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Recent US developments: Baby steps, but steps nonetheless

Submitted by Andrew Lord

There have been several notable developments south of the border recently. Taken individually, the developments may appear small. However taken together, they are evidence of a trend in the US towards controlling greenhouse gas emissions in a meaningful way.

In a news conference in Paris on February 25, James Connaughton and Daniel Price, key environmental and economics advisers to President Bush, announced that the U.S. is ready to accept binding international obligations to reduce greenhouse gas emissions. However, they did not indicate when or by how much the US would be willing to cut its emissions. Also, the they remained emphatic that the US would participate in a global scheme only if nations like India and China also participated. These omissions and caveats have led some European leaders to dismiss the announcement as a repackaging of an old position. The BBC quoted one unnamed official as saying, "President Bush won't be in office to sign off the next climate agreement so we really no longer really care what he thinks." However, it is encouraging to see that the US remains engaged in the international effort to mitigate climate change.

Domestically, tax incentives are widely seen as being instrumental in promoting renewable energy investment in the US. It was therefore also encouraging to see the US House of Representatives passed the "Renewable Energy and Energy Conservation Tax Act of 2002" (Bill H.R. 5351) this week. The bill is particularly enticing because it funds tax breaks for green energy by repealing tax breaks for Big Oil. It extends tax credits currently available for various forms of investment in renewable generation and energy efficiency for several years. The bill also provides new tax credits for investment in renewable energy and energy conservation bonds, as well as for the production of plug-in hybrid vehicles, cellulosic biofuel, and electricity from renewable marine and hydrokinetic sources. Several other tweaks to the Internal Revenue Code are also included in the bill. Perhaps the most controversial aspect of the bill is that it attempts to achieve revenue neutrality by clawing back $18 billion in tax subsidies previously made available for the domestic production of oil, natural gas and related products. This provision is expected to be fatal to the bill when it crosses President Bush's desk. However, similar legislation is likely to fare better after the new Presidential election.

In other news from the House of Representatives, the House's energy committee, chaired by John Dingell, released a white paper this week that expressed concern that regional and state cap-and-trade initiatives could interfere with federal efforts to develop a national cap-and-trade system. The paper notes that the "country is now at the difficult and familiar stage of transitioning from multiple, often unconnected, State and local climate change programs to a comprehensive, national approach to addressing the global problem of climate change." The paper suggests that, if the states continue to develop their own programs, "more stringent State programs might unduly burden interstate commerce or increase the governmental or societal resources needed to achieve the necessary reductions," could shift carbon emissions to less stringent states, and could hamper the ability of the federal government to balance state interests. However, the paper acknowledges that states could be good laboratories for cap-and-trade schemes and may be well-poised to create systems suited to local circumstances. While the paper treats the tension between the states and Washington as a policy question, it is also a legal question of the constitutional division of powers. Whether viewed through the lens of policy or constitutional law, the discussion is evidence that governments at all levels in the US are getting serious about implementing laws to control greenhouse gas emissions.

One thing is clear: local initiatives are moving ahead much more quickly than federal initiatives. On February 14, the first publicly-announced compliance trade under the Regional Greenhouse Gas Initiative (RGGI) was completed. RGGI, which includes 10 northeast and mid-Atlantic states, will cap CO2 emissions in the region beginning January 1, 2009. Icap, the environmental brokerage that arranged the trade, confirmed that the trade was for options for delivery in 2009-2010 but did not disclose the number of units that were traded. Options for RGGI units, each corresponding to a short ton of CO2, reportedly traded for between $5-10 US. This is the very first concrete indication of the potential value of compliance trades in the emerging US cap-and-trade market. That RGGI is open for business proves that progress can be made even before the new President is elected.

However there can be no doubt that the future of the US carbon market is tightly tied to the presidential election. As an example, the election appears to have already had a measurable impact on the price of carbon in the US. The price of units on the Chicago Climate Exchange (CCX), a completely voluntary CO2 market, shot up right after Super Tuesday (February 5). The price when from about $2.75 to over $4.50. Given that John McCain, Barack Obama and Hillary Clinton all support a mandatory cap-and-trade approach, the jump in price may reflect the market's expectation that emissions credits will be worth much more after the election. Like all of the developments discussed above, the change is most meaningful not because of what it says about the state of affairs today, but because of what it suggests about the market of the future.

