Recently in Go-Media. The U.S position on Climate Change is overshadowing all other discussions in the lead up to Copenhagen, even at a conference I recently attended in Melbourne Australia - the 5^th Australia-New Zealand Climate Change & Business Conference, August 24-26^th. The Australian position requires global consensus for a greenhouse gas emissions target by 25% with a successful Post 2012 Agreement in place, but only 5% if that is not concluded. It all depends on what the U.S does in Copenhagen according to their minister Penny Wong

The European Union is the only group that will continue with strong commitments independent of the U.S position with a 20% reduction of greenhouse gases on 1990 levels by 2020 and 30% if a global agreement is concluded.

Katy Cecys of the Pew Centre on Climate Change,  stated that, the American Clean Energy and Security Act sets a target to reduce GHG emissions to 17% below 2005 levels by 2020, and 83% below by 2050. Offsets (project-based reductions) are limited to 2,000 million metric tons equivalent per year, or 30% of U.S. emissions reductions, split evenly between domestic and international offsets.

Ms Cecys said, “President Obama has the right to expand the international offsets flowing into the U.S. to 1.5 billion tons of offsets”. This means that due to the U.S position international offsets will continue under the Post 2012 agreement - it may not be called CDM in the new agreement.

In fact expanded offset provisions are anticipated as the U.S has also included provisions for an additional 5% set aside to import REDD credits (Reducing Emissions from Deforestation and Forest Degradation). There is also 1% set aside for adaptation and 1% set aside for Technology transfer.

Ms Cecys, raised two other issues, which will help the U.S Senate pass the Bill - the first is finding a strong advocate like Waxman in the House to drive the Bill through the Senate - the proposed champions are Senator Barbara Boxer or Senator John Kerry with a moderate republican yet to be nominated. The second point is that if the Senate fails to pass the legislation the U.S EPA can legislate as greenhouse gases have now been nominated as noxious substances, such that some fear the U.S EPA may rule even more strongly than the Senate. So there is a view the Senate will pass the Bill either before or after Copenhagen.

The Pew Centre assessment is that a fully ratified Post 2012 agreement is unlikely, rather an interim agreement with a post 2012 architecture in place including a range of developed world targets and indications of advanced developing levels of support, which will be developed in follow up meetings similar to the Marrakesh accords that followed the Kyoto Protocol.

Developing nations should take responsibility

The U.S and EU has stated all economies should take on commitments as China is set to be the largest greenhouse gas producer in the future.

The developing world response

Alex Wyatt from Climate Bridge, articulated the fundamental approach of the developing world. China and India believe that historical emissions are the way to allocate the burden of responsibility, as they did not create the problem. ” It is a human rights issue - they have the right to lift their people out of poverty,” said Wyatt. He indicated that the developed nations are asking countries to take on responsibilities for greenhouse gas reduction, in nations where 40% of the population live on less than $1.25 per day and 50% on less than $2 per day.

China is not doing nothing, it is quite proactive and recognises the problem of growing greenhouse emissions. It has adopted renewable energy targets of 20% by 2020 and of the $586 billion stimulus package to be spent in the next 2 years, $260 billion is going to the Clean Tech sector according to Wyatt.

A compromise position is one whereby, ‘emerging’ developing countries would ‘graduate’ in terms of their greenhouse gas reduction responsibility.  Some least developed countries (LDCs) like Bangladesh concur.  LDCs like Africa should not be treated on the same basis as the emerging nations of Brazil, Russia, India and China (BRIC nations). They should be assessed in the post-2012 period on the basis of their level of economic development; capacity to act; contribution to global GHG emissions per capita; GDP per capita; current OECD membership and mitigation potential.

Advanced developing countries measures could include national emission caps; intensity targets; energy efficiency commitments; and sectoral intensity targets. India, Saudi Arabia, and China are firmly against reclassification, rejecting the idea of differentiation based on contemporary levels of development, rather seeing differentiation based on historic responsibility.

National caps are unlikely, but the compromise could be that sector caps will be applied to the BRIC nations. If this occurred the Clean Development Mechanism (CDM) would remain outside the capped sectors in the BRIC nations but remain intact in the least developed countries like Africa, Bangladesh and the Pacific. ACES provisions allow for the purchase of international offsets (CDM) from developing countries in order for the U.S to reach its targets at the least cost of abatement.

