Carbon Observer

Carbon crash and burn

The U.S. Senate finally killed the Lieberman-Warner climate change bill on Friday, and as the chart shows, carbon investors were apparently surprised and sent CO2 contracts on the Chicago Climate Exchange tumbling nearly 20 percent in two days.

The White House had promised to veto anything that crawled out of Congress, so it was pretty much an exercise in positioning and vote tallying with an eye on 2009, but still it was a pretty resounding defeat. The Democrats who control the Senate needed 60 votes, but managed only 49. Should the United States ever contemplate joining an international binding treaty along the lines of Kyoto, the support of 67 senators would be needed. That’s just not going to happen with this lot.

The good news is both presidential candidates support fighting climate change by putting a price on carbon through a cap-and-trade system to cut greenhouse gas emissions. The bad news is soaring energy and food prices are making that once-tepid stance in support of market-based solutions seem like the stuff of bomb-throwing radicals.

As the bill went down, the International Energy Agency was pleading for $45 trillion (with a T) to halt global warming, admitting it would drive up the cost of carbon 10-fold with the knock-on increases in retail energy prices.

What would Lieberman-Warner have cost? At most, $1.3 trillion over the next half century. Yet this was still too much for the U.S. Senate.

If John McCain or Barack Obama want an issue on which they can lead the country, this would be it. But as carbon investors in Chicago will tell you, don’t bet on it.

Tags: Barack Obama, climate change, John McCain, Legislation, Lieberman-Warner

Posted in Legislation, cap-and-trade, climate change, greenhouse gas emissions, regulation | 6 Comments »

Carbon price rises as U.S. climate law takes shape

Investors looking to cash in on carbon have pinned their hopes on U.S. legislation that would cap greenhouse gas emissions, thereby putting a price on them.

Those hopes have centered on the Lieberman-Warner climate bill, which will be debated by the full Senate in June. It now seems California Sen. Barbara Boxer plans a substitute bill, and it’s eye-popping. According to Environment and Energy Daily  (sub. required), Boxer’s bill will “raise” $5.6 trillion (with a T) to transform the United States into a country powered by clean-carbon energy.

Boxer cites nearly $1 trillion for consumers to offset the higher cost of energy. That’s encouraging. Hopefully, Boxer won’t cave to opponents and soften measures that will drive up prices, which will go a long way to changing consumer behavior and cutting energy usage, and as a result, emissions.

A full Senate debate and vote would, of course, give investors unusual clarity about the intent of the next president, since the current election will pit two senators for the first time (assuming they show up for the vote).

In the meantime, investors have spoken. Prices for carbon offsets (which the bill recognizes) have risen to a new record at $7.25 per tonne on the Chicago Climate Exchange, a 15 percent increase in a few weeks.

In addition, share prices in the Climate Exchange, which trade in London, have doubled since mid-February.

Tags: carbon offsets, carbon price, climate change, Legislation, Lieberman-Warner

Posted in Legislation, cap-and-trade, carbon credits, climate change, greenhouse gas emissions | 78 Comments »

McCain’s bitter Chinese medicine

 Republican presidential nominee John McCain outlined his plan for fighting climate change this week, and was roundly thumped from both sides of the political spectrum (nicely summed up in the Wall Street Journal’s Environmental Capital blog).

McCain basically endorsed a system of capping emissions for big polluters and allowing the cleanest ones to trade their excess allowances. Likely Democratic nominee, Barack Obama, has endorsed a similar system, although he says polluters should pay for all permits to emit greenhouse gases. McCain worries more about costs and wants to give away the permits, at least at first.

Politicians love cap-and-trade systems, which sounds rather pain-free and business-friendly. McCain emphasized it as a market-driven solution to the problem of climate change and energy security. Little was said of the cost, except when he emphasized he wanted to control it.

We want to turn the American economy toward cleaner and safer energy sources. And you can’t achieve that by imposing costs that the American economy cannot sustain.

In the same vein, McCain wants to suspend the federal tax on gasoline to help lower fuel prices.

McCain should reflect on the government’s data out Tuesday on sales of gasoline. Plotted on a graph, fuel sales and fuel prices form a nice pair of parallel lines moving in lock step over the years. As prices rise, sales (though not necessarily volumes) rise thanks to inelastic demand for the stuff that powers American commutes and trips to the store.

