Some thoughts on domestic energy efficiency initiatives.

There has been considerable furore in the Australian papers recently as a case is being made that the  Government claims that domestic energy efficiency will not reduce Australia’s emissions - this is simply wrong. The claim is that any domestic energy efficiency outcome will immediately result in a corresponding increase in industrial or other emissions somewhere else, but still within the overall emissions cap. There is also the economic problem that domestic abatement is low in volume and high in cost, so the potential impact of an abatement sale is slight at best.

The solution to this problem in the NSW scheme is to credit the lifetime emission abatement for the project on the day that it is commissioned. This results in administrative efficiency, but means that the credits are non-fungible with any other scheme where abatement has to have occurred before any credits are issued for that abatement. I do not see this as an acceptable solution if one end result of the process is a freely functioning and liquid credit market.

There is a second (and there are possibly more) options. We have already presented that, in order to avoid double counting, an energy efficiency credit results in the cancellation of an emission permit, thus ensuring that the cap is unchanged. This, however, is the same result as is intended  in the Australian ETS - action to increase domestic energy efficiency does not reduce emissions below the planned cap. However, consider what would happen if each domestic energy efficiency credit was also rewarded with an additional one or more emission permits which were immediately bought back by the State and canceled. A domestic project would be approved and result in a verified abatement of (say) 10 tCO2-e. The project owner would receive:

1.       Abatement credit certificates to the value of 10 tCO2-e, balanced by cancellation of 10 emission permits.

2.       10 (or 20, or 30 …) emission permits which would be immediately purchased back by the State at the going rate and immediately cancelled.

The net effect is that the project owner receives 10 abatement credits to trade, cash to the value of the 10 (or more) emission permits cancelled and the ongoing benefit of reduced energy costs. From the perspective of the State, this is revenue foregone rather than new expenditure, as the cost for the energy efficiency permit cancellation program would be recovered from the normal auction process for abatement permits. The integrity of the scheme would be protected as the only tradeable credits would in fact be offset by a real reduction of that amount.

Of course, there would be some concern that this type of leveraged program would increase costs to industry by reducing the supply of permits too quickly. I would suggest that:

1.       The supply of domestic energy efficiency credits is unlikely to be excessive, as these projects are notoriously difficult to get going, in any case.

2.       The number of credits available for conversion using this process could be set as part of the program design, and managed using the project approval process.

3.       Different levels of leverage could be used to improve the uptake of different types of energy efficiency program - more leverage for more difficult implementations with a lower actual outcome, such as changes at the household level.

There has been considerable recent furore in the Australian press concerning whether to support Emissions Trading or a carbon tax. One example of the debate happens to surround the inclusion of energy efficiency. The Government is actively promoting domestic energy efficiency actions, and there is no doubt that energy efficiency is a critical part of any overall emission reduction plan. However, the fact is that under the present capped emission arrangements these essential individual actions will not reduce Australia’s carbon emissions, a fact the Government is carefully trying to avoid addressing. Put simply, with an Australian emission cap in place any emission reductions achieved as a result of domestic energy efficiency actions will immediately result in increased emissions somewhere else, and there will be no net reduction. There is also a fundamental economic efficiency problem, which is that domestic abatement is at the individual level low in volume and high in cost, and so any incentive from the sale of abatement credits is slight at best.

The NSW Greenhouse Gas Abatement Scheme solution to this dilemma is to credit the project with its anticipated lifetime emission abatement on the day that it is commissioned. This results in administrative efficiency and delivers a once-off front-loaded payment to the project, but also means that the credits are non-fungible with any other scheme where abatement has to have occurred before any credits. In this case, administrative simplicity is not the answer. Energy efficiency credits must be fungible with the credits issued by other schemes.

There is a second (and there are possibly more) option. It is already established that, in order to prevent double counting, issue of a project based domestic energy efficiency credit must also result in the cancellation of an emission permit, thus ensuring that the emission cap is unchanged. This, however, is the same result as is intended in the Australian ETS - action to increase domestic energy efficiency does not reduce overall emissions. However, consider what would happen if each domestic energy efficiency credit was also rewarded with an additional one or more emission permits which were immediately bought back by the scheme administrator and then canceled.

Effectively, each unit of domestic energy efficiency can be leveraged to any number of units of emission reduction. So, suppose a domestic project achieves one tonne of abatement. The project owner could receive:

1. A one tonne energy efficiency credit that could be sold or held by the project owner; and
2. An additional one or more emission permits which would then be purchased by the scheme administrator and immediately canceled.

The net effect is that the project owner receives one energy efficiency credit to trade, payment to the value of the emission permits issued, reacquired and then canceled and the ongoing benefit of reduced energy costs. From the perspective of the scheme administrator, payment for the canceled permits can be considered revenue foregone rather than new expenditure, as the cost of the emission permits canceled would be recovered from the normal auction process for emission permits. The integrity of the scheme would be protected as the only tradeable credits would in fact be offset by a real and verified reduction of that amount.

Could this result in acceleration of the rate at which the emission cap fell and the price of emission permits rose? Yes, but there are some simple measures which could be implemented that would effectively curtail any untoward changes in permit price:

1. The supply of domestic energy efficiency credits is unlikely to be excessive, as these projects are, in any case, notoriously difficult to implement.
2. The number of energy efficiency credits available for issue using this process in any period could be established as part of the program design, and managed using the project approval process.
3. The leverage factor can be varied over time - either for all projects in a particular period or following a depreciating schedule for individual projects
4. Although likely to create discussions about picking winners and losers, different levels of leverage could be used to improve the uptake of different types of energy efficiency program - more leverage for more difficult implementations with a lower actual outcome, such as changes at the household level.

Taken overall, there is no fundamental reason why innovative thinking cannot change the incentives behind domestic energy efficiency projects to the point where becoming more efficient is simply a good economic decision.

The last post, “The Presidential Candidates on Climate Change”, noted bi-partisan support for Cap and Trade legislation to be enacted in 2009 with a target of 60 or 80% reduction in GHG emissions by 2050. Beyond the cap a consensus exists also for the target to be reached with 15% offsets of CO2e from projects from overseas. What does that mean?  In Kyoto Protocol speak it would amount to either the US accepting the existing CDM process or allowing for offsets to be purchased from developing countries, which is effectively the same thing. Simon Dawes, contributing author explains the benefits of CDM and new methodologies called programmatic CDM, which will allow multiple projects to proceed. (Editor Karla Bell)

The first concept of a Clean Development Mechanism (CDM) was for developed countries to support the clean tech projects in developing countries through technology transfer and by the purchase of Certified Emission Removals (CERs) from implementation and operation of CDM projects. Developed countries and organisations can use CERs to offset some of their own emissions and comply with the obligations of emission trading schemes (such as the EU ETS) and with the Kyoto Protocol. There has been some criticism of the CDM, (greenwash, approval of projects that would have happened anyway), but the overwhelming sense of independent reviews is that the CDM has been a success - almost too successful for its own good.

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