A new program called REDD (Reducing Emissions from Deforestation and Forest Degradation) will assist the advanced developing countries move into the Post 2012 Agreement as well as adaptation measures, technology transfer, and finance. A REDD mechanism means developed countries pay developing countries to reduce deforestation, as de-forestation in the tropics represents about 50% of forest-related greenhouse gas emissions.  Brazil and Indonesia will be major beneficiaries of REDD credits. Brazil has also developed a large-scale hydro and bio-fuels industry such that sector caps are not taboo. It is moving towards the developed world position as a result.

The need for continued improvement in the offset market

The Conference also dealt with an evaluation of the Clean Development Mechanism (CDM) and a number of speakers like Michael Wiener of Perennia and Martijn Wilder of Baker and McKenzie  in Sydney recommended changes to the management of the CDM and advice for creating new mechanisms like NAMAs and REDD going forward under Copenhagen.

Martijn indicated that there had been a lot of criticism of the CDM but reminded everyone that it is the only instrument that drives private sector development and is the global carbon currency. The CDM rulebook has established the global benchmark for offset projects and has become the de-facto standard for all offset projects in the compliance and voluntary markets. The criticism is that the system is too complex with rules from the United Nations CDM Executive Board and in some cases additional host country rules as in China. Michael Wiener noted the lack of sustainability outcomes also. Complaints about the length of time the process takes from project origination to registration through validation and verification, including host country approvals were made by Mina Guli of Peony Capital, who finances CDM projects in China. “Two hundred days for a completeness check is too long - and that is just one part of the chain of getting a project through and a certified emsission reduction (CER) sold into the market’ she said. Additionally, in the first phase China dominated the CDM market with industrial gas projects such as HFC 23 and N20. On the plus side there are 1700 carbon project entrepreneurs in India.

The criticism of CDM by Wiener and Wilder can be summarised as too few countries participated; not a broad enough range of project types were represented; a backlog of projects to be assessed in the CDM pipe-line; a lack of auditors and consistency of decision-making; lack of sustainability outcomes and Post 2012 uncertainty.

Michael Wiener stated that all these criticisms are process issues that need to be solved as the Post 2012 agreement will be relying heavily on the international revised CDM and REDD offset market to reach global greenhouse gas reduction targets. As a founder of Carbonflow Corp, I think technology can assist these markets evolve and adapt, become more reliable faster and efficient, more transparent and user-friendly.

Recently published in Go Media

The United States’ resistance to ratify the Kyoto Protocol and the introduction of state and regional regulations rather than national carbon market have limited US activity in the global carbon market. However, the development of a voluntary carbon market in the US has occurred to compensate for the lack of a national, regulated carbon market. The US has been driving the global voluntary carbon market supplying the majority of voluntary carbon credits and providing the largest source of demand (Ecosystem market place, May 2009). Though the US voluntary carbon market has grown substantially to reach a transaction level of nearly 84 million tons in 2008, it accounted for only 3% of the transaction volume of EU Emissions Trading Scheme (EU ETS). In addition to the voluntary carbon market, a development of voluntary market for renewable energy as well as energy saving projects, indirectly supporting carbon emissions reduction, has taken place in the United States. While small on a global scale, these voluntary efforts have had a positive effect on carbon reduction and policy change in the United States.

(more…)

The carbon market in the United States has developed slowly due to government opposition to regulating greenhouse gas (GHG) emissions and resistance to endorse the Kyoto Protocol. As a result, the US emitted 17 percent more CO2 emissions in 2008 compared to 1990, according to the German Renewable Energy Industry Institute (IWR). In contrast, a carbon market has flourished in Europe leading to Germany reducing its CO2 emissions by 17 percent and the United Kingdom achieving a 6 percent reduction over the same time period. However, the lack of federal regulations for reducing greenhouse gas (GHG) emissions in the US has stimulated the development state-based and regional carbon markets as well as voluntary carbon markets.

Many US states have introduced indirect GHG emissions regulations, including renewable portfolio standards (RPS), financial incentives for the installation of renewable energy, energy efficiency standards, building energy codes, and other government mechanisms to accelerate the development of renewable energy and the reduction of energy consumption. However, only one regional effort has started executing a cap-and-trade program while one state and two other regional initiatives have introduced policies to develop a cap-and-trade program in the future.

