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.

Renewable Energy seems to be one of the big winners in the U.S. Stimulus package. The American Recovery & Reinvestment Act of 2009, an economic stimulus package with tax and spending provisions totaling nearly $800 billion, was signed into law on February 17. The act contains a number of tax provisions that provide significant value to companies and individuals that are focused on producing renewable energy or reducing energy use through efficiency. By extending, modifying and enhancing several renewable energy and energy efficiency incentives, the stimulus package creates many opportunities for taxpayers to get paid for going green according to an article in Greener Buildings.

In Washington, The U.S. Interior Department said it has created a special task force to speed the development of renewable energy projects on federal lands. “More so than ever, with job losses continuing to mount, we need to steer the country onto a new energy path,” said Interior Secretary Ken Salazar.

The government is on the right path from the point of view of creating employment. 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,

“U.S. RE and EE in 2007, generated $1,045 billion in sales and created over 9 million jobs – including $10.3 billion in sales and over 91,000 jobs in Colorado. The U.S. RE and EE revenues represent substantially more than the combined 2007 sales of the three largest U.S. corporations - WalMart, ExxonMobil, and GM ($905 billion) before the melt-down. RE and EE are growing faster than the U.S. average and contain some of the most rapidly growing industries in the world, such as wind, photo-voltaics, fuel cells, recycling/re-manufacturing, and bio-fuels. The study further noted the importance of policy settings to the industry and said that, with appropriate federal and state government policies, RE and EE could by 2030 generate over 37 million jobs per year in the U.S. – including over 600,000 jobs in Colorado. The study goes onto report that the stronger the policy settings the stronger the job creation potential from RE and EE”.

Mr Salazar has said that, “We will assign a high priority to identifying renewable energy zones and completing the permitting and appropriate environmental review of transmission rights-of-way applications that are necessary to deliver renewable energy generation to consumers. We have to connect the sun of the deserts and the wind of the plains with the places where people live.” Furthermore, “the task force will identify specific zones on public lands where the department can act rapidly to create large-scale production of solar, wind, geothermal and biomass energy”.

I have a concern about this approach, which is that although creating large-scale renewable energy projects on government land, maybe more administratively easier, it may lead to local opposition to fields of solar collectors and wind farms. I think the application of this policy should be integrated into communities in a more subtle way.

I have suggested that rather than create renewable energy parks, the better concept is take an integrated approach and create entirely sustainable communities, which I described on this blog - “Convert the suburbs to Sustainable Communities and Bank the Credits”  - In this post I was also suggesting that energy efficiency, sustainable water and waste management be included in the mix of energy solutions such that whole communities could become entirely sustainable. Put another way it involves a move away from the monoculture approach to development and requires the adoption of strategies that mimic nature, based on bio-diversity.

On another blog on Multiple Crises, which concerns sustainable agriculture, I have drawn on the work of Dr Lietaer who takes up the notion of bio-diversity for the banking system. I am applying it to renewable energy systems and I believe that that the more diverse the renewable energy systems are the more resilient the community will be.

The conceptual breakthrough, which applies to all systems whether they be energy, financial or agricultural systems identified by Bernard Lietaer and his colleagues, “takes its evidence from balanced, structurally sound, and highly functioning eco-systems is that that all complex systems, including our energy, monetary and financial ones, become structurally unstable whenever efficiency is overemphasized at the expense of diversity, inter-connectivity and the crucial resilience they provide. The surprising systemic ‘a-ha’ insight is that sustainable vitality involves diversifying systems”.

The interior department is in a good position to do this as it manages one-fifth of the U.S. landmass and over 1.7 billion offshore acres. It needs to create diversity at the core of the sustainable communities it wishes to create and not make the same mistakes with the new renewable energy solutions that we made with the old ones.

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.

This post is a re-print in full from the Regional Greenhouse Gas Initiative (RGGI)

The Regional Greenhouse Gas Initiative new report released on the 4th of March shows that RGGI is working
The  Report Shows Solid Foundation for Emerging Carbon Market.

The report issued today by the ten Northeast and Mid-Atlantic states participating in the Regional Greenhouse Gas Initiative (RGGI) shows that the competitive process is working as intended in the secondary market for carbon dioxide (CO2) allowances. The report concludes that there is no evidence of anti-competitive conduct amongst participants, such as electric utility companies, commodity brokers, and financial speculators.

