bill.

In essence, Senators Boxer and Kerry "punted" on this issue and are leaving the concerns of industry to obtain higher levels of free credits through allocation and to reduce those that must be auctioned to the Finance Committee.  This may be a good sign for industry as there may be a better chance for negotiations under Senator Max Baucus' tutelage.  Mr. Kerry serves on that committee, but is not in charge as chairman.

The climate bill is now clearly set behind the health care bill and will not likely be reviewed by the Finance Committee until that bill is passed or defeated in the Senate.  A vote before the United Nations meeting on a successor treaty to the Kyoto Protocol in Copenhagen seems less likely, although Senator Kerry promises that a vote on a bill will occur in advance of this meeting.

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.

Significant Climate Change Developments Part 1: European Parliament Adopts 20/20/20 Plan on Climate Change

The European Parliament after eleven months of long and tumultuous debate among the various countries and constituencies reached an agreement called 20/20/20.  By 2020 the EU plans to address climate change by achieving: a 20% reduction in greenhouse gas emissions, a 20% improvement in energy efficiency, and a 20% share for renewables in the EU energy mix.  The EU plans to extend and amend its cap-and-trade program referred to as the EU Emissions Trading System or ETS to control greenhouse gas emissions as well. 

A compromise was reached to address concerns by industry in the former communist countries that depend almost entirely on old coal-fired power plants for their electricity.  The EU agreed to provide free carbon allowances to industries that face stiff international competition as a result of greenhouse gas reductions if they face a 5 percent increase in costs.  The former communist countries will receive 70 percent of their carbon allowances without charge in 2013.  The exemption will be fazed out over time and end in 2020, when all allowances in these countries must be purchased at auction.

The revised EU ETS will apply from 2013 to 2020 and is designed to reduce greenhouse gas emissions by 21 % of 2005 levels. The EU ETS is a "cap and trade" system: it caps the overall level of emissions allowed but, within that limit, allows participants buy and sell allowances as they require, so as to cut emissions cost effectively. The Community-wide quantity of allowances issued each year will decrease in a linear fashion, so as gradually to reduce the overall level of emissions each year.
 
The ETS currently covers over 10,000 installations in the energy and industrial sectors, which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas (GHG) emissions (the remaining 60 % will be covered by the 'non-ETS' Effort Sharing decision).
 
In the first and second ETS trading periods (2005 -2012) the great majority of allowances were allocated free of charge to installations. The revised directive establishes auctioning from 2013 in principle (as proposed by the Commission and backed by the Environment Committee), but includes several exceptions, as advocated by the European Council on 12 December 2008.

The "effort sharing" decision sets binding national targets for each EU Member State to reduce greenhouse gas emissions from non-ETS sources (e.g. road and sea transport, buildings, services, agriculture and smaller industrial installations), between 2013 and 2020. These sources currently account for about 60% of all EU greenhouse gas emissions. The decision aims to reduce these emissions by 10% overall between 2013 and 2020, so as to contribute towards the EU's overall aim of a 20% reduction in total greenhouse gas emissions by 2020. The effort sharing decision is the first of its kind worldwide.

The EU Parliament also approved a proposed directive providing for the legal framework for the new carbon dioxide capture and storage technology (CCS). To cut their CO2 emissions, industrial installations and power plants could in the future use this new technology to capture CO2 and store it "permanently and safely underground" in geological formations.  Great Britain's Prime Minister Gordon Brown succeeded in winning a fund of 6 billion Euros to invest in technology to capture and store carbon dioxide from coal-fired power plants in underground formations.  The fund will apparently be established by earmarking 300 million allowances for CCS.

A new regulation will set emission performance standards for new passenger cars registered in the EU. The compromise backs the Commission's proposed target of an average of 120g of CO2/km for the whole car industry by 2012, compared to the current levels of 160g/km. The regulation sets an average target of 130g CO2/km for new passenger cars to be reached by improvements in vehicle motor technology.  It will be supplemented by additional measures to achieve a further 10g/km reduction, so as to reach the 120g/km target, through other technical improvements. The compromise introduces a long term target for 2020 for the new car fleet of average emissions of 95 g CO2/km.
 
Manufacturers will be given interim targets of ensuring that average CO2 emissions of 65% of their fleets in January 2012, 75% in January 2013, 80% in January 2014 and 100% from 2015, have to comply with each manufacturer's specific CO2 emissions target. In case the average emissions of CO2 exceed the targets, manufacturers will have to pay fines.

The revised fuel quality directive requires fuel suppliers to reduce greenhouse gas emissions caused by extraction or cultivation, including land-use changes, transport and distribution, processing and combustion of transport fuels (i.e. fossil fuels like petrol, diesel and gas-oil and also biofuels, blends, electricity and hydrogen) of up to 10% by 2020.

The adoption of post-2012 greenhouse gas reductions is a critical first step in the process of moving toward a global carbon cap and trade system.  The EU has laid down the first step internationally to create the atmosphere for negotiations of a post-Kyoto climate change treaty. The negotiations in Poznan, Poland were to some extent inconclusive, but the Bush Administration was not going to make any commitments late in its administration and has not been willing to take steps to impose a greenhouse gas reduction program in the United States.  2009 could shape up to be the Year of Climate Change.