California was the first state in the US to introduce direct regulations for GHG emissions reductions. In 2002, the Pavley Bill required the California Air Resource Board (CARB) to limit the amount of GHG, especially CO2, emitted in auto exhaust. While CARB did introduce the regulations called Assembly Bill (AB 1493) in 2004, the opposition by the automotive industry and the US Environmental Protection Agency (EPA) resulted in legal proceedings which prevented the implementation of the California legislation. Florida is the second state that introduced GHG regulations. In June 2008, the state enacted the Florida Climate Protection Act, which authorizes the Department of Environmental Protection to develop an electric-utility cap-and-trade program. Pending legislative approval of the final plan, the cap-and-trade program may begin operation as soon as January 1, 2010. (PEW, July 2009)

The first direct regional mandatory and market-based carbon cap and trade policy in the US, the Regional Greenhouse Gas Initiative (RGGI), was introduced in December 2005 by the governors of seven Northeastern and Mid-Atlantic states: Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont. Since then, three other states - Massachusetts, Rhode Island and Maryland - have joined the initiative which mandates capping the regional power sector’s CO2 emissions from 2009 through 2014 at the annual level of 188 million tons of CO2 and reducing it by 2.5% per year (total 10%) during the 2015-2018 period. The RGGI apportions CO2 allowances among signatory states based on historical emissions and allows signatory states to allocate 75% of their allowances as they choose and attribute the rest to consumer benefit programs. The signatory states are not likely to allocate the allowances to electric generators for free, but instead sell them in a regional auction recognizing that generators are likely to pass the cost of allowances onto consumers, whether the allowances are received for free or purchased. The allowance auctions, where electric power generators buy, sell and trade CO2 emissions allowances, are scheduled to take place on a quarterly basis, with the next auction scheduled for September 9, 2009. More than 110 million allowances have been auctioned raising a total of $366.5 million since the first RGGI auction in September of 2008. During the fourth auction in June 2009 the clearing price of CO2 allowances amounted to $3.32 per allowance for the 2009 - 2011 control period and $2.06 per CO2 ton of allowances for the 2012 - 2014 control period. These prices are much lower in comparison to the August 2009 EU Emission allowances spot prices of around EUR 14.4 or US$20.6 per CO2 ton (European Energy Exchange, 2009).

In February 2007, another regional initiative, the Western Climate Initiative (WCI), was introduced to design a market-based approach for reducing GHG emissions involving California, Arizona, New Mexico, Oregon and Washington. Since 2007, Montana and Utah, together with the Canadian provinces of British Columbia, Manitoba, Ontario and Quebec, have joined the initiative. The cornerstone of the WCI strategy is a regional cap-and-trade program to be fully implemented in 2015 covering almost 90 percent of the GHG emissions in WCI states and provinces. WCI partners intend to develop implementation details for the WCI regional cap-and-trade program throughout 2009 and 2010, start reporting greenhouse gas emissions in 2011 for emissions that occur in 2010, and introduce the first phase of the cap-and-trade program on January 1, 2012, with a three-year compliance period. The second phase of the program will begin in 2015, when the program will be expanded to include transportation fuels and residential, commercial and industrial fuels, in addition to electricity fuels covered in the first phase.

On November 15, 2007, Illinois, Iowa, Kansas, Michigan, Minnesota, Wisconsin, and Canadian Province of Manitoba established the Midwestern Regional Greenhouse Gas Reduction Accord, the third regional initiative addressing carbon emissions reductions in the USA and Canada. Under this agreement, they agreed to establish regional GHG reduction targets consistent with the 60 to 80 percent recommended by the Intergovernmental Panel on Climate Change, and develop a multi-sector cap-and-trade system to support meeting the targets. The Governors of Indiana, Ohio, South Dakota and Ontario joined the agreement as observers to participate in the development of the cap and trade system. In June, 2009 the advisory group finalized their recommendations and these are yet to be endorsed by individual state and providential leaders.

Currently the US Senate is reviewing the 2009 American Clean Energy and Security Act (ACES) which was passed by the US House of Representatives on June 26, 2009. If the Senate passes the ACES, also called the Waxman-Markey bill, what would happen to the state- and regional-based incentives?

The ACES proposes a cap and trade system with a ceiling on CO2 emissions at the 2005 level of 7,602 million metric tons, a reduction of 3% by 2012, 20% by 2020; 42% by 2030, and 83% by 2050. The national cap-and-trade system would oversee and regulate carbon allowances and offsets and penalize entities such electric utilities and other energy-heavy industries deriving at least 30 percent of their annual heat input from coal, petroleum coke, or any combination of these fuels (ACES, section 116, page104). The ACES also includes a national combined renewable electricity/energy efficiency standard (RES). Under the RES, large electricity suppliers would be required to invest in renewable energy and energy efficiency submitting federal renewable electricity and electricity savings credits to meet the RES goal for each compliance year (ACES, section 610, page 16).

