A Structure for Promoting Greater Efficiency in the Real Estate Sector to Address Climate Change The research, analysis and preparation of this white paper was partially funded by the joint efforts of BOMA International, The Real Estate Roundtable, U.S. Green Building Council and the California Business Properties Association. Reproduced in full - Donald Simon is an attorney for Wendel, Rosen, Black and Dean.

Summary Argument: Building codes typically affect only new construction, because existing buildings are “grandfathered” and new code requirements apply only to substantial renovations. This is hugely problematic. Existing buildings account for the vast majority of real estate sector GHG emissions, because there are far more of them and they are significantly less energy efficient than new construction. Government incentives are helpful but inadequate and undependable because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years. Cap and trade carbon markets provide a much larger funding source that could partially finance energy efficiency improvements if buildings are allowed to participate. The European carbon market totaled $30 billion in 2006 ² and some predict that trillions of dollars will change hands each in year in global carbon markets by 2030.

A Structure for Promoting Greater Efficiency in the Real Estate Sector to Address Climate Change by . Introduction and Summary
Energy use in buildings accounts for approximately one-third of U.S. greenhouse gas emissions (”GHG”) through a combination of electricity consumption and fossil fuel combustion. Improving the energy efficiency of new and existing buildings is internationally recognized as one of the lowest cost means to reduce GHG emissions.¹ Yet the “low-hanging fruit” of greening buildings is typically not included in carbon markets created under Climate Change laws.

In the world of Climate Change regulation, there are two major classifications of GHG emission sources - direct and indirect. Direct sources release GHGs directly into the air, like power plants and other smoke stack industries. Indirect sources are activities that consume what the direct sources produce, like buildings that consume electricity produced by power plants.

California is currently developing the world’s most comprehensive regulatory system for addressing Climate Change. The conventional wisdom among regulators in California and elsewhere in the world is that market-based programs, like cap and trade, should be restricted to direct industrial sources, because there are fewer of them and they are already heavily regulated. This generally forecloses the possibility for green building projects to generate carbon credits, despite their unrivaled 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 (direct) sources are required to shoulder a greater share of required GHG reductions, all of which increase the societal cost for addressing Climate Change and make it less politically feasible to accomplish.

Under this conventional wisdom, GHG reductions from the real estate sector and other indirect sources are sought through stricter building codes mandating ever-increasing levels of energy efficiency and through limited government incentives programs. But neither mechanism achieves the depth of cost-effective reductions possible. Building codes typically affect only new construction, because existing buildings are “grandfathered” and new code requirements apply only to substantial renovations. This is hugely problematic. Existing buildings account for the vast majority of real estate sector GHG emissions, because there are far more of them and they are significantly less energy efficient than new construction. Government incentives are helpful but inadequate and undependable because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years. Cap and trade carbon markets provide a much larger funding source that could partially finance energy efficiency improvements if buildings are allowed to participate. The European carbon market totaled $30 billion in 2006 ² and some predict that trillions of dollars will change hands each in year in global carbon markets by 2030.

Carbon regulation is evolving. Europe initiated the first GHG cap and trade system, but green buildings are unable to participate. Several eastern U.S. states advanced matters with the Regional Greenhouse Gas Initiative, which provides carbon credits for green building activities that reduce direct GHG emissions from onsite fossil fuel combustion for heating, but no credit is provided for reducing electricity consumption, which accounts for much greater (indirect) GHG emissions. The Australian state of New South Wales leapfrogs all other programs by providing carbon credits for green building projects that improve energy efficiency in fossil fuel combustion and electricity consumption.

For decades, the world has looked to California for innovative leadership in business, public policy and environmental protection. California should continue this tradition by structuring its cap and trade market under Assembly Bill 32 (”AB 32″) in a way that enables new and existing buildings of all types to generate carbon credits for direct and indirect GHG reductions that satisfy statutory requirements. Whatever California does will greatly influence whatever federal legislation finally emerges from Washington, which in turn will greatly influence international efforts, because the next international treaty must be implemented before Kyoto Protocol expires in 2012. Once again, California has the unique opportunity to lead. The stakes have never been higher.