I will further discuss the other three developments in late 2008 that may lead to a global carbon-constrained economy.

UN Clean Development Mechanis Board Reportedly Suspends DNV from Verifying CDM Projects

PointCarbon reports that the United Nations has suspended carbon credit verifier Det Norske Veritas (DNV), headquartered in Oslo, Norway, from acting as a verifier for Clean Development projects under the Kyoto Protocol.

Bi-Partisan Western Governors Call for Energy and Climate Legislation

The Western Governors Association (WGA) sent a letter to President-elect Barack Obama, urging swift action in adopting and implementing a national energy plan that would transform the country's energy infrastructure and economy while reducing greenhouse gas emissions. The group of 19 Western governors from both political parties call for near-zero greenhouse gas emissions from new coal-fired electricity generation in 10 years and from existing generation no later than 2030. The bi-partisan group of governors called on President-Elect Obama to act within the first 100 days of his administration.

The organization is led by Utah Governor Jon M. Huntsman, Jr., Chairman, a Republican, and Montana Governor Brian Schweitzer, Vice Chairman, a Democrat. On Nov. 21, Huntsman and Schweitzer met with John Podesta, co-chairman of Obama's transition team, to promote the WGA proposal.

"The transformation we are talking about is broad based and will require new policies, incentives, market mechanisms and private-public partnerships to be in place by the end of next year," Huntsman said. "We plan to work with the new administration and Congress in addressing the multitude of energy challenges ahead."

"Western states are the country's energy breadbasket, but energy efficiency has also got to play a much bigger role," said Schweitzer. "That includes everything from manufacturing more fuel-efficient vehicles to changing regulatory structures so they reward utilities for achieving reduced energy usage among their customers."

The governors stated that a national energy policy must promote energy efficiency and reduce greenhouse gas emissions on a scale necessary to contribute to climate stabilization. They state the position that the Obama administration's energy/climate policy must maximize the economic development opportunities offered by clean energy; ensure energy costs are affordable and support a sustainable, growing economy. They urge the incoming administration to increase the proportion of energy supplies that come from domestic resources and friendly trading partners; and minimize adverse environmental impacts.

Within the first 100 days, the governors are calling on the Obama administration to:

--Establish an aggressive and achievable national greenhouse gas emissions reduction goal that will put the United States on a path to contribute to global climate stabilization.

--Propose a mandatory national system for reducing greenhouse gas emissions that makes maximum use of market-based mechanisms. Revenue raised should not be used as a means of sustaining or expanding general governmental operations.

--Pursue a national energy efficiency program to reduce existing and future energy demand and thereby reduce greenhouse gas emissions.

--Establish an oil import reduction goal that strengthens energy security and independence. Since nearly 90 percent of oil is used for transportation, an energy plan must bring more fuel-efficient and near-zero emission vehicles into the market; increase the supply of domestically produced, low-carbon fuels; minimize the economic and technological uncertainties inherent in deploying high efficiency vehicles and developing and using non-petroleum transportation fuels; and reduce vehicle miles traveled and increase mass movement of people and goods.

--Create a substantial, long-term national public investment on the scale of tens of billions of dollars annually, along with a similar investment from the private sector, to support the kind of basic and applied research and deployment of clean energy technology and infrastructure that will result in:

--Near-zero greenhouse gas emissions from new coal-fired electricity generation in 10 years and from existing generation no later than 2030.

--Dramatically increased energy from wind, solar, geothermal, hydro and biomass resources.

--Expansion and upgrade of the electricity transmission grid and storage capabilities.

--Advanced vehicle and battery technologies and alternative transportation fuels.

--Next generation energy efficiency technologies and practices.

The governors also urge affordability for lower income energy consumers through energy efficiency and cost assistance programs. They support workforce development and clean energy jobs, adaptation to climate change impacts, reduced consumer impacts - particularly for low-income consumers - and transition assistance to industries.

"While the first 100 days are critical, these actions only represent the first steps," the governors say in their letter. "Within the next year, a comprehensive energy plan must be enacted that will set the direction of this nation for the next 50 years. This plan, though adjustable over time, must establish measurable goals, strategies, milestones and funding to ensure that we are moving towards affordable and environmentally responsible energy security and independence."

"We must not repeat the mistakes of the past," the governors declared in their letter. "We must have the collective political will and resolve to create and implement a long-term comprehensive energy policy despite short-term political and market fluctuations. The future of our nation depends upon it."

The environment really isn't a red or a blue issue. It's an American issue. I'm trying my very best as just one Republican, and I know there are others, to remind people of that fact — and that it will take a bipartisan effort," the Utah governor said.

The governors are calling in a bi-partisan way for action on energy policy. The biggest question is whether US senators can find a bi-partisan solution that reflects the governors’ proposal. Huntsman has been criticized by some Republicans for supporting climate change legislation and cap and trade.

"The Republican values I'm speaking to are right out of ... Teddy Roosevelt's playbook. He taught us all to revere our land, to leave a legacy ... to the next generation," Huntsman responded to criticism from some Republicans. "I'm also doing a very Republican thing to incentivize and develop technologies that are going to fuel our economy."