The “Report on the Secondary Market for RGGI CO2 Allowances,” which addresses the period from August 2008 to January 2009, was prepared by Potomac Economics, RGGI, Inc.’s independent market monitor.

Potomac’s other key findings include:

• Although trading volumes remain light compared to the number of allowances sold in auctions, the average volume of allowance futures trading grew from 155,000 allowances per day in September 2008 to 330,000 per day in January 2009.

• Despite continued fluctuations in market price, overall market volatility has declined over the period of study.

• A substantial number of firms (at least 25) have participated in the trading of standard futures and options contracts on public exchanges, which is a positive sign for the competitiveness of the secondary market at this early stage.

Potomac’s conclusions were based on the analysis of data reported to the Commodity Futures Trading Commission, the Chicago Climate Futures Exchange and other data.

“This report draws on the extensive expertise of Potomac Economics in monitoring electricity markets,” said Jonathan Schrag, executive director of RGGI, Inc. “It shows buyers and sellers of RGGI CO2
allowances, as well as the public, that an experienced market watchdog is in place.”

The complete Report on the Secondary Market for RGGI CO2 Allowances is available here:
www.rggi.org/docs/PE_Secondary_Market_Report_News_Release_FINAL.pdf

About the Regional Greenhouse Gas Initiative-The 10 Northeast and Mid-Atlantic states participating in RGGI have designed the first market-based, mandatory cap-and-trade program in the U.S. to reduce greenhouse gas emissions. The states have committed to cap and then reduce the amount of CO2 that power plants in their region are allowed to emit, limiting the region’s total contribution
to atmospheric greenhouse gas levels.

Under the RGGI process, the 10 participating states will stabilize power sector CO2 emissions at the capped level through 2014. The cap will then be reduced by 2.5 percent in each of the four years 2015 through 2018, for a total reduction of 10 percent. The 10 states participating in RGGI are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode
Island and Vermont.

For more information about RGGI, turn to: www.rggi.org

About the Regional Greenhouse Gas Initiative, Inc.

For Immediate Release - March 4, 2009
Contact: Emilee Pierce - 212-417-3179

Carbonflow CEO, Neal Dikeman developed the Carbon Trading Game, “to teach people how to better understand the nuances of Carbon Trading. The Carbon Trading Game, according to Richard Barber, CTO of Carbonflow is “a really good introduction to Carbon Trading - it is somewhat different to what you think it is going to be like. People run-away from coal-fired power stations very fast”. Mr Dikeman said that, “an interesting finding is that, price volatility by either the emitters or traders does not effect whether the Cap is met. If the Cap is an enforceable cap abatement of carbon dioxide (CO2) tends to happen whether people make profits or the price of carbon is high or not - ERGO the ENVIRONMENT WINS!

The Carbon Trading Game may well be the game that people need to play in order to understand how Carbon Trading actually works. This is particularly so as there is a debate going on in the U.S press about whether the Carbon Trading mechanisms, (New York Times March 1st 2009) should be maintained in the revised Kyoto Protocol to be reviewed in Copenhagen December 2009 by all nations of the world including the United States. The U.S is starting to criticize the market mechanisms, which were included in the original Kyoto Protocol at the behest of Bill Clinton in 1997. These markets mechanisms, which include CDM can be improved with software solutions like Carbonflow particularly suited to resolving issues like additionality and time to market, but not only. It would be unfortunate if the potential of  CDM was canceled out just as it is coming up to speed, simply because of a lack of awareness on the part of key U.S negotiators about solutions. It seems many do not understand how the Carbon Markets work.

Mr Dikeman says that, “the aim of the Game is to model how effectively the Cap and Trade Carbon Game can be at forcing and driving low carbon infrastructure change. It also shows how small changes in system design can have wide impacts on the cost of abating carbon, the price of carbon and who are the winners and losers. The Game shows the impact of uncertainties in carbon policies and markets have on the early changes in price and emitter behavior.

The rules are quite simple and only apply to the power sector. Other sectors could be added, however for the purposes of education the power sector is used, which happens to correspond to the current system in the North-East of the U.S, the Regional Greenhouse Gas Initiative (RGGI) and to the EU-Emissions Trading Scheme (EU-ETS).

THE RULES OF THE CARBON TRADING GAME

It is a 4 round game with an expanding cap in the power sector. The cap starts small and expands throughout the game.  Each round represents a commitment period 2012, 2017, 2022, 2027 of Kyoto Mark 1 and 11, where we auction more carbon permits per unit of power because the cap is expanding. Each round the number of credits auctioned is fewer 75%, 50%, 25%, 25%.