No consensus on biofuel certification

Submitted by Jason Fisher

The BBC News website has reported that the G8 nations and five important developing nations have been unable to craft a consensus policy on biofuels following meetings in held in Brazil this month. The nations held the meetings to try develop an international certification system for biofuels, which would hopefully result in a review of tarriffs put in place to block imports of biofuels into the US and EU.

Although no binding decision was reached, the parties were able to agree on some of the fundamental principles that should be employed in any test for certification, such as requiring that biofuels not be made from materials grown on land with "recognized value for biodiversity", and requiring that GHG emissions from the production and use of biofuels "should be significantly less than those produced by fossil fuels".

US cap-and-trade inevitable - market could be worth $1 trillion

Submitted by Andrew Lord

Economic researchers at New Carbon Finance released a report this week estimating that the US will be home to a carbon market will be worth $1 trillion by 2020. The forecast assumes that the US will implement an economy-wide cap-and trade system within 4-5 years and that the system will be confined to domestic trading only.

Currently, the US House of Representatives and Senate are discussing 13 different climate change bills, most of which propose a market-based solution such a cap-and-trade system. It is likely that some version of one of these bills will be passed after the US presidential election. All three front-runners in the presidential race have declared their support for a mandatory cap-and-trade system. Both Hillary Clinton and Barack Obama would like to see emissions reduced by 80% from 1990 levels by 2050. John McCain, who sponsored the McCain-Lieberman Climate Stewardship Act introduced in 2003, hopes to achieves a more modest reduction of 60% over the same period.

The impact of a cap-and-trade system is forecasted to be enormous. Researchers expect the carbon trading market to be worth about $1 trillion by 2020, more than twice the size of the EU ETS. This forecast is based on an estimated carbon price of $40 per tonne as early as 2015. A price of $40 per tonne is expected to raise the cost of electricity by 20%, of gasoline by 12%, and of natural gas by 10%.

The researchers noted however that the impact need not be so severe. All 13 bills currently under consideration share a common feature: they would limit the trading of emissions to the US only. They all restrict trading with other cap-and-trade systems, such as the EU ETS, and forbid participation in the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI) projects. If the system permitted international trading and participation in CDM and JI projects, the price of carbon would be closer to $15 per tonne. A price of $15 per tonne would only raise the cost of electricity by 7%, of gasoline by 4%, and of natural gas by 5%.

The increasing likelihood that the US federal government will implement a cap-and-trade system will have repercussions both domestically and abroad. Domestically, a federal system could displace many initiatives that are already under way. For example, several states have already committed to participate in regional cap-and-trade systems, most notably the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and the Western Climate Initiative in the West. Some states are also taking local action. For example, California intends to implement a cap-and-trade system for its electricity market.

Internationally, the leadership of the US could prompt other jurisdictions to implement similar programs. For example, Japan announced this week that it would study the feasibility of a cap-and-trade system, an idea that it had vehemently opposed in the past. US leadership abroad may not just be by good example: there is already talk of imposing trade sanctions on imports from countries unwilling to participate in mandatory emission caps.

It is almost certain that Canada will follow the lead of its neighbour to the south. The question is one of timing. The federal government may sit tight until the US makes its move. However, some provinces seem more restless. BC, for example, just announced a new carbon tax (see below) and is already a member of the Western Climate Initiative. Regardless of when the government makes its move, pro-active Canadian businesses should start planning for change now.

Carbon Tax - "Ouch - my gas tank" OR "Yeah my wallet"

The 2008 BC Budget was released yesterday, and yes it was green. It was even released on green paper (or at least the pdf copy was).

The papers are all carrying a similar headline this morning "Carbon Crunch" or "Budget hits gas tanks" but really, the BC carbon tax will be a moot point for most of us. At $10 per tonne of carbon in 2008 (gradually increasing to $30 by 2012) it amounts to 2.41 cents per litre of gas. But this is all offset by tax rebates to both individuals and businesses. Low income families get an extra top up, and each resident of BC will get a $100 in the pocket this year as a one time 'dividend' for making the polluter pay. Add in the tax rebates on certain green techs (i.e. EnergyStar appliances) and it is easy for this to be a windfall for most British Columbians.