As 2009 approaches and the new administration prepares to work on climate legislation in the new Congress, this call by governors of both parties for climate and energy legislation suggests growing pressure on Congress to pass a climate bill. It appears only a possible filibuster in the Senate stands in the way of climate legislation. How the votes will come out on a climate filibuster remains to be seen.

Florida Climate Committee Evaluating Joining RGGI and/or the Western Climate Initiative

The Governor's Action Team on Energy and Climate Change is evaluating the affect of Florida joing the Regional Greenhouse Gas Intiative (RGGI) or the Western Climate Initiative (WCI).  RGGI is a program that ten Northeastern and Mid-Atlantic states formed to curb carbon dioxide emissions from power plants.  The WCI involves seven state participants and four Canadian participants developing a greenhouse gas emision reduction program that would reduce emissions of all six greenhouse gases throughout the economy in those states and provinces.  If Florida joins either or both of these multi-state programs, it will give a boost to the movement by the states to establish climate change legislation and greenhouse gas regulation in the United States regardless of whether Congress acts after the presidential election.

Hart Energy's 2008 Energy Solutions Conference to Be Held in Houston, Texas

Texas - Thompson & Knight Partner Scott Deatherage will be a featured speaker at Hart Energy's 2008 Energy Solutions conference being held November 6th through 7th in Houston, Texas. Deatherage will discuss "The Future of Carbon Trading and Its Benefit to the Sustainable Industry" on November 6th.

The 2008 Energy Solutions conference will feature other timely discussions on the developments and challenges facing the global energy industry, including solutions being developed by refiners, automakers, fuel producers, governments, and capital markets to balance the supply and demand situation with sustainability requirements. The conference will also include the Global Energy & Environmental Excellence Awards Dinner, which recognizes and celebrates the remarkable progress the global energy industry, engine manufacturers, technology suppliers, and governments are making toward the sustainability of natural resources. For more information on the 2008 Energy Solutions conference, please visit the Hart Energy Conference website.

EU to Consider Forest-Based Carbon Credits in October

The European Union is poised to consider forest-based carbon credits or emission offsets.  The European Parliament’s Environment Committee’s review of the EU Emissions Trading Scheme (ETS) is scheduled to discuss the inclusion of forest-related credits on October 7, 2008.

Several Non-Governmental Organizations (NGOs) are lobbying for inclusion of forest-based credits in the greenhouse gas control schemes.  The Rainforest Alliance and the Climate, Community,  and Biodiversity Alliance provide verification and validation of forest-based carbon credits.

The United Nations is evaluating including avoided deforestation in the Clean Devlopment Mechanism under the Kyoto Protocol.  In the United States, several developing state programs would include forests and agriculture as land-based emission offsets.  The Lieberman-Warner bill that was ultimately filibustered in the Senate, included provisions allowing forest-based offset credits. 

If the EU would accept these credits and the UN would approve methologies for obtaining Certified Emission Reductions under the Kyoto Protocol, this would be a major supporting step.  Now, voluntary emissions reductions (VERs) can be obtained by, for example, seeking credits under the Voluntary Carbon Standard (VCS).

Carbon credits for avoided deforestation present a means, along with other actions, to help reduce the destruction of our remaining rainforests. 

Lehman Carbon Trading Desk Reportedly Shut Down after Firm Seeks Bankruptcy Protection

Lehman Brothers carbon credit business may be the first to fall as a result of the financial crisis.  Reuters reports that the bank shut down its carbon business as a result of the bank's decision to seek bankruptcy protection.  Lehman had reportedley invested in several projects that were largely located in China.  The number of carbon credits was estimated at 10 to 12 million Certified Emission Reduction Credits (CERs) under the Kyoto Protocol and worth an estimated $385.4 million.

Northeastern States Set Auction Dates for RGGI Carbon Emission Allowances Auction

The Regional Greenhouse Gas Initiative (RGGI) has set dates for the first set of auctions for carbon dioxide emission allowances.  RGGI is a regional program whereby ten Northeastern states have entered into agreements, developed model rules, and passed legislation and have or are developing their own state regulations to implement the regional CO2 cap-and-trade system covering power plants.

The dates for auctioning the allowances required by the regulated power plants to continue operating have been set for September 10, 2008 and December 17, 2008.  These auctions will be the first sale under the first mandatory or compliance greenhouse gas regulatory system in the United States.  Most of the emission allowances may be auctioned under RGGI rather than provided for free as in the case of the European Union’s Emissions Trading Scheme (EU ETS).

Other states are working on such a system including California and several Western states, Canadian provinces, and Mexican states, and a separate group of Midwestern states.

The RGGI auctions will initiate the compliance trading market in the United States.  As this market develops, one significant issue will be whether the RGGI system has over allocated the number of allowances, as the EU ETS did in its initial phase.  In that case, the price for the allowances dropped to near zero.   The development of the market for RGGI allowances will be interesting given that many parties have asserted that more allowances have been issued to states for sale or allocatin than are required to allow the emissions of CO2 from the regulated power plants.