The ACES takes a significant step forward towards the implementation of a new and stronger system for the development of a low-carbon economy by accelerating the installation of renewable energy, energy efficiency and low carbon technologies. It is likely that the majority of the state and regional carbon market programs will follow the national policies and programs, even though their requirements might be more environmentally rigorous. However, the state and regional programs offer a trial and innovation opportunity for federal policies and programs.

The next blog will discuss how a voluntary carbon market has developed in the US alongside the state and regional carbon markets for the reduction of GHG emissions.

Copy from my Column from Sustainable Industries July 2009

The American Clean Energy and Security Act, known as the Waxman-Markey bill, is “a rare opportunity to rise above parochial concerns to enact a bill with a profound national impact,”according to President Barack Obama. Republican critics are attacking Democrats as pro-business and anti-consumer and small business, which is ironic as the GOP is the “The Party of ExxonMobil (NYSE: XOM) and Peabody coal. “Using this tactic, the GOP wants to hold the line against the climate change bill, even though Duke Energy (NYSE: DUK), Johnson & Johnson (NYSE:NJN) and Shell Corp., along with other businesses and environmental organizations, are backing the bill. “I find it extremely amusing that suddenly the Democrats are being attacked for being too friendly to business creation,” Senator Barbara Boxer (D-Calif.), chairwoman of the Senate Environment and Public Works Committee, has said. The GOP argues that the Waxman-Markey bill would create higher energy costs for small business and consumers.

The real issue is the bill does not go far enough. It needs to create an “energy-efficiency and renewable energy set aside”-or green building carbon offset program-which rises above the regulatory approaches to energy efficiency. The Waxman-Markey bill provides for an economy-wide cap-and-trade program. The cap reduces greenhouse gas (GHG) emissions to 17% below 2005 levels by 2020, and 83% below by 2050. Offsets (project-based reductions) are limited to 2,000 million metric tons CO2 equivalent per year, or 30% of U.S. emission reductions, split evenly between domestic and international offsets. Domestic offsets do not include offsets from green buildings.

However, federal regulators are closely watching California, which is holding public hearings about AB32 implementation [see "California gives legs to AB32, Sustainable Industries, December 2007]. Members of the San Francisco Carbon Collaborative, including Carbonflow, have made significant progress with the regulators on getting an “energy efficiency set aside” into the discussion for possible inclusion in AB 32. This is an important first step, as California is known as a global leader in energy related legislation.

Simultaneously, at the recent CarbonExpo in Barcelona, many expressed interest in a Global International Protocol on Energy Efficiency and Renewable Energy set asides. Under the Waxman-Markey bill, energy efficiency would be achieved through a renewable electricity standard, a low-carbon fuel standard, and energy efficiency programs and standards for buildings, lighting, appliances, as well as vehicles and stationery sources and fuels.

These are all good initiatives. But according to Anne-Marie Warris, author of the Voluntary Carbon Standard, “the problem is that it relies on energy efficiency measures to be applied as the natural turnover of building stock takes place,which is estimated to take anything from 500 to a 1,000 years….which is time we simply do not have to prevent climate change,” Warris says.

Indirect sources of emissions

The Waxman-Markey bill relies on capping direct sources of emissions such as power plants and other smokestack industries. The bill’s definition of domestic offsets includes agriculture,landfill, waste-to-energy projects and biomass. But, it does not include green building offsets. The conventional wisdom is that cap-and trade should be restricted to direct industrial sources, because there are fewer of them and they are already heavily regulated. The bill follows the reliance on reductions from direct sources and forecloses on the possibility to achieve reductions from indirect sources, such as buildings that consume electricity despite their cost effectiveness.

“As a result, a valuable incentive for voluntary GHG reductions is lost, the low-hanging fruit of increasing energy efficiency in buildings goes unpicked, and industrial sources are required to shoulder a greater share of required GHG reductions, all of which increase the societal cost for addressing climate change and makes it less politically feasible to accomplish,” says Donald Simon, an attorney for Wendel, Rosen, Black and Dean.

Huge potential with existing buildings

Existing regulation leading to emissions reductions through “green” construction techniques usually comes in the form of building codes that reach only new construction and substantial renovations. Yet the majority of GHG in the built environment come from existing buildings. Current government incentives “are helpful but inadequate because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years,” Simon says. Domestic green building offsets would allow regulated industries to choose between reducing their own emissions or purchasing offsets from others who are able to reduce theirs at lower cost.