In the first round we allocate enough permits ahead of the auction to ensure an oversupply to run power plant and produce power. Each round we also auction off a random set of power plants coal, nuclear, gas, wind and hydro with different capacity factors. We auction of different fuels to run the power plants and then we auction of the carbon credits.

For example: One coal-fired power station and one supply of coal and two units of carbon credits is required to run the plant and produce electricity. In this model we were auctioning off the power plants using a 2nd price auction, which is one where, “the highest bid wins but pays the 2nd highest bid”. The next thing is to auction of the fuel using a dutch auction, where everybody bids the number of fuel units and price per unit. Everyone who wins pays the price they bid for settled in order of highest to lowest bid.

We have played multiple games of the Carbonflow Carbon Trading Game with Executives from Designated Operational Entities (DOE) like DNV and SGS, the auditors of the current carbon trading industry.

CONCLUSION and INSIGHTS OF THE CARBON TRADING GAME

1. Carbon prices tend to be higher in early rounds and stay flat or fade as commitment periods go on.

2. In the after-market, where players buy and sell fuel between themselves so they can run their plants, if you don’t have enough fuel and carbon credits you can’t run your coal or gas plant.  In this after-market we found that prices for fuel and carbon became highly inter-linked and have a large impact on the value of power plants and the mix of power production.

3. Also as might be expected high capacity renewable plants and low carbon power plants such as nuclear and wind are able to be sold for substantially higher prices than coal or gas plants with high emission factors and attendant fuel risks like not having enough fuel to run plants or the low emission factor and low capacity wind plants.

4. The most interesting thing is that the simulations confirm that the farther one goes into the commitment period the more inter-linked the fuel commodities and carbon markets become and the higher the discount to justify coal plant investment, even though coal fuel is in oversupply by the end of the game. This is an indication that coal and gas plants tend to be retired in favor of hydro-electricity, wind and nuclear plants. In the fuel markets the differential on a per KWH basis between low carbon commodities like nuclear and gas fuel tends to rise drastically and unpredictably higher than high carbon fuels like coal.

5. Under this simulation we assumed that fuel was always adequate to supply plants into the market. It does not appear to be clear. The price changes are driven by financial traders taking commodity bets and physical traders seeking to secure forward supply.

6. Price volatility by either the emitters or traders does not effect whether the cap is met. If the Cap is an enforceable cap abatement of carbon dioxide (CO2) tends to happen whether people make profits or the price of carbon is high or not - ERGO the ENVIRONMENT WINS!

7. The other conclusion is that Cap and Trade does push out the high emitting coal and lower emitting natural gas plants. The price per ton of carbon in most of our games varied between $20 to $80 dollars per ton per round.

CARBON OFFSET SIMULATION

We did simulate the impact of offsets like energy efficiency, which seem to provide emitters with the opportunity of making profits outside the cap and has a slightly moderating downward pressure on prices for carbon. In the early days it is a limited effect with virtually no impact towards the end of the game as the cap is reached.

HOARDING CREDITS and TRADING STRATEGIES

Trading strategies and hoarding of credits due to uncertainty in early rounds seem to outweigh the impact of the oversupply of allocation of offsets in the early rounds thus keeping prices down.

By later rounds the market expectation is that offset emitter energy efficiency and free allocation would mean emitters escape paying a price of carbon and abatement doesn’t occur. However, we find that the opposite is true, traders making a market for carbon and emitters buying to secure future carbon supply act in a way that supports the price of carbon because inventory of carbon stays high. As the game goes on carbon inventories are exhausted, low carbon fuel prices rise and the value of low carbon plants rise and high carbon fuel prices fall as companies more rapidly than expected shift to a lower carbon market.

Trading strategies are highly profitable as the industry grows and pure commodity trading strategies tend to do badly. The only obvious losing strategy is straight coal but that does not become apparent until later rounds and the last point is the winning strategy tends to be won by those that invest heavily on low carbon strategies as soon as possible.

In Conclusion, this is a fanatastic game to bring everyone up to speed on the mechanics of carbon trading and it has the benefit of showing actual human behaviuor, which can only be factored in when people are in the position of actually buying power plants and seeing what they would do when faced with a cap and a requirement to buy fuel and carbon credits to run their plants.