Carbon Needs Ratings

Without the certainty to be achieved through a strong international climate change agreement at Copenhagen, committed to the short, medium and long term reduction of carbon in the atmosphere, we’re going to have to find another way to make it work. That means carbon markets, and that means market tools.

 

Despite the enormous growth the carbon market has experienced in the last couple of years, it continues to come under fire due to a combination of volatility and market uncertainty.  The impact of the collapse of the global credit markets has also understandably led to mistrust of the traditional tools of the market. Yet its difficult to know what other tools to use.

 

There is little question the carbon market has continued to grow strongly despite the credit crunch. According to figures from Point Carbon, the carbon market`s total value for 2008 was estimated at €92bn (US$125bn), more than double the €40bn it was worth in 2007, and that growth is set to continue. And, while the price of carbon has fallen significantly with the drop in industry and manufacturing, about 25% of the overall drop in emissions within the EU is said to be down to the carbon market.

 

Yet, if negotiators fail to achieve a successful international climate change treat in Copenhagen, we could end up with a wide range of unconnected carbon markets across the globe. In fact, according to Trevor Sikorski of Barclays Capital, it could be at least seven different markets.

 

We’ll have the EU ETS, at least three US programmes (RGGI, WCI, MRGGRA), Australia’s CPRS, a planned Japanese programme, as well as the ongoing contribution of the CDM and JI under Kyoto. The difficulty will lie in understanding how these schemes can work together.

 

In a globalised economy, there is going to have to be cross-border analyses of the carbon footprint of goods and services. And we’re going to need some standardised way of comparing the quality of one offset to another if the carbon levels of those goods and services are going to be agreed.

 

Buyers, sellers and investors need confidence in what they are buying or, at the very least, they need ways to differentiate between the risks attached to the different credits that are going to be use. Just because the markets operate on a regional basis, doesn’t mean that there isn’t a global implication.

 

A global carbon market requires a set of tools to predict risk, as historical data alone cannot predict the likelihood of future events. Just like financial investors in the debt market (although hopefully with more common sense and a more robust set of tools), they want a clear, transparent and unbiased declaration of those risks, enabling the necessary price differentials to develop. One of the most well-established instruments for enhancing the transparency and efficiency of financial markets is the use of independent credit ratings.  

 

Ratings tells investors/buyers what they should rationally expect to be delivered from a project, given its fundamentals. Therefore, ratings will be a key element in driving the efficiency of the market.  

 

With an increasing number of project developers looking to sell carbon credits into the emerging compliance and voluntary markets around the world, the widespread use of effective carbon ratings might be the only thing standing between separate regional carbon markets, and the introduction of economic protectionism. And that’s something that none of us can afford.

Posted via email from Conquering Carbon

In Praise of Offsets

The idea of the carbon offset has been taking a beating for some time, with people lining up to accuse the idea of being nothing more than an excuse for shirking responsibility for cutting emissions.

DECC recently released guidelines on measuring and managing emissions, along with a definition of carbon neutral which included offsets. According to the UK Government, “carbon neutral means that – through a transparent process of calculating emissions, reducing those emissions and offsetting residual emissions – net carbon emissions equal zero.”

But there is a real purpose behind the concept of offsets, both regulated and voluntary, and if the system is being abused then the system should be amended, not attacked. The concept of the carbon offset has been much maligned, but it has also been badly misunderstood.

The purchase of carbon credits is not just helping western companies meet their compliance quotas or salve their consciences. It also acts as an incentive for greater investment into new clean technologies, generating huge flows of global finance from rich to poor, allowing for technology transfer between countries and enabling wider sustainable social and economic development in developing parts of the world, while actively reducing emissions of GHGs.

A central premise of the CDM was to develop clean energy infrastructure for developing nations. GHGs are damaging on a global scale, no matter where they are emitted, so the idea was that the best way to start is by cutting them where it’s cheapest – in the developing world. And it supports acceleration of the local economy to a lower carbon basis. Technology transfer involves the conveying of equipment, knowledge, operating skills and project management expertise from where it’s developed to where it’s needed.This flow of finance and technologies also allows for far wider social and environmental benefits across the developing world, creating job opportunities and helping retrain the local workforce.