This would reduce the overall cost of climate change regulation for consumers because the market would exploit the lowest cost GHG reductions. Green building carbon credits would provide a large funding source that partially finances energy efficiency improvements. Poorer communities would benefit, as credits would fund energy efficient and renewable energy upgrades to existing building stock at a more accelerated rate than building codes currently create.

Making energy upgrades affordable

Moderate House Democrats and Republicans say that under a cap-and-trade program, ordinary people would incur higher energy costs over time because most have not upgraded their homes and small  businesses with energy-efficient technologies.

However, by allowing green building offsets into the federal cap-and-trade system, subsidies to poorer communities for increased energy costs would not be necessary. Their buildings would be retrofitted by the private sector using the dollars from green building offsets. Ultimately, these people would consume up to 50 percent less energy, with no net energy cost increase. Green building offsets would allow construction companies, project developers, engineers and architects to initiate energy efficiency and renewable energy building projects. And, revenue from the sale of the credits would fund projects and create new “green” jobs. Without this small inclusion to the Waxman-Markey bill, the Democrats may miss a chance to pass sweeping climate change legislation in 2009.

Over the past 10 years, US political leaders have played only a minor role in the global carbon offset market, changing their views about climate change and global warming with each new administration. Once a forerunner of the Climate Change Conference held in Kyoto, Japan in 1997, the United States failed to stay on the track, allowing the European countries to drive the development of a carbon offset market.

In the 1990s, the Clinton administration was involved in the crafting of the Kyoto Protocol, proposing the Joint Implementation Scheme to encourage international partnerships to enable low-cost reduction in greenhouse gas (GHG) emissions. Though the Clinton administration supported the Kyoto Protocol, it was not submitted for ratification after the Republican-led Senate made a statement that it would not ratify any treaty which did not include binding targets for developing nations expecting to be responsible for the majority of emissions in the future.

During the U.S. presidential campaign in 2000, George W. Bush promised to set mandatory targets for the reduction of CO2 emissions but expressed his reservation about participation in the Kyoto Protocol.(Dietrich, 2005) Later as president, he did not introduce domestic CO2 reduction targets. The U.S. also pulled out of the Kyoto Protocol discussions, with the Bush administration stating that the Protocol did not impose compliance on the countries responsible for the majority of CO2 emissions globally, and therefore, participation in such treaty could only cause serious harm to the US economy. The Bush administration also emphasized the importance of further scientific research about global warming, and proposed the use of alternative energy sources and “market-based incentives” such as a voluntary approach and energy-efficiency programs to reduce GHG emissions.(Dietrich, 2005)

The Kyoto Protocol required ratification by 50 nations in order for it to be recognized as a major international agreement according to United Nations. After Russia ratified the agreement in 2004, the Kyoto Protocol entered into force in 2005 without any reliance on US support. The Bush administration stayed isolated from the global debate on climate change throughout its eight-year term, continuing to favor an “aspirational” approach instead of mandatory CO2 caps to combat climate change. (Bohan, 2007).

President Barack Obama has been very outspoken about the importance of US involvement in climate change issues and the development of national regulations to reduce GHG emissions, lower energy consumption and accelerate the adoption of alternative energy technologies. However, Obama was not always supportive of the Kyoto Protocol. In 1998, as an Illinois senator, he voted for the bill condemning the Kyoto treaty and disapproving GHG emissions regulations in the state of Illinois to protect the coal industry, as Dilanian (2008) conveys in his article “Obama shifts stance on environmental issues”. The article states that Obama continued expressing his favoritism towards the coal industry during his election to the U.S. Senate in 2004 proclaiming that “there’s always going to be a role for coal” in Illinois. Dilanian (2008) points out that during Obama’s campaign for president, he addressed his opposition towards the bill by saying that the Kyoto treaty did not have “meaningful and achievable emissions targets,” and that he “did not believe that state agencies in Illinois should unilaterally take steps to implement a global policy on their own …”

However, in the U.S. Senate Barack Obama showed his favor towards environmental friendly policies by opposing then-President Bush’s air-pollution proposal for relaxing federal air pollution control restrictions. Although Obama continued sponsoring bills that provided coal subsidies, he shifted towards broader public interest the closer he moved towards the presidential elections.

