Clean Energy Legislation May Have to Wait Until Next Year

Although time may be running out to debate and pass a climate change bill before the end of the current legislative session, ending August 9^, the Senate met in hopes of finding some common ground to garner enough votes for passage. On June 29, 23 senators met at the White House to discuss possible legislative paths for energy and climate legislation. Realizing there are not enough votes to pass the recently proposes “American Power Act,” Senators Kerry and Lieberman offered concessions in hopes of getting some needed Republican support. Rather than a sector- by- sector economy wide approach to pricing carbon, it was proposed to scale it back to include only power generation utilities and omit the transportation and manufacturing sectors. Power plants account for approximately 40% of the greenhouse gases in the U.S. Whether or not the plan would include cap-and-trade trading to price carbon, the Administration feels strongly that a price must be put on carbon to move the nation toward clean energy development. The White House will have to move quickly if it hopes to have any chance of passage before the world meets in Cancun in late November to negotiate a successor agreement to the Kyoto protocol expiring in 2012. With mid-term elections this fall, legislators already face a full agenda when they return in September.

The American Power Act

The long-awaited Senate bill limiting carbon emissions, “The American Power Act,” was unveiled on May 12.  As expected, the bill mandates carbon emission reductions of 17 percent by 2020 and 83 percent by 2050 as compared to 2005. Utilities would be required to meet a cap in 2012, heavy industries in 2016, and importers and producers of transportation fuels at a later date. Those emitting in excess of 25,000 tons of carbon annually will be required to comply. It is estimated that 7,500 U.S. factories and power plants would be subject to carbon caps. Agricultural crop and livestock producers would be exempt from the carbon caps, but agricultural processing and manufacturing facilities would be affected. A carbon tariff would be imposed to protect energy intensive industries if the products come from countries that do not control carbon emissions.  

Emitters would be required to surrender to regulators, on an annual basis, carbon credits equal to their emissions. A combination of allowances and offsets would be offered. Allowances would be made available through government auction with offsets generated from carbon sequestration projects. Annually, 2 billion offsets will be made available to the market with at least 75 percent of them originating in the U.S.  An exchange would be established with standardized contracts where carbon credits can be traded. Carbon credit prices would be collared at $12 to $25 per ton with annual increases indexed to inflation.  Access to allowance auctions and exchange trading privileges would be limited with off-exchange trading and over- the- counter (OTC) derivatives not allowed.

Producers will be eligible to earn carbon credit offsets by implementing soil carbon sequestration practices. The USDA would be given the responsibility to monitor land idling practices, such as afforestation projects, and place acreage restrictions if it is determined there is a serious adverse effect on U.S. agriculture production and prices.

Prior to releasing the bill there were discussions held with affected industries and their input was used to create the final draft. Whether or not the Senate gets an opportunity to debate the bill before later in the year will depend on what happens with financial reform and immigration legislation. The outcome of the next major world climate change meeting scheduled for November in Mexico will depend on how much progress is made here in the U.S.

New Senate Climate Change Bill is Forthcoming

 

The U.S. Senate is getting close to introducing a new climate change bill with the prospect of putting it to a vote by the end of April. Senators John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I/D-Conn.) met with industry groups this week with an outline of a compromised bill that would require U.S. industries to cut emissions of carbon dioxide and other greenhouse gases associated with global warming. With work still to be done, the approach differs from the legislation approved by the House of Representatives in June, and by the Senate Environment and Public Works Committee in November. It would set a mandatory cap on carbon emissions but would apply different sets of regulations to different polluting sectors. Some emission sources would have to deal with a market based cap-and-trade system that would require the purchase of pollution allowances while others would face a straight fee or tax based upon the market value of carbon emissions. Consumers would be rebated half the revenue generated from selling the allowances. There would an economy-wide cap that would begin in 2012, with the target of reducing carbon emissions 17 percent by 2020 and 80 percent by 2050 based upon 2005 levels. Electric utilities and the manufacturing sector would have separate caps with a 2016 start date for manufacturers. Transportation fuels would be taxed at the pump. A “carbon tariff” would be applied to imported goods from countries that do not regulate carbon emissions. Carbon prices would be kept in the range of $10 to $30 per ton initially by adjusting the number of allocations available to the market. Overtime, values would rise to meet reduction goals. The legislation is expected to be released by the end of March.

U.S. Carbon Emissions Debate Continues

The White House is sending mixed singles with regards to climate change legislation. In the President’s state of the union address on January 28, the words carbon and cap-and-trade were not included. Obama’s new budget proposal did not include the $646 billion of projected revenue from 2012 to 2019 that was included in last year’s proposal. However, on Fedruary 1, the President called for Congress to endorse a “comprehensive market-based policy” to fight climate change. With the unpopular nature of cap-and-trade legislation, the budget office suggested businesses would have flexibility to find least-costly ways of cutting emissions, such as investments in offsets at farms or in clean eneregy project offsets from other countries similar to what the Kyoto Protocol offers today. There have been other alternatives circulating Washington D.C. that range from a simple carbon tax to cap-and–trade proposals that have a narrower scope than the current House and Senate versions. Any revenue generated would be rebated back to consumers. Without a program to reduce carbon emissions, the U.S. would have a difficult time meeting the commitment made by President Obama in Copenhagen. Fifty-five countries, which account for almost 80% of world-wide greenhouse gas emissions, have pledged their goals for fighting climate change under the January deadline set by the Copehagen Accord in December.