To date, the voluntary carbon market has been the preserve of those projects not easily verified under the CDM. This includes investing in forestry or in smaller programmatic projects where the cost of compliance with Kyoto (certifiers, validators, consultants, and so on) can be prohibitive.  The voluntary market has its own standards, and perhaps the plethora available make it hard to make valid comparisons between different offsets. Yet there is real potential in a number of voluntary standards to create a significant difference. A leading example is the Gold Standard, an NGO initiative that provides tools to develop emission-reduction projects that result in real and additional emission reductions, promote the transition to sustainable energy systems and secure both local and global sustainable development benefits.  

Many criticisms of the offset concept point to the fact that it doesn’t cut emissions from an activity, simply offsets it.  Predominantly the argument is that these projects generating offset credits would have happened anyway, so they’re pointless. But how do you prove a negative? How do you prove that that a developer would not have built a project, or changed to a cleaner fuel, or planted more trees?

The reality is that any contribution to lower emissions is a positive thing. In a perfect world, people would suddenly change their behaviour overnight, but that’s not likely to happen. What the offset system supplies is a transitional process whereby people become slowly more aware of the economic risk of their daily activities.

Carbon offset credits can be as simple as equivalent to 1 tonne of C02 equivalent not emitted, or they could carry a sustainable development aspect. We could demand that any carbon credit generating  project should have a net benefit for the environment; that local sustainable development should be encouraged, or even prescribed; and we should demand globally accepted standards and methodology. It’s up to us to decide which offsets we choose to value, and how.

Posted via email from Conquering Carbon

DECC pulls the teeth of the CRC

There has been growing uproar from UK business in recent months, as the potential financial implications of implementing the Carbon Reduction Commitment (CRC) became increasingly clear. In response, the UK’s Department for Energy and Climate Change has just announced that the first year of the programme will be a ‘monitoring period’ only, and that no emissions allowances will need to be bought.

The scheme has also been renamed to reflect an increasing focus on energy efficiency – it’s now called the Carbon Reduction Commitment Energy Efficiency Scheme. Large energy users in business and the public sector (those who consume over 6000MWh per year) will be required to take part in the scheme from 1st April 2010.

The UK’s emissions reduction targets are at least 34% on 1990 levels by 2020, and are in large part expected to be achieved through energy efficiency. The CRC is expected to ensure that large organisations play their part. The scheme is mandatory for organisations which consume over a set amount of power, and is expected to eventually save participants around £1billion per year by 2020 through cost effective energy efficiency measures that are not yet being taken up.

Under the programme, all participants must buy allowances to cover their carbon emissions in a given year. Then the revenue from the sale of those allowances is given back to the best performing organisations, adjudicated through the use of a league table. Basically, the more action you take, the more money you make.

In the first year of the scheme, the payments would have been based on the back of early action, such as the installation of automatic metering. Now the first year of the three year introductory phase will only consist of reporting emissions.According to the new guidelines, to smooth the introduction of the scheme and to help ease the upfront costs, organisations will only have to report emissions in the first year (2010/11). In subsequent years organisations will have to buy allowances corresponding to their emissions from energy use, and then surrender them by the end of the year. The only encouragement for early action now is that, in the second year (2011/12), extra weighting will be given to organisations which take action early to improve energy efficiency.

The cost of a new scheme, from the purchase of allowances and the cost of registration and compliance, to the actual cost of implementing energy efficiency measures, could prove significant. At the same time, the CBI has warned that many companies affected by the scheme don’t realise that this is the case.  This makes it understandable that the Government would weaken the stringency of the early days of the scheme, in order to help protect business in a difficult global economic environment.

The reality however is that action must be taken as soon as possible if the UK is to have any hope of achieving its emissions reduction targets, and that weakening the scheme in response to corporate concern sends exactly the wrong signal to those invested in the development of the low carbon economy. The mandated expenditure involved in improving corporate energy efficiency could provide stimulus to parts of the economy, and help the UK develop a foothold in the developing low carbon economy.

More importantly, lessons should be learned from the failures of the EU’s Emissions Trading Scheme (ETS). Concerns about the impact of the scheme on corporations led to the allocation of millions of free allowances to emitters regulated under the scheme. Not only did this result in, effectively, the allocation of free money to many major emitters but, combined with miscalculation of emissions, led to the collapse of the carbon price to less than a euro during the first phase of the scheme.