In October 2007, Senator Barack Obama presented a plan to decrease the US dependence on foreign oil and fight global warming with a national “cap and trade” system across the economy to reduce greenhouse gas emissions including an auction system requiring power companies and other energy-intensive industries to pay for their pollution. He continued to encourage mandatory policies throughout his presidential campaign.

Thanks to growing global awareness of climate change issues and Obama’s emphasis on low carbon economy, the United States now is actively pursuing implementation of enforced reductions for GHG emissions and stronger energy efficiency legislation. As a result, the U.S. House of Representatives recently passed the Waxman-Markey bill (also known as American Clean Energy and Security Act - ACES) as a first step towards a regulated carbon market. The new legislation proposes national energy efficiency targets for residential and commercial buildings as well as a cap-and-trade mechanism mandating a reduction of 2005 emissions levels by 20% by 2020. The cap-and-trade system is set up to regulate carbon allowances and offsets for electric utilities and other energy-intensive industries. The Obama administration has repeatedly promised to pass federal legislation that would limit CO2 emissions in the United States, and continues to pressure the Senate to follow the House’s lead - emphasizing that the Waxman-Markey bill would create jobs, lower the cost of renewable energy and reduce oil dependency. In his speech at the first meeting of the Strategic Economic Dialogue between the United States and China on July 27, President Obama stressed the importance of the cooperation of world’s two largest emitters of greenhouse gases on climate issues.

The Kyoto Protocol expires in 2012. This December 2009, the UN and international government officials will meet in Copenhagen (UNFCCC COP15) to discuss the final details of a new climate agreement. The Obama administration plans to be actively involved in the negotiations of a new treaty trying to regain leadership in the international climate debate.  It remains to be seen whether Obama will act upon his words to become national and international leader in the fight against climate change.

The past resistance of the US government to establish national carbon reduction targets and to participate in the Kyoto Protocol has significantly slowed down the development of a carbon market in the United States. The next posting will describe how the carbon market has developed in the US in light of the resistance of the US government.

At a recent conference called, “Navigating the American Carbon World Conference and Trade Fair” sponsored by Point Carbon and IETA, PG & E,  April 1-3 2009. San Diego, California, there was a consistent general tone to the presentations on the importance of doing something about Climate Change, how little time we have to do it in and how the global community including the developing world must come together for a Post 2012 Climate Change Agreement in Copenhagen 2009. There was broad consensus from all speakers such as, Janet Pearce, Vice President, Markets and Business Strategy, Pew Center, Carl Pope, Executive Director Sierra Club, Nancy McFadden PG& E,  to firm targets for the next commitment period 2012-2017, followed by a series of rolling interim targets with a firm long term 2050 target for the U.S and the rest of the world.

It is expected that the U.S will join the Annex 1, first world Kyoto countries and take on an absolute Cap of greenhouse gas emission of 60-80% below 1990 levels by 2050. However, U.S presenters are very artful and one notices that U.S speakers never actually state that the U.S will ratify the Post 2012 Climate Change agreement without mentioning in the same breath, the need for a commitment to targets by the developing world.

Nancy Sutley, Whitehouse Council on Environmental Quality, raised the question of engaging with the BRIC (Brazil, Russia, India and China) nations on sector targets for developing countries. IETA (The international Emissions Trading Association) also discussed giving BRIC nations sector caps, in other words targets on specific industry sectors, which would expand over time to include more sectors. An example of a sector cap, which was often cited was the cement sector in China. Sector Caps for developing countries seems to be the compromise solution to allow the U.S. Congress to agree to an international agreement and not to be seen to be letting U.S competitors off the hook. My concern is what happens if the developing world does not agree to any kind of cap on emissions including sector caps, where does that leave the U.S?

Today, The Obama administration is convening a meeting of 17 major nations April 27-28 in Washington to begin talks on international action to address climate change. The talks are a prelude to the December UN meeting in Copenhagen to create a new global treaty on Climate Chane. These talks confirm the U.S position, which is to insist on greenhouse gas caps on developing countries. The meeting underway in Washington includes nations responsible for 75 percent of the world’s carbon emissions and includes Western European countries, Japan, South Korea, Brazil, China, India, Indonesia and Mexico. Michael Froman, Deputy National Security Adviser for International Economic Affairs, told journalists April 24 at the State Department’s Foreign Press Center, “We believe that it is critical that those 17 be able to make progress on the outstanding issues and reach political consensus if there is to be to a deal in Copenhagen”.

