The New Carbon Cycle

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.

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.

Programs at Upcoming World Petroleum Conference Show Importance of Climate Change, Carbon Trading, and Sustainable Development for Global Oil and Gas Industry

The World Petroleum Congress will get underway next week in Madrid, and will include many panels on climate change, carbon trading, and sustainable development. The official theme for the upcoming WPC is “A World in Transition: Delivering Energy for Sustainable Growth,” reflecting the ongoing concerns of the global industry.

I am fortunate to be speaking at the WPC with a distinguished panel on carbon trading issues. I will be speaking on Monetizing Reductions in Greenhouse Gas Emissions:  Opportunities in Carbon Credit Markets.  The other panelists and their topics are as follows:  Ignacio Bachiller, CDM Projects Portfolios: the Economics; Pat Concessi, The Benefits and Challenges of Linking GHG Emissions Trading Schemes; Paula Coussy, Implications on the European Union Emission Trading Scheme (EU-ETS) of Capture Transport and Geological Storage Projects: Dr. Jagdish P. N. Giri, Economic Modeling to identify Emissions? Reduction Opportunities at Carbon Energy Business During Fossil Energy Lead Time? Aligning the Value Chain of CDM & JI on Long Term Emissions' Trading and Carbon Energy Management in the Asian Context.

The potential for the generation and trading of carbon credits to become a significant part of certain oil and gas development projects is developing and will only increase as the opportunities for reducing greenhouse gas emissions from oil and gas exploration and production as well as transportation are identified and pursued. 

Carbon capture and sequestration or storage present significant opportunities.  A specific panel on carbon capture and storage will explore these issues at the WPC. 

A variety of other projects will address sustainable development and the role of this concept in international oil and gas development.

The trends of ever-growing expectations on oil and gas companies to address climate change, sustainable development , ecosystem and habitat preservations, and other environmental issues presents challenges to these companies.  Greenhouse gas reductions and monetizing those reductions in the form of carbon credits may actually prove to be a significant opportunity in the changing global market that is tending to evolve toward a carbon-constrained economy.

After Lierberman-Warner Defeat, Business Leaders Call for Action on Climate Change

The Lieberman-Warner Bill was blocked by a Republican fillibuster in the Senate a few weeks ago.    While it was not expected to get through the Senate and then the House this year, most of the potentially regulated industries expect something to be passed in the next two years.  The international negotiation and discussion of a post-Kyoto treaty continues.  As part of this public discussion, a series of CEOs from large, multi-national companies have called for action on climate change.  These leaders are part of the World Economic Forum.

A Steering Board consisting of the following World Economic Forum Industry Partner companies guided development of this CEO statement for the G8: Alcoa (USA), AIG (USA), Applied Materials (USA), Basic Element (Russian Federation), British Airways (UK), Deutsche Bank (Germany), Duke Energy (USA), Electricité de France (EdF) (France), Eskom (South Africa), Petrobras (Brazil), RusHydro (Russian Federation), Royal Dutch Shell (Netherlands), Telstra (Australia), Tokyo Electric Power (Japan), TNT (Netherlands), Vattenfall (Sweden).

The comprehensive statement can be found at CEO Climate Policy Recommendations to G8 Leaders. 

One of the leaders of this group, Alain Belda, CEO of Alcoa, stated, "We know we must address climate change. We may not have sorted out every detail, but we are willing to take a leadership position and embrace open dialogue... that will get us all to our common goals of protecting our world for future generations. The changes that are needed can't be incremental; we need major breakthroughs."

"Energy and the environment are the two great social and engineering challenges of our time and will only increase in importance as world economies continue to grow. As businesses and government prepare for post-Kyoto, these proposed climate change policy recommendations serve as a useful guide," advised Mike Splinter, President and CEO of Applied Materials."

One of the reccommendations of the CEOs is that the system be "market-oriented."

• Comprehensive. For environmental effectiveness and economic efficiency, the

framework should encompass all major economies, in particular the G20

economies,11 all major greenhouse gases (not just carbon dioxide) and the

principal greenhouse house gas-emitting sectors, including energy,

transportation, buildings and deforestation/land use change.