After Copenhagen, Carbon Trading Volume

With the climate change talks in Copenhagen yielding little in the way of legally binding global greenhouse gas emission reductions, there are nations around the world that are continuing with their emission reduction initiatives. Brazil and South Korea are moving forward with plans to reduce their carbon emissions by 39 and 30 percent, respectively, by 2020 versus 1990 levels. South Korea is launching a pilot scheme for emissions trading starting in January that is expected to eventually link up with the world carbon trading markets. Regional accords in the U.S. are moving forward with proposed legislation to reduce carbon emissions through taxes and trading platforms. Architects of these agreements were hoping the talks in Copenhagen would lend some structural support to their efforts. Although in some cases it may easier to design a program that is not limited by a global protocol, it may make it more difficult in the future to adapt if a global agreement is reached.    

According to trade data the global carbon market increased 68 percent last year from 2008 levels to 8.2 billion metric tons of carbon traded. The market value, however, remained unchanged with the decline in carbon values as a result of the global economic slowdown. Increased trading activity in the Europe Union’s Emissions Trading Scheme accounted for the largest share of carbon trading. The global market increased $3 billion from 2008 reaching $136 billion in 2009. The weighted-average of world carbon prices for 2009 was $16.40 per metric ton vs. $27.15 in 2008.

Copenhagen in review

Two years of U.N. climate talks that lead up to the meetings in Copenhagen culminated last week without a legally binding deal on cutting carbon emissions. World leaders tried to rescue a global climate agreement on Friday but the failure of leading greenhouse gas emitters China and the United States to come up with new proposals blocked chances of an ambitious deal. There was a broad agreement on limiting the rise of global temperature below 2 degree Celsius from pre-industrial era levels. There was also agreement on establishing a global fund of $30 billion in the next three years to help poor countries cope with climate change. The fund would be scaled up to $100 billion a year in aid by 2020. Rich nations agreed to reduce their carbon emissions 80% by 2050 but were not willing to include mid-term targets. A major issue that arose was China and India’s reluctances to allow outside verification of their proposed reductions. Although there was progress made on this issue it will require further negotiations to make it acceptable. The outlook for a legally binding agreement to replace the Kyoto protocol was less than optimistic going into the talks with the outcome at the low-end of expectations. With the Kyoto protocol scheduled to expire in 2012 the U.N. summit dropped a previous 2010 deadline for achieving a legally binding treaty. It is clear that there is much work to be done to bridge the divide between the developed, developing and under developed nations in dealing with greenhouse gas emissions. There are discussions to move up the scheduled December 2010 Mexico City Summit by six months to mid summer.

Copenhagen climate talks, carbon credit values

The first week of international climate talks in Copenhagen, Denmark pulled together the main elements of a global pact that 192 nations have been negotiating for two years. The participants spent the week laying out expectations for global green house gas reductions and financial commitments toward an annual $10 billion fund to help poor countries adapt to the effects of global warming. The money would help poorer countries protect their coasts, adjust crops threatened by drought, build water supplies and irrigation systems, preserve forests and move from fossil fuel to low-carbon energy systems such as solar and wind power. The draft agreement is less specific than other proposals and attempts to bridge the divide between rich and poor countries. It left the specifics to be negotiated next week by 110 heads of state, including President Barack Obama, Chinese Prime Minister Wen Jiabao and Russian President Dmitry Medvedev and most of Europe’s top leadership, who are due to arrive in the Danish capital next week. The final outcome of the negotiations will be heavily dependent upon what the U.S. brings to the table.

Other than a small spike in European carbon credit values going into the climate change meetings in Copenhagen the market remains on the defensive waiting for results of the international talks. While U.S. offset values have been trading at well under $1.00 per mton European offsets have been trading around the $19 per mton level with allowances trading close to $21 per mton.

Copenhagen expectations lessened, new futures contracts unveiled

Goals have been lessened for the upcoming meeting in Copenhagen, December 8-17, to negotiate a successor treaty replacing the Kyoto Protocol. The Kyoto Protocol is scheduled to expire at the end of 2012 and the 190 nations meeting in Copenhagen had hoped that an agreement could be reached that would define binding GHG reductions.

Rather, a consensus has emerged that a framework will be designed with specific language committing developed nations to emission reduction goals and text detailing aid for climate change adaption for poor countries. With the U.S. Senate’s decision to put off debate on a climate-change bill until next spring, the U.S. will not be in position to offer binding reductions at the convention. Although many nations are busy outlining their GHG reduction strategies, the world is waiting for a U.S. commitment before finalizing obligations. The market for carbon credits will remain soft until agreements are reached and the demand side of the market becomes better defined.

The Chicago Climate Exchange (CCX) released two new futures contracts on its Chicago Climate Futures Exchange (CCFE), separating project-based offsets from the allowance market. Project-based offsets come from sequestration and mitigation activities that either reduce or capture greenhouse gases. Allowances are pollution permits that members receive on an annual basis equal to their cap.

Having different futures contracts that represent both types of credits will more closely mirror the cash markets and assure participants what type of credit will be delivered against the contract. Project-based offsets have been trading at a premium to allowances, in anticipation they will be recognized under domestic and world protocols that are being negotiated. In the European market, which is more mature, the opposite is true where allowances are trading at a premium to offsets.

Interest in carbon sequestration grows

While elected officials in Washington continue to debate climate change legislation, soil carbon sequestration as an offset gains interest. Earlier this summer, the narrowly passed House bill recognized soil carbon which greenhouse gas emitters can apply toward potential mandatory reductions.

 Under the House bill, the demand side of the market for carbon credits, currently voluntary here in the U.S., would have a compulsory component with potential to increase the value of carbon offsets. Farm operators could earn and monetize credits, partially negating any increase in operating costs associated with the climate change legislation.

Just like storing grain to take advantage of higher prices in the future, carbon credits can be held to a later date for pricing once they have been recognized. In addition to the cash market for carbon credits, there is also a futures and option market similar to today’s grain and livestock markets.