Carbon Trading Timeline

I've been hearing a lot of questions lately about what I expect the timeline for carbon trading to be in the United States. So, very quickly here is what it looks like.

June 30 2007: California Climate Registry must publish discrete early action greenhouse gas emission reduction measures that can be implemented prior to January 1, 2012.

3rd Quarter 2007: I believe APX will be hired by California Climate Registry to administer trading program

January 1 2008: By this date California must pass legislation to require monitoring and reporting of GHG emissions by "beginning with the sources or categories of sources that contribute the most to statewide emissions."- AB 32

2nd Quarter 2008: Agreements will be made between NEPOOL, PJM, and ERCOT to make RECs fungible with the developing carbon market based on local emission factors of RECs

January 1 2009: Regional Greenhouse Gas Initiative begins
January 1 2009- January 1 2010: Midwest Greenhouse Gas Initiative likely to begin

January 1 2011: California Climate Registry deadline for early action
January 1 2012: California Climate Registry allocates allowances and trading begins

I expect that California will continue to explore joining Kyoto and will indeed move up its allowance trading by at least 1 year. I expect the United States to ratify Kyoto in the year 2009 and will join for Phase III trading in 2013.

Conversations with Corporate Decision Makers #4 Voluntary Programs

So, you've defined your carbon footprint and purhcased green power; what next? This conversation will discuss a few different options for reporting your entity's actions.

Him/Her: Hey, thanks for sitting down with us today.
Me: My pleasure.

Him/Her: We've defined our carbon footprint for our 25 US facilities and have made 20% of our energy consumption green by purchasing RECs. You've also helped us qualify for the EPA Green Power Partnership; so what's next.
Me: The next step is reporting your emissions. You have a few choices:

1. US DOE Voluntary Reporting Program 1605(b)
2. California Climate Registry
3. EPA Climate Leaders
4. WWF Climate Savers

Him/Her: Ok, could you quickly discuss each one?
Me: Sure.

1. US DOE 1605(b) - This program is probably the most underutilized of the four choices. It gives industrial companies a means for differentiating themselves, as it actually rates your overall carbon emissions measurement and quantification methodologies. The more direct your company is (by using CEMS - Continuous Emissions Monitoring Systems) the more robust your results will be. In my opinion this options is more attractive for industrial polluters who may have invested more capital in their monitoring technology and want to receive credit for their efforts.

2. California Climate Registry - This program is the most appropriate for large office based organizations and entities with offices located in California. It is important to understand that you need not have any facilities in the state of California to register your emissions. It is also important to understand that California will likely merge with RGGI (and possibly preempt the federal government and join Kyoto). This means that early voluntary actions now will likely have a real financial benefit once allowances are doled out beginning Jan. 1 2012. Also, California Climate Registry requires 3rd party verification - which is integral to the process of carbon trading.

3. EPA Climate Leaders - This program is very similar to the California Climate Registry, but will not result in trading benefits. This has been the standard for US corporations for the last few years, but CCR is likely to replace it.

4. WWF Climate Savers - This program focuses more on helping its participants become more active in reducing emissions, but the formal reporting program will not likely be as robust as the CCR. The first six participants in the WWF Climate Savers were International Business Machines (IBM), Johnson & Johnson, Polaroid Corporation, Nike, Lafarge, The Collins Companies, and Sagawa Express.

Him/Her: Which program would you suggest for us?
Me: Well, since over 90% of businesses carbon emissions are from office/facility occupation and not direct combustion or industrial process emission - I would suggest California Climate Registry. The program is robust, user friendly, and will likely become a part of the national reporting system in the US.

Him/Her: Ok, thank you. Next time could we talk about the steps and time horizons involved with reporting emissions to California Climate Registry.
Me: Absolutely.

Conversations With Corporate Decision Makers #3 Stewardship Claims

A common question that I hear is: "Besides slowing climate change in general; what are the benefits of buying green power or defining my carbon footprint?"

Him/Her: So, now that we understand our options for making an intial foray into the realm of corporate sustainability- can you explain how we can best leverage our actions?
Me: Sure, there are really three levels of involvement/sophistication to consider when you're making environmental stewardship claims.