The issues under discussion in Washington this week were discussed at an IETA hosted side-event, “Making Markets Work for the Environment” at the Point Carbon Conference in San Diego earlier this month. IETA released a document on “Principles for a Post 2012 International Climate Change Agreement”, which captures the key debating points around the Post 2012 Climate Change Agreement under discussion in Washington.

IETA recommended that the parties agree to:

- Firm targets for the next commitment period 2012-2017 followed by a series of rolling interim targets with a firm long term 2050 target. (They did not specify the actual target).

- Longer commitment periods of 8 years not 5 to provide predicatability and certainty for business decisions.

- Support for differentiated targets for Annex 1 nations and new forms of commitment such as sectoral caps for BRIC nations. IETA stressed that criteria for differentiation needs to be clearly elaborated including ways in which non Annex 1, developing countries such as China and India can move to Annex 1 mid-period - a pathway for all nations to move to the higher standard of commitment.

- Develop long-term standardized global network of Inventories and Monitoring, Reporting and Verification systems (MRV). Indira Balkinson and Barbara TooleO’Neil of DNV raised the necessity for 3rd party independent validation at the Point Carbon conference. It is not practical diplomatically for the U.S EPA to audit overseas credits it is better to be done by independent validators.

IETA countered U.S criticism of Emissions Trading and the flexible mechanisms by stating the need to focus on the provision of a global carbon market that facilitates trading between private entities and Parties as a pillar of the next Climate Change Agreement.

IETA Supported:

- The existing Flexible Mechanisms: Emissions Trading, the Clean Development Mechanism (CDM), and Joint Implementation (JI), which has been the key to jump starting emission reduction activities as well as facilitating the flow of technology. (Currently, CDM allows for credits generated in a developing nation to be sold into a capped nation like the EU as a means to meet it’s cap). IETA supports continued access to CDM for developing countries without a sector cap or  for un-capped sectors, which would cover most developing countries and most sectors. CDM credits, (CERs) serve as a linkage between regional trading systems, a crucial function until a global direct linkage has occured.  Interestingly, Steven Messner of SAIC showed a slide that indicated without domestic or international CDM offsets, the price of carbon would double in the U.S., showing that purchasing CDM credits by the U.S. would reduce the cost of cutting carbon. U,S criticism of CDM is based on the notion that it involves transfer of U.S.D and technologies to developing countries like China, which is why the U.S argues for developing country caps.

- IETA indicated that a JI like mechanism, (trading between two capped nations) would become more important in a post 2012 international Climate Change Agreement as more countries would have caps.

-IETA also indicated that domestic offset projects will become a complement to Cap and Trade regimes, as they promote emission reduction within those Parties economies. There are numerous opportunities to enhance the use of domestic offsets alongside more traditional cap and trade mechanisms, particularly in areas such as forestry, agriculture, land-use change and waste. The discussion indicated that some European countries that did not allow domestic offsets in the 1st commitment period such as France and Germany were interested in domestic offsets to drive private sector activity, jobs and technology uptake.

- IETA supported the transferability of the existing carbon market projects in process through the CDM/JI to domestic offsets as new nations formally adopt emission limitations.

I found myself agreeing with the points made by IETA and suggest further reading of their material. In summary they are arguing for all existing and future market mechanisms, which have the explicit intention of attracting private sector investment to create a secure investment environment with clear rules for participation and crediting and to use the market to create the most effective way for the private sector to participate in the Post 2012 Climate Change Agreement.

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.

The San Francisco Carbon Collaborative was coordinate by David Pascal, Clean Technology and Green Business advocate for the City of San Francisco. The meeting was hosted by law firm Morrison and Forester on the 18th and 19th of February 2009. David Pascal thanked everyone who participated for “their enthusiasm and willingness to explore the possibility of anchoring the US environmental markets here in San Francisco”.

David has said that the City of San Francisco has a number of advantages including, “our legacy as a financial and IT centre, our position as an environmental leader, and our economic linkages with China and the rest of the Pacific Rim”. This is a case of think global and act local. San Francisco can host the carbon market players throughout the whole chain of carbon credit creation to trade credits within California, the United States and the rest of the world. Others are thinking along these lines too like Bill Joy, partner at KP who is advocating that the skills of Silicon Valley be put at the disposal of Carbon Valley. Bill Joy was Chief Scientist of Sun Microsystems.