This paper outlines the potential structure and benefits of a voluntary green building carbon credit (”Green Building Credit”) that empowers the real estate industry to monetize energy efficiency and sell the resulting GHG reductions into the cap and trade carbon market or a parallel market funded by cap and trade auction revenues.

II. Green Building Carbon Credit

A. The General Role of Carbon Credits.
Cap and trade is the favored mechanism for GHG regulation, because conventional wisdom believes the market will find the lowest cost methods to reduce GHG emissions. Regulators establish absolute limits (caps) for total GHG emissions for each of the largest GHG industrial sectors, like electricity, cement and oil refining. Each sector cap is allocated among individual sources, which must comply through on-site improvements or by purchasing carbon credits from others (trade). These trading transactions are conducted through bilateral negotiations or a centralized exchange (like commodities).

Many GHG reduction opportunities exist outside the industrial sectors typically regulated under cap and trade systems. Policy-makers can encourage such voluntary reductions by structuring carbon markets in a way that allows parties to convert their GHG reductions into carbon credits they can sell to regulated sources to offset their emissions. Such offsets provide regulated industries an alternative way to comply with regulatory obligations by letting them choose between reducing their own emissions or purchasing offsets from others who were able to reduce theirs at lower cost. ³ This reduces the overall cost of Climate Change regulation by letting the free market exploit lowest cost GHG reductions.

B. Design Issues.
By law, California may only credit efforts that produce GHG reductions that are real, quantifiable, permanent, verifiable, enforceable and additional beyond those that would otherwise occur under business as usual.⁴ The same general requirements govern offsets in other GHG programs throughout the world. These are the threshold design issues a Green Building Credit must satisfy

1. Double counting.
The most frequently cited reason for not allowing offsets from green building and other efficiency measures that indirectly reduce GHG emissions is that the same reductions are counted twice, first by the building owner and a second time by the electricity sector. ⁵ Green building credits would be awarded based on energy savings and the resulting reduction in GHG emissions from the electricity sector. Unless the electricity sector cap is adjusted, this reduction in electricity demand will cause the electricity sector to have a surplus of carbon credits equal to the number of Green Building Credits issued. If the electricity sector is allowed to use or sell those surplus credits, then the same GHG reductions are counted twice. No net GHG reduction occurs, and the electricity sector receives windfall profits by selling carbon credits for fictitious reductions.

This double counting problem is easily solved by reducing the electricity sector cap by an amount equal to the number of Green Building Credits issued. The New South Wales program uses this solution in Australia. New South Wales implemented a carbon credit for energy efficiency improvements to new and existing buildings of all types in 2003 as part of its regulatory system that establishes GHG emission benchmarks for the electricity sector. Utilities meet their benchmark obligations by improving operations or purchasing offsets from others. Double counting is avoided by reducing the sector benchmark by an amount roughly equal to the volume of green building and other energy efficiency credits issued. As of December 2007, energy efficiency and other demand side abatement activities had reduced GHG emissions by 18.5 million tons under the New South Wales program.

2. Additionality.
Another regulatory design prerequisite is that offsets must represent “additional” reductions that would not have otherwise occurred under business as usual. For example, a standard definition precludes crediting actions already required by law because they would have occurred anyway. Additionality criteria determine the baseline and counting methods used to quantify the number of credits a given project creates. In some systems, a customized process is used for each project, such as in the Clean Development Mechanism under the Kyoto Protocol. But such project-by-project analysis creates high transaction costs that undermine the financial viability of offset projects. The preferred and more effective method is to use standardized measurement and verification protocols.

Markets thrive when participants are able to predict a return on investment (”ROI”) so they can better evaluate the capital investment necessary to achieve a desired return. This is especially important for Green Building Credits, because energy efficiency measures often require substantial capital expenditures. Predictability is enhanced when baselines and protocols rely on objective standards and readily available information. This enables building owners to quantify the ROI for green building investments. In new construction, building codes provide an objective and quantifiable baseline for determining additionality and quantifying offsets. For existing buildings, a more sophisticated approach may be necessary, since building codes seldom require upgrades in the absence of significant renovations.