1. EPA Program Membership
2. Voluntary Reporting Standards
3. Voluntary Emission Trading

Him/Her: #1 we know about. EPA Green Power Partnership and EPA Climate Leaders seem very straightforward. Green Power Partnership simply requires that we purchase Green Power or RECs and report those purchases. Whereas, EPA Climate Leaders simply involves doing a carbon footprint, setting a base year and objective and tracking emissions over time. What is the next level?
Me: Well, the next level is reporting your emissions (and emission reductions) under a voluntary framework such as US DOE Voluntary 1605(b) or California Climate Registry. The main difference is usually the inclusion of outside verification/certification of annual emission reports and public reporting on the registry.

Him/Her: What is the advantage of public reporting?
Me: Early voluntary actions may have real financial benefits under a future Cap & Trade emission trading program. California Climate Registry (CCAR) and the Regional Greenhouse Gas Initiative (RGGI) both allude to the potential for early actors to receive early reduction credits that could be traded with regular allowances when the two programs begin trading in 2012 and 2009, respectively.

Him/Her: How much could these early action be worth?
Me: That's actually level 3, which is trading the assets that you create by voluntarily reporting and reducing your emissions. The answer to that is somewhere between $1.50 - $15.00 per ton. The dollar value depends on how robust your emission reduction units are. These are things a carbon risk management firm should help you define. Things like measurement, verification, and motives help determine how valuable your early actions are. The highest level would be an emission reduction project that could qualify as a CDM/JI (Clean Development Mechanism/Joint Implementation). These would be assets certified under the Kyoto Protocol to be traded under that mechanism. The average Verified Emission Reductions (VER) project is current going for around $3.75/ton. (metric ton that is)

Him/Her: Ok, thanks for the info. Maybe next time we can talk more specifically about the voluntary reporting programs you'd mention.
Me: Absolutely, I look forward to it.

Conversations With Corporate Decision Makers #2 Carbon Footprint

So, you're interested in carbon footprint? Here's how it usually goes.

Him/Her: So, with a name like Carbontrader you must be the guy to talk to about our "Carbon Footprint".
Me: Well, I did learn from a Londoner...

Him/Her: Ok, so we've heard alot about being carbon neutral and its our understanding that getting our carbon footprint done is the first step towards it.
Me: Precisely. Another thing to consider is that your Green Power (REC) purchase will actually cause your footprint to immediately require a smaller shoe.

Him/Her: I assume that was an attempt at humor and I'll ignore it.
Me: Well, yes. A certain modicum of levity never hurts in my opinion. But I digress.

Him/Her: Ok, so what do you need from me to make this carbon footprint happen?
Me: First we need your electricity bills for the past year. For 95% of businesses emissions arising indirectly from purchased grid generated electricity, steam, and chilled water are the largest factor in a carbon footprint.

Him/Her: Utility bills. Check.
Me: Next, if you generate electricity or steam onsite we will need your fuel consumption records.

Him/Her: Ok, that shouldn't be a problem...we purchase our natural gas from the same provider that we purchase electricty from.
Me: Next, mobile sources. Company cars. We'll need fuel consumption records, but if you don't have those we can work with the make/model and mileage travelled.

Him/Her: Okay, whats next.
Me: That's it. For most companies that's all we need. Utilities, manufacturing companies, companies that have distributed generation, and companies with significant refrigeration appliances will need more detailed analysis. However, most carbon risk companies can handle the various special cases.

Him/Her: How long will this process take and what does it entail?
Me: For most companies it will require one or two visits to corporate headquarters. Carbon emission estimates should be turned around with in a few weeks.

Him/Her: What are the added values?
Me: A carbon risk firm should help you develop a carbon risk managment program with a formal reporting process. They should also help you understand how your company might be affected by potential state or federal carbon dioxide regulations in the future and how voluntary reporting now under CCAR, US DOE 1605b, or RGGI might benefit from an experience or financial standpoint.

Him/Her: Anything else?
Me: Yes, they should be able to provide you options for reducing your footprint by providing pricing for various types of renewable energy (RECs) and carbon offsets (VERs, CERs, EUAs).

Me: Oh, and energy efficiency consulting. They should be able to refer you to a consultant for managing energy in an existing facility or an sustainable architect that can help you build new "GREEN" buildings.

Me: Oh, one more thing. They should be able to help you quantify and monetize any early carbon emission reduction projects or efforts that you make. Reducing emissions now will very likely have monetary value under a future US Cap & Trade scheme.