As the Government continues to undercut each positive legislative or regulatory action with subsequent amendments, if it's not careful, it will lose any hope of being taken seriously on climate change.

Posted via email from Conquering Carbon

Peak Oil is here – action on fossil fuel is no longer a choice

The latest research from Deutche Bank, reported in the FT, warns of high price volatility in both oil and electricity as the environmental agenda, bankruptcy of the car industry, ongoing war and global oil supply challenges affect the market.

 

The bank doesn’t yet seem to accept the peak oil theory, but rather believes that there will be a shift away from oil towards natural gas, that the impact of hybrid cars will grow strongly and that confusion over government green policies will disincentivise investment in oil.  The reality is however that if the price of oil is going to continue to become increasingly volatile, we're going to need a new way to look at our energy environment.

 

Back in the fifties M. King Hubbert, the Shell geologist who came up with the concept of peak oil said:

 

 “We now are moving away from a period of smaller populations, lower levels of technology, and dependence on non-renewable resources. It appears therefore that one of the foremost problems confronting humanity today is how to make the transition from the precarious state that we are now in to this optimum future state by the least catastrophic progression. Our principal impediments at present are neither lack of energy or material resources nor of essential physical and biological knowledge. Our prinicpal constraints are cultural. During the last two centuries we have known nothing but exponential growth and in parallel we have developed what amounts to an exponential-growth culture so heavily dependent upon the continuance of exponential growth for its stability that is incapable of reckoning with problems of non-growth.”

 

The thing we need to remember is that oil isn’t produced, it’s extracted. What we’ve been doing for the last hundred odd years is removing all the easily accessible oil, the stuff lying near the surfact (relatively speaking). In the early days of oil extraction, for every barrel of oil used in the exploration or extraction of oil, another 100 were discovered.  

 

Even if there is new oil to be found, it is going to become increasingly difficult to extract economically if, as some believe, our engineering capacity to extract oil is reaching its limits. That means it will take more money and energy to extract, refine and transport it until, at some point, when it takes the energy of a barrel of oil to extract a barrel of oil, further extraction becomes pointless, no matter what the price.

 

What peak oil really means is:

1.       The world will run out of accessible fossil fuels at some point fairly soon; and

2.       These resources are likely to become more expensive until then

 

And when you boil it down to basics, what that means is that whether you believe that climate change is a problem or not, we’re going to have to find ways of using alternatives to oil. That means putting alternatives such as renewable power, and increasing energy efficiency, ahead of any alternatives. We’ve got to begin a structural change within our economic systems if we’re going to get through the coming crunch.

Posted via email from Conquering Carbon

Senate carbon bill – is it but sound and fury, signifying nothing?

The first draft of the latest Democrat-backed Senate cap and trade bill looks like a serious commitment. The legislation proposed by Senators Barbara Boxer and John Kerry, the Clean Energy Jobs and American Power Act, sets a target 20% emissions cut by 2020 (83% by 2050),  from a baseline date of 2005.

At first glance it seems as if the Senate is considering strong action. Critically, it outlines the penalty for non-compliance at twice the annual average market price per tonne for each tonne not surrendered. This penalty would be administered by a new office of ‘offsets integrity’. At the same time, it limits the number of carbon credits that can be imported, demanding action within the US. Interestingly, it proposes higher cuts that the House Bill passed in June, the Waxman-Markey, which called for cuts of 17%.

The reality is not so clear. The use of 2005 as a baseline for emissions data weakens the proposal. It means that even if the Bill passes, proposed US reductions would be lower than those of Europe and Japan, which use the Kyoto framework of emissions reductions from 1990 levels. At the same time, falling emissions due to lower manufacturing and falling power demand (caused by the recent economic contraction) mean that US carbon emissions are expected to be 6% lower in 2009 than 2008. If accurate, that prediction would see 2009 emissions already 8.8% lower than in 2005 – which wouldn’t demand a huge amount of action from US industry. The key issue is that action on climate change needs to be now, if we are to prevent the further build-up of greenhouse gases in the atmosphere.

There are also structural weaknesses within the outline. While the Bill sets a fixed limit on emissions, it retains credits to be auctioned off if the financial pressure gets too great, and it only impacts about 2% of US business (around 7,500 companies). There is also no clarity on the number of permits that would be allocated for free, a practice which when implemented, proved a disaster for the first phase of Europe’s Emissions Trading Scheme.