Existing Green Building Credit programs use various protocols and methodologies to quantify carbon credits for different building types and green building improvements. The Regional Greenhouse Gas Initiative and the New South Wales programs award credits based on how much energy the green building improvements actually save in comparison to a baseline. For new construction, baselines are determined with reference to building codes. For existing buildings, baselines are tied to actual energy consumption before the green building improvements were made. All calculations and data are verified by independent third-party audits. The New South Wales program gains additional leverage by using the same measurement protocol that the Australia Green Building Council uses for its Green Star building certification program. California could similarly leverage existing systems. Assembly Bill 1103(2007) already requires benchmarking of existing commercial buildings using the Energy Star Portfolio Manager tool. Title 24, Energy Star Target Finder, or LEED (ASHRAE 90.1) could similarly provide a benchmark for new construction.

Additionality concerns can also arise when green building projects are partially funded through government or utility incentive programs. The fairest way to address these situations may be to reduce the number of Green Building Credits in proportion to the percentage of public funding received. Therefore, if public funding pays 20% of the owner’s total costs, then the owner would acquire carbon credits equal to 80% of the avoided GHG emissions. New South Wales uses this approach.

C. Alternative Design Structure To Avoid Potential Impacts To Cap And Trade Compliance Markets.

Regulatory experience with cap and trade is relatively limited, causing many regulators to prefer a conservative, limited cap and trade market design with fewer participants and restricted use of offsets. Instead, California’s regulators are discussing buildings in the context of stricter building codes, increased utility incentive programs and imposing mandatory retrofit requirements at time of sale. Unfortunately, the imminent dangers of irreversible Climate Change do not afford society the luxury of an overly conservative approach that delays important GHG reduction strategies. Both interests can be served by constructing the Green Building Credit as a parallel market separate from the cap and trade compliance market.

Regulators would use a standards-based approach by approving a measurement and verification protocol as rigorous as for any compliance offset; however, Green Buildings Credits would not be used for compliance purposes. Instead, they would be funded by a quasi governmental entity with revenues generated from the sale (auction) of cap and trade allowances.This would protect cap and trade program integrity and avoid various regulatory concerns. In California, that quasi-governmental entity could be the California Climate Trust proposed by the Air Resources Board’s Economic and Technology Advancement Advisory Committee.

This structure could be maintained indefinitely. However, the goal should be to eventually transition the Green Building Credit into a compliance offset after the cap and trade market has proven stable and regulators have gained confidence in the Green Building Credit protocol and resolved double-counting, additionality and any other concerns. This would empower “learning by doing” without jeopardizing the larger priority of a well-functioning cap and trade market. It would also make the Carbon Trust into an incubator that develops and refines new, market-based GHG reduction strategies. And although these Credits would not satisfy compliance obligations (at least initially), this structure would ultimately lessen the burden on regulated sectors by enabling real estate to contribute toward overall, economy-wide GHG reduction targets, like AB 32.

D. Rationale For Including A Green Building Carbon Credit In the Earliest Stages of Cap and Trade.

1. Reduced infrastructure and peak load.
Taking one’s foot off the accelerator is the first step for stopping a car. The Climate Change accelerator is the construction of new power plants built to satisfy America’s growing energy demand, which has increased an average of 2.2% each year since 1990. ⁶ As McKinsey & Company noted in a prominent study, cost-effective Climate Change policy requires tackling energy efficiency first, because it can alleviate the need for constructing new power plants and distribution capacity, saving billions of dollars in utility capital expenditures that would otherwise be imposed on the economy through higher electricity rates. ⁷ After this infrastructure is built, the economic value of energy efficiency drops, because its cost must then be compared to the cost of taking existing power plants and infrastructure off-line, which is considerably less favorable than avoiding their construction in the first place. Even if the Green Building Credit succeeds only in reducing peak energy demand, it will reduce operating time for the dirtiest power plants, which customarily remain in service to serve peak demand.

2. Faster, more permanent GHG reductions.
Green building provides more immediate GHG reductions than other, more frequently discussed GHG reduction strategies, because it is rapidly deployable and uses readily available, off-the-shelf technology. Other solutions take years to implement, like converting power plants from coal to natural gas or replacing existing electricity generation with nuclear or wind. Technology solutions, like carbon capture and storage and clean coal will not be viable for decades to come, if ever. Evolving scientific understanding of Climate Change reveals a growing urgency to reduce emissions now, and nothing can provide meaningful reductions faster than energy efficiency.