Him/Her: Ok, well. I think we are ready to go ahead get our carbon footprint done. So, what should I google?
Me: Try, carbon risk solutions. That should get you a list of companies that can help you define your risk and get you to "Carbon Neutral".

Him/Her: Great, appreciate the help. Next time, can we talk about Carbon Offsets?
Me: You got it.

Conversations with Corporate Decision Makers: #1 Green Power

This is how it usually goes.

Him/her: Hi Mr. Carbontrader thanks for meeting with me today.
Me: No problem Fortune 500 Decision Maker.

Him/her: I have some questions today that pertain to our environmental stewardship goals and carbon risk in general and I hope can help.
Me: Fire away.

Him/her: So, first of all we are looking at purchasing renewable energy for our corporate headquarters and we've called our local utility. They offer "Green Power" for an additional 2 cents per kilowatt hour. That's pretty good right, its just 2 cents.
Me: No, that's awful. As a matter of fact its insulting that they would charge you that much considering that you are trying to make a socially responsible decision.

Him/her: What do you mean? How much does that come out to in dollars per year?
Me: Well, lets do some quick math. Do you know how many kWh you use per year at your facility?

Him/her: Well, I do have that information somewhere, but our facilities manager pretty much handles that.
Me: Ok, in lieu of that number we can make an estimate using information you should know. Answer these questions:
1. How many square feet does your facility occupy?
2. What type of use is it? (Educational, office space, grocery, manufacturing,
religious use,warehouse,etc.)

Him/her: Let's say 100,000 square feet and it happens to be office space
Me: Okay, so all we need to do is multiply your square footage times your median electical intensity. This number generally ranges between 4 and 50 kWh. A warehouse is at the low end and a grocery store with its isles of refrigeration is nearer to the high end. The average office space is usually around 8.5 kWh/sq.ft/year. So, 100,000 x 8.5 = 850,000 kWh per year.

Him/her: Okay, that sounds about right.
Me: Now, take that value and multiply it times $.02/kWh to get a green power price tag of approx. $17,000. Now, don't forget that is an annual cost.

Him/her: That's not bad. We don't really have a choice though because we dont want to switch to another provider.
Me: You dont need to switch electricity power providers in order for your power to be GREEN.

Him/her: Really, how is that possible.
Me: Well, when you buy Green Power from your utility or ESCO you are really buying two separate things. 1) Power and 2) Green.

Him/her: Okay, I think I get it. The power is just the regular electricity that I have been buying and the "Green" is a Renewable Energy Certificate (REC) which represents the renewable attributes that every 1 MWh (1000 kWh) of energy produced by a renewable generator is tagged with.
Me: That's correct.

Him/her: So, what you're telling me is that my current provider is selling me electricity for about $.06/kWh and RECs to go along with that electricity for $.02/kWh in order to make it Green.
Me: That's correct. That's using the average electricty rate for the city of Chicago. In areas of higher electricty consumption rates, such as LA, NY, and Texas you could be looking at closer to $.12/kWh.

Him/her: Well, for Chicago that means that we're paying a 33% premium to go green.
Me: You got it.

Him/her: So, what is your solution?
Me: I can recommend a handful of Green Power/Carbon Trading companies that can deliver the RECs to make your current electricity GREEN, for 10-20% of the cost that your utility is offering.

Him/her: So, we continue buying the power from our current provider and we buy the RECs from these Green Power/Carbon Trading companies?
Me: That's correct.

Him/her: Okay, what is the cost.
Me: Well, I wouldn't pay more than $.004/kWh. So, instead of 2 cents you can get the same greeness from a company that specializes in RECs and carbon for less than half of one cent.

Him/her: Interesting. So, looking back at my consumption of 850,000 kWh per year, I could cut my green power cost from $17,000 to $3,400.
Me: That's right and if you have multiple facilities I happen to know that you can get Green Power RECs for even less than that when you buy in bulk. Try $.002/kWh.

Him/her: So, if I have 10 facilities that all need Green Power I could buy in bulk and for the same $17,000 that I thought was a good deal buying from my local provider - I could buy RECs for 10 of my facilities and make them 100% Green Powered????
Me: Precisely.