• Commitments-based. The framework should establish clear international

commitments that are “nationally appropriate”; “measurable, reportable and

verifiable”; and, in the case of developing countries, “enabled by technology,

financing and capacity-building”.

• Flexible. The international framework should respect and preserve the

prerogative of national governments to choose their own domestic policy

options to address climate change. The new framework should accommodate

this diversity by allowing variation in the magnitude and timing of countries’

commitments, providing that the overall framework is capable of meeting the

agreed intermediate and long-term environmental goals.

• Equitable. To achieve broad participation, the framework must reflect the

fundamental principle of “common but differentiated responsibilities”13. In light of

their greater historic contribution to climate change, and their stronger

capacities, G8 and other developed country governments should show

leadership in sharing the burden of addressing climate change. We would

support such an outcome. We also note that in moving forward, future equity

and future responsibilities will require developing countries to also take on clear

emission reduction commitments.

• Framed within the context of sustainable development. The new

framework must view climate change within the context of the wider

development challenge faced by many of the poorer countries in the world. The

new framework must be designed to allow for economic growth in developing

countries, while meeting its overall international environmental objectives.14 As

agreed in the Bali Action Plan, the framework should provide incentives and

support for mitigation efforts in developing countries, including finance for

technology deployment and institutional/policy development and by providing

adaptation assistance to those countries most vulnerable to climate impacts. In

combination, these elements could provide tangible support to the sustainable

development and economic growth aspirations of developing countries.

• Technology-enabling. The framework should promote an international level

playing field to support the rapid RD&D of all clean energy and fuel technologies

that can lower GHG emissions and technologies that can help adapt to climate

change. In the near term it should encourage the wide-scale deployment of all

best available technologies that improve energy efficiency to achieve emission

reductions. It must enable research, development, demonstration and

deployment (RDD&D) of the next generation clean energy technologies, in

particular those needed to de-carbonize coal powered energy emissions. It

must also contain mechanisms to protect the rights of technology owners.

• Predictable. The long-term business strategies and investments necessary to

achieve such a paradigm shift are feasible only in the context of a stable,

predictable international policy framework, based on the principles set out

above. As this framework evolves, business must be confident that the

UNFCCC will remain the principal venue for it; that nations will honour their

commitments regardless of changes in government, and that successive

agreements will be negotiated, accepted and implemented in a timely manner.

Carbon trading or a cap-and-trade emissions market for greenhouse gas reductions is therefore a fundamental aspect of their recommendations--showing a clear preference by industry and business for a cap-and-trade system in any treaty that will be negotiated to follow Kyoto.

Global Food Transportation May Be Pulled Into EU Emissions Trading System

In a New York Times article entitled The Environmenta Costs of Shipping Groceries Around the World, the issue of the greenhouse gas emissions from shipping fruit, vegetables, fish, and other food products is discussed.  The article describes the move by the European Union to add air transportation to the EU Emissions Trading System (ETS) would put a cost on air transportation of food and manufactured items.  The EU is reviewing the addition of shipping emissions to the ETS as well.  Many of the countries that produce these food items complain that the charging of a carbon tariff or requiring the purchase of offsets or allowances for these food items is a form of trade protectionism.  As the debate over the transportation in this article, and production (including use of electricity from coal-fired power plants) continues, countries will find themselves debating over the emissions and costs to compensate for the potential impact on climate change and global warming. 

Fortis Predicts $400 Billion Carbon Credit Market Between 2012 and 2015

Fortis NV, a Belgian-Dutch bank/financial firm and significant player in the international carbon market, predicts the EU carbon market to be $100 billion in 2009, and the international market to rise to $400 billion by 2012 to 2015, depending on the timing of the entry of the United States into the carbon market.  The US would join the market through domestic legislation and entry into an international treaty to follow the Kyto Protocol.