Energy efficiency improvements to existing and new buildings are the “gift that keeps giving” because buildings are long term assets that lock-in their energy and GHG performance throughout their useful life. Every building constructed without optimal energy efficiency represents a lost opportunity, because it costs much less to make buildings energy efficient during initial construction than to do so later through retrofits. For example, the California Air Resources Board notes that solar hot water systems cost twice as much to install in existing buildings than new construction. Consequently, the revenue a building owner might receive from carbon credits is more valuable during initial construction than a later retrofit, because it finances a larger percentage of the cost for energy efficiency improvements. The sooner Green Building Credits are included in regulatory carbon markets, the greater their contribution to GHG reductions will be.

3. Domestic creation of new “green collar” jobs and economic development.
An important co-benefit of a Green Building Credit is that energy efficiency improvements are more labor intensive than most other GHG reduction strategies. This provides substantial workforce development opportunities, especially for relatively low-skill but comparatively high-paying “green collar” jobs in the construction trades that cannot be outsourced to other countries. This co-benefit is exceptionally valuable, given the loss of so many blue-collar manufacturing jobs. Unlike imported offsets, such as the Clean Development Mechanism that funds GHG reductions in other (typically developing) nations to offset domestic carbon emissions, revenue from Green Building Credits remains in California (or the WCI) and supports domestic economic development.

E. The Green Building Carbon Credit Compliments Existing Energy Efficiency Programs And Is Superior To Other Strategies Being Contemplated To Fund Greater Energy Efficiency.

As noted above, California recently adopted AB 1103 (2007), which requires benchmarking and disclosure of energy consumption in commercial buildings. It is expected this will make energy efficiency a competitive building feature. But this benchmark data could also provide the basis for a Green Building Credit protocol, which would leverage AB 1103 beyond disclosure by providing the tool for incentivizing actual energy reductions.

California and a limited number of other states currently promote energy efficiency through financial incentives and consumer education programs. These programs are often administered by local utilities, because they are regulated industries and have the most interaction with consumers. But this structure expects and requires private utility companies to act against their interest by reducing demand for the product they sell - energy. These programs have been modestly successful in states like California, where utility profits are not directly tied to energy sales (i.e. decoupling), but even here, success is constrained by the fact that the core competency of utilities is selling energy, not saving it. And since decoupling is rare, California type utility programs cannot provide a model for federal or international efforts.

Existing programs create a monopoly structure by delegating energy efficiency responsibility to utilities. Regulated monopolies are an efficient delivery method for basic commodities where customers have identical needs, like electricity and natural gas. But they are inefficient and incapable of providing highly variable services, like energy efficiency improvements. Green Building Credits provide a profit motive that incents private sector competition to develop more sophisticated and successful ways to expand energy efficiency far beyond what the current monopoly system of utility incentive programs can provide. And unlike these current programs that are limited by scarce public funds, Green Building Credits would be funded through carbon markets. Potential funding would be limited only by the comparative cost of Green Building Credits in relation to other GHG reduction activities and any regulatory cap that might be imposed.

Utility programs also typically fund specific measures, like installing more efficient lighting or mechanical systems. They do nothing to spur energy conservation and little to ever increasing plug loads. But since a Green Building Credit would be quantified based on actual energy savings, conservation and plug load reductions would count the same as efficiency improvements. This would provide an incentive for behavior modification, which the real estate market could motivate through green leasing concepts.

In a properly constructed regulatory system, these Credits would be treated like other commodities. Financial institutions would invariably create new financial products that enable building owners to finance the cost of energy efficiency improvements based partly on the carbon credits they will create over time. Since upfront cost is the biggest hurdle to energy efficiency, this could revolutionize the building industry and exponentially increase the pace of existing building retrofits, all of which would spur private capital investment into increasingly efficient building products and systems.