What is much more interesting is the impacts this will have on BC businesses. Here are a few highlights:

• Truckers - take a tip from the street racers and get yourself a new spoiler. A whole slew of add-ons for the trucking industry aimed at making the transportation sector more fuel efficient are now PST exempt. Labour for installation is also exempt.
• Builders - as announced in last years budget, a new building code is coming to BC. Aimed at greening building practices and increasing the efficiency of our building stock in BC, this years budget has added funds to program to ensure it meets the rigid timelines set for reform.
• BC Coal - a strong message in this budget - don't burn coal in BC. If you weren't convinced after the 2007 Energy Plan when new coal plants were limited to those with no carbon emissions, the carbon tax adds over $20.79 per tonne to Canadian bitumous coal consumed in BC. By 2012, this will be $62.73 a tonne. Query, will this impact our imports of energy from coal fired plants in Alberta? Probably not as the BC government has specifically said the goal is to only target BC sourced emissions.
• Other Energy - all energy producers using fossil fuel, be it diesel in remote communities, or natural gas in large thermal plants, will feel the squeeze of the carbon tax. On the other hand, renewables such as run-of-the-river, wind, ocean and solar, are all a bit more competitive as they do not have to pay tax on their fuel source.
• Biomass - biomass and biofuels are specifically exempted from the fuel tax on the basis that the carbon released represents carbon previously sequestered as the plant matter grew. Of course this only holds true as long as we plant as much as we cut...
• Small Business Venture Capital Act - this great piece of BC legislation offers enhanced investment tax credits for investors in start ups. Clean tech companies get an extra boost of 'tax credit budget' under this budget.
• International Financing Activity Act - another piece of legislation for encouraging investment, the patents that can now be invested in now include wind, solar and tidal power.

Incremental change, but it is a nice start for greening BC's economy, and I suspect we will see even more when the BC Climate Action Plan is announced, and then again as legislation begins to rollout throughout 2008.

Alberta’s Climate Action Plan Banks on CCS

Submitted by Daniel Jarvis

On January 24, 2008 Alberta’s Premier, Ed Stelmach, unveiled Alberta’s Climate Change Action Plan that proposes to cut projected emissions by 200 mega-tonnes by 2050, with an absolute reduction of 14% by 2050 compared to 2005 levels.

The key to the plan appears to be the use of carbon capture and storage technology (CCS), which is touted by Premier Stelmach to hold tremendous potential for Alberta and “will help us meet 70% of our reduction target”. In his speech outlining the plan, Stelmach commented that “[a] lot of Canadian experts see carbon capture and storage as the most practical and promising way for Canada to reduce greenhouse gas emissions safely and effectively.”

The use of CCS is supported by the Integrated CO2 Network (ICO2N), a proposed CCS system for Canada. ICO2N members are primarily resource based corporations such as Husky Energy Inc., Suncor Energy Inc. and Transalta Corporation. The proposed system will move CO2 captured from multiple industrial sites via pipeline to storage sites deep underground. ICO2N’s website states that “Studies indicate the ICO2N carbon capture and storage proposal has the potential to reduce Canada's CO2 emissions by 20 million tonnes - the equivalent of annually removing four million cars from the road.”

CCS research is currently underway in Canada at the Weyburn oilfield in southern Saskatchewan, home to a major CO2 sequestration demonstration project (pdf) made possible through government and industrial sponsors, and a research consortium comprised of public and private sector research agencies from Canada, the U.S. and Europe. Phase I of the project involved the development of drilling and site facilities. In Phase II, the captured CO2, piped in from the Great Plains Synfuels Plant in North Dakota, is used for enhanced oil recovery with an injection rate of about 1.5 million tonnes per year. CO2 injection is expected to produce at least 130 million barrels of incremental oil and extend the life of the oilfield by some 25 years. It is also anticipated that some 20 million tonnes of CO2 will be injected and become permanently stored underground over the lifetime of the project.

In Europe, on January 23, 2008 the European Commission proposed a Directive (pdf) to enable environmentally-safe capture and geological storage of carbon dioxide (CO2) in the EU as part of its Climate and Energy Package. This was a response to the call of EU leaders made at their Spring summit in March 2007 and follows the Commission's proposal set out in its Communication "Limiting Global Climate Change to 2 degrees Celsius: The way ahead for 2020 and beyond" from January 2007.

The use of CCS to reduce CO2 emissions is increasingly being viewed as a viable option. Critics of CCS, however, view it as a ‘end-of-pipe’ solution, that involving storing waste rather than eliminating it, and technology that is years, if not decades away from being commercially viable. Environmental groups see it as putting hope in a solution that may or may not be realized in time to address rising CO2 emissions, and promoting a fossil-fuel economy.