Environmentalists argue that the cuts are window-dressing, an offering that is too little too late. The general scientific consensus, adopted by the Major Economies Meeting (a non-UN group which includes the US and China) in June 2009, is that the increase in global average temperature must be kept below 2 degrees Celsius to avoid the worst impacts of climate change.  This limit has been accepted within the EU since the mid-nineties and is backed by some of the world’s largest companies.  

Another question is whether, even if the Bill proves to have few teeth, such a bill can be passed. According to reports, when senators held a rally to promote the legislation, not one single Republican Senator joined the party. The new Bill does include funding provisions for nuclear, natural gas and coal, although details would have to be worked out by the Senate. One key issue is how such a programme would be administered, and the House bill saw an agreement that the Department of Agriculture would be responsible for agriculture and forestry projects. The Senate bill seems to side-step that question, which could lose it support within the agricultural lobby. At the same time, limitations on the number of non-US credits could increase the cost base of such a programme dramatically, which would be politically difficult.

It remains questionable whether or not the Bill can be passed in its current fashion, especially given the difficulties encountered by those promoting health reform. So at least its good to know that the Obama administration has a backup plan.

Posted via email from Conquering Carbon

Water as important as energy in climate debate

The European Environment Agency (EEA) has said that water efficiency is as critical as energy efficiency and energy performance of buildings in the current climate change debate.
There is increasing concern that the impact of a growing population, increasing agricultural demand, combined with climate change, could result in permanent drought in many regions.  At a conference on water issues, the EEA’s executive director expressed her surprised that existing technologies that could help manage and improve the water environment had not made it through into urban planning circles.

While historically, the focus on water has been on improving it’s quality, rather than concern about its scarcity, climate change has the potential to change this drastically. Questions of mitigation and adaptation cannot be addressed without addressing issues surrounding water and land.

While the EEA plans to launch water accounts by the end of 2009, requiring Member States to draft river basin management plans, there has been little done to address issues of water wastage.

Water is critical to humanity, both for drinking and growing food. If the temperature rises around 3 degrees celsius, we could see the glaciers of the Himalayas, Andes, Rockies and Alps begin to melt, affecting the flow of clean water to land all over the world.

In Australia, the Murray River basin is under massive stress as overuse and drought strain its capacity, and residents of Adelaide could be reliant on bottled water by next week.  Australia's worst drought in a century has lasted over 10 years in places, and many cities have had to restrict water use.

The Chinese water minister, Chen Lei, recently told a water conference that two-thirds of Chinese cities now face serious shortages due to rapid industrialisation and climate change. By 2015, he warned, water efficiency would have to be increased by 30%.

According to a UN environment programme report, perennial drought conditions are developing in south-eastern Australia and south-western North America and that water scarcity could increase in southern and northern Africa, the Mediterranean, much of the Middle East, a broad band in central Asia and the Indian subcontinent.

The implications of water scarcity are immense. Access to water supplies is believed to have provided a spark for the outbreak of civil war in 2003, as droughts affected grazing lands and people moved from their traditional homes and came into conflict with those whose lands they entered. The tragedy, which has resulted in the deaths of hundreds of thousands has also resulted in the destruction of foodstocks, seeds, livestock, wells and irrigation systems, making the region basically uninhabitable, and with refugees and displaced persons running into the millions.

The key issue in the current approach to the mitigation of climate change is how best to alter our energy environment in order to avoid the use of fossil fuels. Yet the enormous water footprint relating to energy production is being ignored and is becoming an increasingly critical consideration. When weighing nuclear against coal, the carbon benefit is clear, yet nuclear power requires vast amounts of water for cooling. New energy technologies – from advanced methods of extracting fossil fuels to low-carbon renewable energy – can exacerbate water worries, creating ugly trade-offs between carbon and water. As water stresses increase, the water intensity of energy technologies’ should play as great a role as their carbon footprint in determining the future makeup of the global energy mix.

There are incredibly complicated problems to resolve: what do we do about transboundary water; how do we quantify the growing risk of water-related international tensions; how do we best understand, measure and engage with water resources through corporate water footprinting; how do we embed water efficiency at a cultural level? While quite what we do about this is not yet clear, as the economic/environmental equation has not really been fully clarified for water, it is clear that it’s time that we embed water management in any action on climate change