An Economist with CIBC in Canada Predicts Carbon Tariffs Will Bring Jobs Back to North America from China and Other Developing Countries

An economist with CIBC World Markets Jeff Rubin has issued a report predicting that Canada will impose carbon taxes or carbon tariffs on imported goods from China and other developing countries that do not have restrictions on greenhouse gas emissions. He also predicts that this will cause jobs and manufacturing to come back to North America, because emissions and energy efficiency will be more important than labor costs. He states that non-metallic mineral products - cement, glass and lime - with energy intensity 130 per cent higher than the Chinese industrial average, are likely to return to North America, as well as the printing, primary metal manufacturing, and machinery industries.

Rubin believes the tariff, based on $45 per tonne of carbon dioxide or equivalent, would raise roughly $55 billion a year from Chinese exports to the United States, and raise U.S. consumer price inflation by more than 0.6 percentage points.

“What I'm suggesting is that the minute that we start putting a price on our own domestic emissions, then our tolerance of those who do not is going to fade very quickly," Rubin said. "What we're going to say is that if you don't play by the same carbon rules, that's an unfair trade subsidy that we're gong to countervail against."

This is an interesting prediction that may ignore the post-Kyoto treaty negotiations and the potential challenges that such carbon taxes or carbon tariffs may face in the World Trade Organization.  It is a continuing issue that I have posted on several times on this blog, and not one that will go away if China, India, and other developing countries with significant greenhouse gas emissions do not agree to some form of cap and then reductions in their emissions.

Professor Joshua Busby Issues Report Through Council on Foreign Relations on Climate Change and National Security

Joshua Busby, a professor at the LBJ School at the University of Texas has issued a report entitled Climate Change and National Security: An Agenda for Action through the Council on Foreign Relations.  In this report, Professor Busby moves beyond diagnosis of the threat to recommendations for action. Recognizing that some climate change is inevitable, he proposes a portfolio of feasible and affordable policy options to reduce the vulnerability of the United States and other countries to the predictable effects of climate change. He also draws attention to the strategic dimensions of reducing greenhouse gas emissions, arguing that sharp reductions in the long run are essential to avoid unmanageable security problems. He goes on to argue that participation in reducing emissions can help integrate China and India into the global rules–based order, as well as to help stabilize important countries such as Indonesia. He suggests bureaucratic reforms that would increase the likelihood that the  U.S. government will formulate effective domestic and foreign policies in this increasingly important realm.

Environmental Justice Groups in California Issue Declaration Against Carbon Trading

It appears that most left and right wing groups oppose carbon trading and emissions markets.  The left because they want government making the decisions through a pure command and control system of regulation, and the right because they oppose regulation and believe the environmentalists are exaggerating environmental effects.  One is a command and control view, the other a laissez-faire view.  Both political extremes ignore the lessons learned from the US sulfur dioxide program that achieved the needed reductions in sulfur dioxide emissions from coal-fired power plants at costs well below what industry or even the EPA estimated.  They also ignore the mobilization of capital and greenhouse gas reductions achieved by the Kyoto Protocol and the EU Emissions Trading Scheme.  Neither side considers the issues from a scientific or economic view, but denies the objective facts, and argues from a perspective of pure ideology.  Let us hope the governments of the world look beyond these views and understand how emisisons trading bridges the gap between economics and ecology, markets and climate, and mobilizes capital investment to contribute substantially to achieving environmental protection and reduction in climate change.

A recent example of the left wing view is a group of environmental groups in California who have issued a declaration against carbon trading.  The California Environmental Justice Movement’s Declaration on Use of Carbon Trading Schemes to Address Climate Change decries the use of emissions markets to achieve emissions reductions, but seeks to have the government make these decisions.

Quotes from the California Environmental Justice Movement's Declaration demonstrate this view:

Carbon trading is undemocratic because it allows entrenched polluters, market designers, and commodity traders to determine whether and where to reduce greenhouse gases and co-pollutant emissions without allowing impacted communities or governments to participate in those decisions.

