The New Carbon Cycle

Reported Post-2012/Post-Kyoto Carbon Credit Sale at Reduced Price

PointCarbon reported a deal between Norsk Hydro and Statkrafte Energy and carbon fund C-Quest Capital.  Finding buyers for post-2012/Post-Kyoto carbon credits has been a challenge.  PointCarbon reported that carbon brokers said that such deal would likely reflect aprice of 6-9 euros per ton CO2e.    The current price for CERs under the Clean Development Mechanism would be about 14 euros.  The discount for post-Kyoto credits would thus be 5-8 euros--a significant reduction reflecting the uncertainty of the negotiations at Copenhagen and at UNFCC meetings thereafter.  If a treaty is not finalized until next December, these low prices may continue until then.

Atlantic Article Delves into Complexities and Interrelationships of Energy and Climate

A very good article from The Atlantic was shared with me by Mike Titens, one of Thompson & Knight's corporate partners and a member of our Climate Change and Renewable Energy Practice Group.  The article is entitled The Elusive Green Economy and delves into the complexities of and interrelationships between climate change, renewable energy, energy independence and security, as well as how entrepreneurship and government can have a positive impact or a negative one depending on the policies adopted. 

 

It's rare that any insight is shown on these issues by the press (or politicians for that matter).  While I may not agree with every conclusion, I was pleased to see a more in-depth discussion of these complex issues and recommend it for your reading.

Energy Efficiency and the Competitive Advantage of Our Nation

Management guru and professor Michael Porter's concludes in The Competitive Advantage of Nations that one of government's roles involves "acting as a catalyst and challenger, . . to encourage--or even push--companies to raise their aspirations and move to higher levels of competitive performance. . .."  In the Senate debate over the American Clean Energy and Security Act, H.R. 2454, the "Waxman-Markey Bill", the Senators should consider the extent to which energy efficiency contributes to both domestic firm competitive performance and to the competitive advantage of the nation as a whole.

No doubt companies that can substantially reduce their energy consumption can reduce costs and,therefore, increase profits.  As an example, Walmart is working with numerous potential vendors to reduce its energy consumption as its energy costs are significant.  Walmart's Sustainable Building Plans among other efficiency plans would reduce energy usage dramatically.  Other companies such as Dow cite substantial reductions in electrical use and concomitant reductions in greenhouse gas emissions.  Dow's energy savings program  has resulted in energy savings of $8.6 billion and has prevented 86 million metric tons of CO2 from entering the atmosphere. With the ability to monetize these greenhouse gas reductions in the form of carbon credits, these firms will have an additional incentive to reduce electrical and transportation fuel consumption.

In addition, these firms will be incentivized to switch transportation fuels for their fleets of trucks.  Natural gas is now abundant in the United States with the discovery of the means to extract natural gas from the various shales from across the United States that contain huge stores of natural gas.  Not only does the use of natural gas allow the potential savings in fuel costs over the long term, but the monetization of the greenhouse gas reductions by switching from diesel to natural gas permits yet another revenue stream to assist in financing a more sustainable and more efficient company.

As a nation, these changes make the firms in the country more competitive as costs of production decrease and allow the use of domestic fuels.  To the extent, new regulations promote not only energy efficiency and fuel switching, but the invention and domestic manufacture of new technologies and products for export, then the nation become even more competitive.

Nations that reduce their dependence on foreign oil will undoubtedly increase their domestic and international competitiveness.  Those that can design new, more distributed energy sources for their troops to produce water, drive electronic-based weapons and communications, and alternative ways of fueling mechanized aspects of their sea, ground, and air-based forces will have a stronger military.  The United States armed forces are spending significant money to develop these technologies.

McKinsey & Company recently issued a report entitled Unlocking Energy Efficiency in the U.S. Economy.  In this report, the leading business consulting firm states its central conclusion as follows:

Energy efficiency offers a vast, low-cost energy resource for the U.S. economy--but only if the nation can craft a comprehensive and innovative approach to unlock it.  Significant and persistent barriers will need to be addressed at multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million buildings and literally billions of devices.  If executed at scale, a holistic approach would yield gross energy savings worth more than $1.2 trillion, well above the $520 billion needed through 2020 for upfront investment in efficiency measures (not including program costs).  Such a program is estimated to reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent of projected demand, potentially abating up to 1.1 gigatons fo greenhouse gases annually.

The McKinsey Report demonstrates that a more energy efficient country is a more competitive country.

To put this in competitive context, Europe and China are pushing for more energy efficiency and the building of domestic sources of energy and fuel and the development of renewable energy technology firms, energy efficiency technology firms, and the domestic manufacturing of new 21st-century products.  Technologies like LED lighting that will reduce the consumption of electricity dramatically are the race to the future by companies around the world.  The countries that achieve development of firms with lower energy consumption and energy efficient technologies and alternative fuels will likely be the more dominant economic powers in this century.

Thus, a look back at Michael Porter's book and the application of its model to the current debate about the Senate version of the American Clean Energy and Security Act is warranted.  Putting politics and ideology aside, the empirically demonstrated need to move toward a 21st-century energy policy is critical to the future competitiveness of the nation.  This should be at least one of the critical strategies underlying the debate in the Senate over the next few months.

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.

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.

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.

Article Published in Fuel Magazine Discusses How Carbon Credits Can Finance Use of Flared Gas

In the July 2008 edition of FUEL magazine I published an article discussing how carbon credits can serve to help finance local uses of natural gas that is otherwise flared or vented.  The article is entitled “Carbon Credits: New Uses for Financing Natural Gas.” 