Him/her: Well, Carbontrader you've been very helpful. I'm going to google REC marketers and see who pops up!
Me: Glad I could help. Next time, we can talk about how to read a REC contract to make sure you're getting the best bang for your buck and also what government programs can help you capitalize on your environmental stewardship purchase.

Don't choose renewables?

I just had to quickly share this little tidbit of inadvertant greenwashing with all of you. All of you being the very few greenies that actually sift through my bucket of word vomit. Thanks by the way. So, I was speaking with an energy consultant contact of mine in New York. He's a savvy industry guy and has been involved with large REC procurement deals since 2004. He pointed out something to me about a certain REC marketer that I'll choose not to allude to. He said that when they sell RECs they calculate the amount of carbon offset by the purchase by using the buyers local grid emission factor. So, this would suggest that living in West Virginia (a highly coal intensive state) would give you the opportunity to offset more carbon by purchasing RECs. Excuse me while I LOL. The logic this company (and most of the industry) uses to arrive in this remote locale is that when you buy a REC you displace your actual electricity usage with renewable energy. Now, this is possible - but not likely. Certainly not if you buy their "Nationwide" product. Nationwide means it can be sold to anyone in the nation and could come from anywhere in the nation. So, you could live in West Virginia and buy a "nationwide wind" product generated in Washington state. The carbon you are offsetting with this purchase is not the nearly 2 lbs/kWh that is the average in West Virginia, but the .35 lbs/kWh that is the average in Washington state. This is because you are displacing grid average generation IN WASHINGTON! So, on a dollars per ton of carbon dioxide offset or displaced if you pay $4.00/MWh for the REC thinking that you're offsetting 2000 lbs you believe that your paying about $4.40/tonne. In reality you have to buy 6 RECs to offset one tonne. That's $24 per tonne!!! So, if you have a 100,000 square foot facility with an electrical intensity of an average office space (say 10 kWh/sq.ft/yr) you probably consume about 1,000 MWh of electricity per year. Now, if you live in West Virginia that translates to roughly 1,000 tonnes of CO2. When you spend $4,000 to buy those 1,000 Washington RECs to make your operation "carbon neutral" you're actually falling considerably short. The carbon neutrality that you thought you were buying would actually cost $24,000 if the proper emission factors were taken into consideration. The moral of the story is - REC marketers know about electricity - but very little about CO2!!

Arbitrage This...

January 25th 11:41Am Chicago, IL Sunny & Cold

I recently spoke with one of the largest corporate REC purchasers in the US for 2006. He told me that for his purchase he didn't really take into consideration the CO2E displaced by the purchase. As I said in my last blog; I'd like to quickly discuss a common error made when purchasing green power (RECs). The assumption is that the lowest cost/MWh is the best deal for a nationwide product. This idea is also coupled with the preference for wind and small hydro. Most corporate buyers like the idea of solar as well, but when they see the price tag they make like a first time high end car buyer and slowly drift away from any purchase. However, a common approach is to designate 1% of the purchase to consist of solar RECs. As for pricing. I'm hearing that most corporate purchases are for wind and are priced between $3.50 & $4.50/MWh. That's not bad. Now, biomass is usually $0.25 - $0.35 less expensive. LFG or biogas can be even less than that. Small hydro is a crap shoot because you generally find it in small clumps. Because its small. Which, if you have the right connections can mean that you can get it quite cheaply.

Now, its important to understand that when you are buying a REC, unless you are doing it to support the local renewable utility provider or energy independence, you are probably doing it to support climatechangeglobalwarmingearthdaygreensustainablemotherearth. You're doing for the worldwide environmental benefits. If that is the case; then you should be considering the CO2e emission displacement factor associated with the purchase. This is essentially how much of a difference the marginal MWh that you are purchasing is making to the grand scheme of things. The GHG protocol and EPA generally suggest that NERC subregion or power pool be used to determine the current grid mix of your facility level consumption of power. This can be even further pinpointed if your utility (like mine; Com Ed) publishses its actual generation mix. This is usually organized by percentage of type of generation (coal, nuclear, natural gas, renewables, etc). That mix translates into an average lbs CO2/kWh value. The average emission factor in the United States is around 1.5 lbs/kWh as of the most recent EPA eGrid report (2004 data - released 12/06). That translates to .679 metric tonnes per MWh of electricity consumption. So, the average nationwide REC displaces about .679 tonnes of CO2.