Over 60 companies attended the afternoon and following morning including global carbon credit auditor - DNV, global carbon brokers - CantorCO2e, Evolution Markets, global carbon project developers - EcoSecurities, First Climate, California green building companies - Studley, California Green attorneys - Morrison and Foerster, Binghams, Gordon and Rees, U.S and California policy makers and registries - Center for Resource Solutions, UC Berkeley, CARB, Climate Registry, software providers - APX, Carbonflow, U.S. Carbon and Clean Tech investors Clean Pacific, Jane Capital, Vantage Point and Tech companies like Fluid Trade, Media - San Francisco Business Times, Climatebiz and Sustainable Industries. Additionally, local businessman Barry Hoffner of HFS is interested to set up a San Francisco Carbon Exchange.

This was the first meeting of the Carbon Collaborative with future meetings planned in March. David noted that, “The impact of the policy position of the U.S government and the California response to that took up much discussion” Furthermore he said that San Francisco must also develop a Consensus Opinion on AB32 the California Emissions Trading Scheme.

The most important discussion agenda item is the San Francisco City policy position and how it fits into the national U.S Cap and Trade, AB32 and finally to be truly global the international revised Kyoto Protocol to be undertaken in Copenhagen December 2009. The policy position will make or break the notion of San Francisco as an anchor for the carbon markets. This is the nexus between policy and innovation - it is just this juncture, which either leads to green business activity or not.  If for example a carbon tax was to be put forward it would not lead to the same outcome. A tax on carbon polluting industries does not lead to much change in behaviour - it is inelastic. Double your cost of electricity or petrol prices for your car - and you still do not go out and buy photovoltaic cells for your house or a new Toyota Prius, do you? You just pay the tax! Also a carbon tax is not in line with global positions on ways to combat Climate Change. See this blog on the Carbonflow Carbon Game, which showed that as long as you auction the carbon permits,(not grandfather them, meaning give away the permits, the criticism of the European Emissions Trading scheme),  Emissions Trading will lead to a move away from coal fired power stations.  Interestingly, the Bay Area emitters like PG & E did not attend. David indicated that, based on discussions with those parties prior to our meetings, they expressed interest, but appear to be taking a “wait and see” approach to our initial moves. Once a clearer picture of our coordinated activities begins to emerge, San Francisco city will re-approach them with more specific opportunities for engagement.

Also for future meetings, there was mention of reaching out to key SF-based organizations that represent carbon interests in China and India which were also not present. It appears, these organizations may be looking to the US to solidify their standards and practices before they would participate in any new, SF-based market initiative. The U.S position on the post Kyoto framework will have a great impact on Indian and Chinese policy. Will they accept a cap on their emissions or a sliding cap perhaps - a bit less than the industrialized world?

The City of San Francisco has secured a place to meet regularly and continue formulating policy responses and projects that the city can undertake.

• Policy and markets - 3/19 @ 8:30am
• Communications - 3/18 @ 8:30am
• On-going collaboration - 3/26 @ 5pm
• Capacity building - 3/25 @ 5pm
• Energy Efficiency - 3 / 30 @ 2pm

The working group on Energy Efficiency and Agricultural Offsets in the U.S Cap and Trade has been included at my request in order to maximize green business activity, create more green jobs, greater transparency and auditability. According to a study, Defining, Estimating and Forecasting the Renewable and Energy Efficiency Industries in the U.S and Colorado by The American Solar Energy Society, Boulder, Colorado, and published on Climatebiz it found that with appropriate federal and state government policies, Renewable Energy (RE) and Energy Efficiency (EE) could by 2030 generate over 37 million jobs per year in the U.S. The study goes onto report that the stronger the policy settings the stronger the job creation potential from RE and EE”. The inclusion of Rnewable Energy (RE) and Energy Efficiency (EE) in the U.S Cap and Trade will unleash the private sector to create the green businesses of the future around transport, energy efficiency and agriculture.

The consequence of good policy will be all the myriad of activities people want to see including a diverse range of companies prospering in a Carbon Valley hub of entrepreneurs, investors, policy people, educationalist and technology companies, which would support a  Carbon Valley Carbon Exchange.

To assist this process a web portal communication center or clearing house will be established by the City of San Francisco with education material focusing on carbon capacity building and communications. The Web portal clearing house would include the following content: Early Carbon Action / Showcase projects / Best practices / ANSI standards /Carbon policy / FAQ’s / Sharing of baseline data  / Summit - case studies (national and international), conferences / Website - city sponsored, blog, education, events, SF version of Open Carbon World / Cluster Building - incubators, think tanks, networking events/ Calendar of local events, local emission reduction projects / Use BC3 as network platform / Capital introductions.

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.