The Green Building Credit is likewise superior to newer strategies being considered for enhancing energy efficiency. An amendment to the Lieberman-Warner federal Climate Change bill proposed having a set-aside of cap and trade carbon allowances that would be given to local governments to sell and raise money to fund energy efficiency projects in their jurisdiction. This same concept is purportedly being considered in California. The Green Building Credit is a superior strategy, because it promotes market adoption by providing a single measurement and verification protocol that industry can use throughout the jurisdiction, whereas the allowance set aside provides no such efficiencies because each local government would operate a separate program. The allowance set-aside is merely an alternative currency that would be less efficient than even direct grants to local governments, because it would require them each to become traders in the carbon market.

Because cap and trade will increase the cost of electricity production, some anticipate this will encourage the electricity sector to help finance building energy efficiency improvements in order to reduce their own cap and trade compliance obligations. But this could only work in a load-based point of regulation where the compliance obligation rests with utilities, because they sell electricity directly to consumers and could link specific projects to their service obligations. In the load based or first-seller point of regulation favored in California, the Western Climate Initiative and federal legislation, the compliance obligation rests with power plants. There is no way to know which power plant is powering a building at any given time, because their electricity is fed into the grid. So the power plant would have no incentive to finance a particular project, because its emissions would not necessarily be reduced, since the building may be receiving its power from a different power plant and reducing that plant’s compliance obligations rather than those of the plant that funded the project. Moreover, unlike load serving entities, power plant revenues are not decoupled from electricity sales, so they would have no incentive to decrease demand for their power. ⁸ The Green Building Credit overcomes this problem by creating a commodity that can be traded without any need to link project carbon reductions to a specific power plant.

III. Conclusion

A properly constructed Green Building Carbon Credit is supported by the same rationale that underlies cap and trade and other market-based initiatives for addressing environmental problems. By providing a mechanism to seize the low-hanging fruit of building energy efficiency, a Green Building Credit will enable the market to deliver GHG reductions faster and cheaper than otherwise possible.

Each new study shows that Climate Change is accelerating. Society must deploy innovative regulation to harness the power of the market to deliver the immediate reductions needed. The Green Building Carbon Credit is one such prescription. And it warrants serious consideration among those entrusted with devising the solution. In places like California, electricity sales are decoupled from utility profits. But this only applies to load-serving entities. Many power plants are owned by separate entities that are not subject to regulatory decoupling.
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¹ See, Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?, U.S. Greenhouse Gas Abatement Mapping Initiative Study (McKinsey & Company et al., December 2007). http://www.mckinsey.com/clientservice/ccsi/pdf/US_ghg_final_report.pdf; and Green Building In North America, Secretariat of the Commission for Environmental Cooperation, March 2008, http://www.cec.org/files/PDF//GB_Report_EN.pdf.
² The European carbon market fell sharply at the end of 2007 as it became clear that regulators had freely awarded too many carbon credits for the initial 2005-2007 regulatory compliance period. Supply far exceeded demand and the market price for carbon credits of that vintage fell to less than one Euro. This temporary problem was solved by regulators issuing fewer credits for the 2008-2010 compliance period, and carbon was trading at 24.5 Euros ($35) per ton as of September 5, 2008.
³ The term “offset” is often reserved for GHG reductions unrelated to and outside of any regulated industry sector. Because building electricity consumption affects electricity sector emissions, a green building carbon credit is more properly referred to as an emission reduction credit. However, the “offset” term is more readily known, and the general concept is the same, so the green building carbon credit is interchangeably referred to here as an offset.
⁴ AB 32, section 38562(d)(1).
⁵ Green Building Credits could be created by building owners, tenants or whoever else causes the energy efficiency project to occur. For simplicity, this paper assumes that building owners create and own the credit. In the New South Wales program, Green Building Credits are awarded to the party contractually obligated to pay utility bills, including landlords, tenants and building managers, who may  ssign ownership of such credits to third-parties. This promotes a third-party market for those seeking to capitalize on the revenue stream green building offsets provide, such as energy service companies.
⁶ National Energy Technology Laboratory report, February 18, 2008, based on U.S. Energy Information
Administration data. See www.netl.doe.gov/coal/refshelf/ncp.pdf.
⁷ http://www.mckinsey.com/clientservice/ccsi/pdf/US_ghg_final_report.pdf, p. xvi.
⁸ In places like California, electricity sales are decoupled from utility profits. But this only applies to load-serving
entities. Many power plants are owned by separate entities that are not subject to regulatory decoupling.

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.