In the article, it is explained that “The World Bank has formed a group that is working to reduce natural gas venting or flaring, based in part on its recent report estimating global vented or flared natural gas reaches about 14 billion cubic feet per day (Bcf/d). The burning of the natural gas reportedly produces 400 million tons a year of carbon dioxide, which GHG [greenhouse gases] scientists blame for contributing to climate change.”

The article also discusses the fact that  “one of the means by which natural gas is captured and moved to markets such as the United States is through liquid natural gas (LNG) projects.”  However, “often there is no perceived market for this gas, and no known way of financing the transport of it to market if identified.” The article explains how GHG emission reductions can produce carbon credits, which can then be sold and serve as a basis for helping finance more local markets for flared natural gas.  Deatherage discusses carbon trading, “pollution rights,” cap-and-trade systems, and other market aspects of climate change. I conclude that “emission markets encourage capital to reduce GHGs and provide economic benefit to developing countries to be invested in these projects as they find substantial return on their investments.  Carbon trading may prove to be a key element to many of these projects, including those to reduce the venting and flaring of natural gas.”

To view the full article, please visit www.hartfuel.com.

World Resources Institute and World Business Council for Sustainable Development Working on Product and Supply Chain GHG Protocol

Following the success of the Corporate Standard and Project Protocol for measuring greenhouse gas emissions, the World Resources Institute and the World Business Council for Sustainable Development are now working on a new standard for measuring greenhouse gas (GHG) emissions from a product and supply chain to allow GHG accounting and reporting beyond direct emissions.

To develop the new guidelines, the GHG Protocol is following the same broad, multi-stakeholder process used to develop the Corporate and Project Protocol, with participation from businesses, policymakers, NGOs, academics and other experts and stakeholders from around the world.

The WRI/WBCSD announced that the new standard will include guidelines on both product life cycle accounting (”carbon footprinting”) and scope 3 accounting and reporting, which encompasses the full value chain of an organization. Building upon existing methodologies, the guidelines will provide a standardized approach for companies to inventory GHG emissions along their value chains and better incorporate GHG impacts into business decision-making, based on a life cycle perspective.

The protocol apparently is designed allow companies such as Wall Mart who have asked their suppliers and their suppliers' suppliers to demonstrate the sustainability of their products to measure the GHG emissions from the product supply chain.  What will be interesting to see unfold is to what extent these protocols lead to GHG reductions in developing countries.  For example, since many products are manufactured in China, where GHG emissions have grown dramatically and continue to grow, what steps will or can the suppliers make locally to reduce greenhouse gas emissions? Will they have to build windmills or install solar panels to avoid power use from Chinese coal-fired power plants?  Will such costs take away or at least reduce China's cost advantage?  The question is what level of affect could such standards and the insistence by retailers that the suppliers demonstrate reductions have on the suppliers?

The market could be a powerful force for incentivizing GHG reductions.  To what extent this will occur remains to be seen.  The formation of such standards may be seen as a potential alternative to the GHG tariffs that have been discussed in bills filed in Congress and discussed in the European Union.  The goal of such tariffs is to take away the competitive advantage that the failure to control GHG emissions is thought to have for countries that are not required or refuse to reduce their emissions. China and to some extent India are the main examples of such countries.  The suppliers in China and other developing countries may find it more and more difficult to deal with either customer or government imposed GHG emission reductions and the potential impact on their price advantage over manufacturers in developed countries.

Clean Tech Inventors and Start Up Companies Looking for Capital

As gas prices climb and energy security and climate change drive public policy and private investment, inventors and entrepreneurs are moving into the clean tech and greenhouse gas reduction business at a rapidly growing pace.  The green inventors need capital to start get their business going.  To find this startup capital, they are looking to angel investors, venture capital funds, and private equity firms.

The investment community is investing more and more money in companies in the clean tech space. We are seeing more and more companies and inventors contacting us to find out how they can obtain financing, how greenhouse gas reductions from their technologies and processes can be monetized in the form of carbon credits, and what the regulatory and legislative landscape may be in the future that would make their inventions more profitable.

This is a growing area for our law firm and we see more venture capital firms and private equity firms looking to invest in this space.  All of the nascent companies require capital to get their business off the ground.  Some of the companies we are currently working with include companies looking to build wind power projects in Africa, to reduce fuel consumption from truck fleets, to reduce nitrogen fertilizer use, to avoid deforestation, and to develop geothermal energy projects.

Energy efficiency, energy security, climate change, and carbon trading opportunities will drive more capital to inventors and companies that develop the ideas and technology to solve these critical issues.  Finding capital will be an essential part of making these ideas and technologies a reality.

Accounting Board Proposes Changes in How Environmental Liabilities and Other Loss Continencies Must Be Reported

The way companies report contingent liabilities, in particular environmental liabilities, in their financial statements would undergo significant changes if a proposal by the Financial Accounting Standards Board goes into effect. 

On June 5, 2008, FASB released for public comment Proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies. The proposed standard would significantly expand the quantitative and qualitative disclosure requirements for loss contingencies under SFAS 5 and 141(R). In issuing the draft, FASB is responding to investors and other users of financial statements who are seeking additional information to assess the likelihood, timing, and amount of future cash flows associated with loss contingencies.  The proposed standard would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years.

Responses from interested parties wishing to comment on the proposed standard must be received in writing by August 8, 2008. Interested parties should submit their comments by email to director@fasb.org, File Reference No. 1025-300.

Environmental managers, attorneys, chief financial officers, and accountants should pay attention to how FASB ultimately addresse this issue, and should submit comments if they want to express any concerns to FASB.