Alberta’s Climate Change Action Plan, appears designed to address this, by setting long-term (2050), rather than short-term targets for CO2 emission reductions, in order to allow for the technology to move from the research and small-scale stage to large-scale commercial deployment. Whether or not this is a viable strategy, or ‘too little, too late’, will remain to be seen.

US FTC reviewing carbon offsets

I am often asked whether an offset can actually 'make a difference' to climate change. The straight answer is yes, the complicated answer is, yes, if done right. The main thing to remember about an offset is that it does not actual represent a decrease in an individuals greenhouse gas emissions. Instead it represents either a reduction by someone else, a new project that has lower emissions than other projects, or the creation of a 'carbon sink'. The most well known carbon sink is the planting of new forests, which allow an increase in the amount of carbon that the global carbon cycle can process.

All three of these types of offsets can be undertaken, and marketed, with varying degrees of success in the goal of reducing greenhouse gases. For example, how permanent is the offset (trees die and release the carbon back into the atmosphere eventually), are the reductions verified by a third party, and are they already being counted somewhere else? All of these are, or should be, valid concerns of any purchaser of a carbon offset.

To address this problem, the US Federal Trade Commission is reviewing green marketing in the US. The first workshop was held in January and focused on carbon offsets. One seller of offsets, TerraPass, has recently posted a blog on the process of verification, along with their comments to the FTC.

It will be interesting to see what the FTC has to say on carbon offsets, and whether guidelines begin to develop in Canada. In particular, TerraChoice, the main environmental labelling body in Canada, is now offering a service to its clients to analysis risks and opportunities involving greenhouse gases.

Barroso and the European Commission Take the Lead in an Ambitious "Climate and Energy Package" Way

Acting on a proposal in January of 2007 to increase the share of renewable energies in the EU's final energy consumption from 8.5% to 20% by 2020, and to provide for a 10% minimum target for biofuels in transport by the same date, on January 23, 2008 the European Commission unveiled far-reaching targets as part of its “Climate Action Package”. The Package was introduced by José Manuel Barroso, President of the European Commission, who stated that “[t]he vision was set out last year with leadership from the European political community. It was consolidated by European leadership at the Bali Conference. Now we will show how a modern economy can be designed to meet the challenge. This is sustainable development in action.”

In addition to the renewable and biofuels targets, the Commission set out new rules for Carbon Capture and Storage (pdf), and plans were released for ‘Phase 3’ of the EU Emissions Trading Scheme (EU ETS [pdf]) which would run from 2013 to 2020.

The EU ETS is based on (pdf), which entered into force on October 25, 2003 and is the largest multi-country, multi-sector emissions trading scheme in the world. Phase 1 of the scheme ran from 2005 to 2007 while Phase 2 runs from 2008 to 2012, with Phase 2 coinciding with the first commitment period of the Kyoto Protocol. The scheme is mandatory for all 27 EU Member States and exclusively covers energy intensive industries, including for example, combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, brick ceramics or pulp and paper. The ETS does not currently cover chemical manufacturing, transport, aviation, buildings or small GHG emitters.

One main change proposed for the EU ETS is that instead of 27 different emissions allowances for Member States as determined by the Commission (through National Allocation Plans) there would be one EU-wide cap on the number of emissions allowances which would decrease along a linear trend line and continue beyond the end of Phase 3. In addition, the power sector would be required to obtain carbon credits through an auction, rather than through a free allocation from the Commission, and other industrial sectors, including aviation, would step up to full auctioning gradually.

The Package targets and revision of the EU ETS are seen as very ambitious plans and have received a mixed reaction from the EU Member States, environmental organizations, industry and experts. EU Member States mostly welcomed the proposals, while admitting that much work would need to be done to adapt current environmental and industrial strategies. Environmental organizations on the other hand have largely criticised the proposed measures as not going far enough to address the impacts of climate change and see the 10% biofuels target as leading to an increase in the cost of food stuffs as well as deforestation and the destruction of prime agricultural lands. Instead of backing down on the target, the Commission has tried to meet this criticism by setting stringent environmental sustainability criteria to ensure that biofuels counting towards the 10% target are sustainable and not in conflict with the EU’s overall environmental goals. This means that the biofuels must achieve at least a minimum level of greenhouse gas savings and respect a number of requirements related to biodiversity.

The Climate Action Package requires approval from both Member States and the European Parliament, with measures seen coming into force at the end of 2009. The Parliament has already approved the 20% cut in carbon dioxide emissions by 2020.