The California Environmental Justice Movement DECLARES that the EU-ETS, including the CDM, is a step in the wrong direction; and

The California Environmental Justice Movement FURTHER DECLARES that we will fight at every turn all efforts to establish a system of carbon trading and offset use in California; and

The California Environmental Justice Movement FURTHER DECLARES that our demands for real changes in the way we make and use energy will not be silenced by promises of money or token adjustments to the fundamentally flawed trading and offsets approach; so

BE IT THEREFORE, RESOLVED, that the California Environmental Justice Movement stands with communities around the world in opposition to carbon trading and offset use and the continued over reliance on fossil fuels; and

BE IT FURTHER RESOLVED, that the California Environmental Justice Movement will support conservation, regulatory, and other measures to address greenhouse gases only if they directly and significantly reduce emissions, require the shift away from use of fossil fuels and nuclear power, and do not cause or exacerbate the pollution burden of poor communities of color in the United States and developing nations around the world; and

BE IT FURTHER RESOLVED, that the California Environmental Justice Movement will oppose efforts by our state government to create a carbon trading and offset program, because such a program will not reduce greenhouse gas emissions at the pace called for by the international scientific community, it will not result in a shift to clean sustainable energy sources, it will support and enrich the state's worst polluters, it will fail to address the existing and future inequitable burden of pollution, it will deprive communities of the ability to protect and enhance their communities, and because if our state joins regional or international trading schemes it will further create incentives for carbon offset programs that harm communities in California, the region, the country, and developing nations around the world.

Unfortunately, the environmental movement and environmentalists will for the most part continue to oppose carbon trading and emissions markets seeing private capital and markets as inconsistent with achieving environmental protection or protection of people from industrial and private capital interests.  The return to a government-based system of collecting taxes and investing in pollution reduction activities would be largely ineffective, inefficient, and take a very long time to implement, too long to contribute to reductions in greenhouse gases that this group so vehemently argues is necessary in a very short time.

Carbon Tarriffs again Threatened by the EU against China and the US

Once again the call for “carbon tariffs” has risen as European Union leaders according to an Associated Press article threatened the United States and China with trade sanctions if the two largest emitters of greenhouse gases do not join in an international treaty in 2009 to reduce their emissions.  Carbon tariffs have been the subject of a prior post on this blog.  The problem is that the economy is weakening, and the potential the impact on industry from the EU’s pledge to reduce greenhouse gas emissions by 20 percent from 1990 levels by 2020 is raising strong concerns from industry that the US and China will not be facing economic impacts from taking similar steps—what the Europeans see as an competitive disadvantage.

Next year is important because the United Nations is set for a global conference in Copenhagen, Denmark to negotiate the treaty that will follow the Kyoto Protocol and how to reduce and adapt to global warming.  The  US has previously been unwilling under the current President to agree to a cap on US emissions.  The twenty-seven EU leaders after a two-day summit reportedly warned: "If international negotiations fail, appropriate measures can be taken" to protect European industry.  French President Nicolas Sarkozy was reported to have stated, "Our main concern is to set up a mechanism that would allow us to strike against the imports of countries that don't play by the rules of the game on environmental protection.” German Chancellor Angela Merkel stated, "Industry, faced with global competition could be exposed to a real disadvantage if no international climate accord is struck, but we in Europe have very strict rules."

China continues to argue against any cap on its emissions.  It does not appear likely an international treaty can be effective unless these two countries pledge to reduce their emissions.

British Prime Minister Gordon Brown appeared concerned about too much trade saber rattling, "I don't think we should allow things to stand in the way of getting the best possible international agreement.”

Other suggested steps to reduce the impact on EU industry have included a German proposal to reduce emission limits on steel and cement under the EU climate change legislation.  This brought on serious objections from environmentalists in the EU who are striving to keep the 20 by 20 reductions in place.

One proposal from Prime Minister Brown was a reduction in sales taxes on environmentally friendly products.  This would tip an advantage to those products made through low carbon processes.

In any event, it appears the battle is being set between the US, China, and the EU over greenhouse gas emission cuts.  The question is whether the US will go to the side of the EU, its traditional ally, or move toward China, its traditional competitor.  With the presidential elections in November with three pro-climate change candidates, most experts are betting the US will move toward its historic ally. However, the politics of climate change may be hard to predict.