Now, the last price of a tonne of carbon in Europe (an EUA) was right around 15 Euro (I cant find the EURO text symbol). EUH07 last trade was $1.3007. So, 2008 vintage Co2e was worth a whopping $19.51. So, initally anyone who knows anything about trading and arbitrage....which guest lecturer Wikipedia will quickly explain:

"In economics, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, a risk-free profit. A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives and currencies."

Thank you Wikky. So, 1 MWh of average wind generation in the United States displaces .679 tonnes of carbon (there are more complications that I wont get into yet, frankly because I'm not your consultant....yet) Wind is priced around $3.50. So, .679 tonnes divided by $3.50/MWh comes to $5.15 per tonne of CO2 displaced.

Now, like I said...this is a complicated subject but.....$19.51 - $5.15 = $14.36. I think the guys at GE Financial Services have read that little blurb on Wikipedia, huh? Maybe thats why they're buying up as much wind as they can get their hands on. Until next time, you better check your tonnage before you purchase your RECs.

RE: Sustainablerenewableenergyclimatechangeglobalwarming

Depending on your level of interest in sustainablerenewableenergyclimatechangeglobalwarming; the big story today was either the Oscar nomination for Grouchy Al or the AWEA report on the increase in wind capacity. One highlights the pop culture transformation that is occuring in the sustainablerenewableenergyclimatechangeglobalwarming space and the other signals..... well nothing really.

The former is certainly an exciting development and frankly couldn't happen to a more deserving guy. (I still think he's a bit grouchy; but I guess I would be too if small print prevented me from leading the free world)

Now, the latter means the more money is flowing out of fossil fuel energy and into renewables and that is a good thing. However, there is an irony. The irony is that the majority of the capacity is being built in the strangest places. GE, Xcel, John Deere, our friends at Babcock & Brown and countless other investors are racing to beat the potential expiration of the renewables production tax credit on 12/31/07 by building wind farms in........WINDY LOCALES! Now, a smart investor wants to get the most GWh for his buck. It costs about 1-2 M for every MW of capacity. The key is build where the wind blows the highest percentage of the hours per year. Hello, West Texas. The wind blows about 28% of the time in cowboy country. That amounts to 2452.8 hours/year of generation at lets say $75/MWh (+another $5/MW capacity) = $196,225 per year. So, roughly you're looking at a breakeven of about 7 years. Now, add in the $19/MWh that the Energy Policy Act of 2005 generously contributes to the generators and they're looking at about 5.5 years to breakeven.

Now, and if you've read this blog this long you're finally being rewarded with a little bit of (perhaps) valuable information. The Texas REC market is currently $3.20-$4.20/MWh. So, this means that the environmental benefit of the wind generation makes up roughly 3% of its value. Frankly, 3% is something to sneeze at. So, the fact that capacity is going in at record levels, doesn't necessarily mean that attitudes towards the environment are really changing. The key will be how much supply and demand there will be once the tax credits lapse and make wind generation a bit less profitable.

Another important ramification to consider with all this Texas based generation is going to be true environmental value of a MWh of renewable generation. It may not be what you think. So, my next intellectual flea market will discuss the true value of that REC you're thinking of purchasing. Until then; keep the winds of change blowing.

New Carbon Trading Blog

This carbon trading blog will examine and discuss carbon dioxide emissions regulation and trading in the United States. It will monitor the development of clean technology, as well as rewnewable energy and energy efficiency trading.

The main themes that will be discussed a few times each week are; Cap & Trade in the United States, Energy Efficiency Credits (EEC's), Renewable Energy Certificates (REC's), Green/Sustainable Building, LEED certification, Carbon Footprinting/Carbon Buildingprinting, and various other CO2 emission related subjects.

This blog is a source of valuable information for corporate executives interested in Carbon Risk Management, sustainable building developers, emissions traders, and other stakeholders. My sources will range from information garnered from industry relationships, to Greenbiz.com, to my own internet reading. I hope to see you here everyday. I think I will. Later on.

Carbon Footprint Offset Kyoto Protocol Carbon Trading Carbon Dioxide Emissions Offset ISO 14064 Voluntary Carbon Program Carbon Carbon Carbon Dioxide CO2 C02 Footprint Environmental Attributes REC's EEC's Green Tags Offset Planet Choice Renewable Energy