However, beginning in late 2007 and into this year, sales of gasoline began to level off, even as oil prices rocketed higher. Americans are dusting off bikes and train and bus schedules and discovering carpooling as gasoline prices continue to climb into record territory. Given a screaming loud price signal, consumers responded. As a consequence, emissions from cars should also decline.

Imagine what would happen if a price were put on carbon and if that price rose over time. Consumers would drive less and turn off the air conditioning in summer when the house is empty.

McCain could have taken a moment to explain this, to provide some leadership and tell voters that a dangerous and urgent crisis such as climate change requires some painful changes.

Instead, he promised to insulate Americans from sticker shock, but he also promised in the text of his speech (though he apparently softened this in the actual speech) to dish out some pain to Beijing.

We will apply the same environmental standards to industries in China, India, and elsewhere that we apply to our own industries. 

That sounds a lot like tariffs and a restriction on access to American markets for Asia’s dirty exporters. Clearly, he realizes higher costs bring about changes in behavior - but he’s just not prepared to use that medicine to cure American voters of carbon obesity.

Tags: cap-and-trade, John McCain, politics, trade

Posted in Legislation, Uncategorized, cap-and-trade, climate change, greenhouse gas emissions, regulation | 3 Comments »

Government to investors: buy carbon

If the government tells you it’s taking steps that will drive up a stock price five fold over the next decade, that would be considered a very strong buy signal.

It could be argued that’s what the Energy Information Agency said this week in a report about a bill that is likely to become U.S. law on climate change.

The EIA reviewed the Lieberman-Warner Climate Security Act of 2007, which is on the floor of the Senate. The agency found plenty of good news for backers of the bill. Emissions could be cut more a third below 1990 levels for only a slight economic cost, of around 0.6 percent (or $1.3 trillion) of gross domestic output under the costliest scenario or slightly more than the twice the Iraq war so far. Other scenarios put the cost at less than half that.

For carbon investors, the agency sees the price of carbon dioxide allowances rising to $30 per tonne in 2020 under the most optimistic scenario or $76 under the bleakest conditions. By 2030, the agency estimates carbon could hit $156. Carbon traded in Chicago currently sells for around $6.40. That’s quite a return, thanks to Uncle Sam.

There’s plenty of reason to think carbon prices might be closer to the higher end of the agency’s forecast. For one thing, if the cost of the bill is relatively slight, will Americans really accept the optimistic big increases in nuclear output after a generation-long freeze in new plant building? The lower price forecast for carbon also assumes the roll-out of technology to capture carbon emissions from coal plants, a technology that has yet to emerge from the research phase.

Another striking aspect of the report: the agency doesn’t expect much impact on consumer behavior or energy prices. Gasoline is expected to range between $2.86 a gallon and $3.46 by 2030 (in 2006 dollars), a price most Americans would line up around the block for today. Electricity prices are forecast to rise in a range of 12 percent to 60 percent by 2030, even as many utilities warn of increases of more than 150 percent to comply.

Of course, the current price for carbon offsets on the Chicago Climate Exchange won’t neatly translate into the prices in the agency forecast, which refer to prices for permits to emit greenhouse gases. But expect a very similar trend. As the folks at the Climate Exchange will tell you, carbon offset prices have nearly tripled since Super Tuesday established John McCain as the Republican nominee. Why? That seemed to assure that all potential presidential candidates will back a cap-and-trade law along the lines of the Lieberman-Warner bill.

In other words, buy carbon.

Tags: Lieberman-Warner

Posted in Legislation, cap-and-trade, carbon capture and storage, carbon credits, climate change, regulation | 3 Comments »

Bush White House to lead fight on climate change?

The Bush administration will announce a plan to tackle climate change as early as this week, according to the Associated Pressand the Washington Times.

While surprising, this isn’t a sign the White House has suddenly gone green. The White House said it was trying to deal with a “train wreck” of evolving regulations and this obviously doesn’t signal some sudden worry about greenhouse gases.

The administration floated the policy change by Republican members of congress, who weren’t too thrilled.

Several media analysts suggested this is the Bush White House’s way of getting in front of global warming as an issue and as a way to making 1600 Pennsylvania Ave. relevant again. By offering its own plan, it’s still possible that a Democrat-led alternative could be watered down.

Aside from politics, does the White House have a point? Does it make sense to fight a global problem state-by-state or even region by region?

Consider this, lifted from the annual report of AES, a large utility, which is describing for investors its regulators (and very heavily edited from an original that ran page after acronym-filled page). It’s enough to convert Dick Cheney into a committed Green:

In July 2003, the European Community “Directive 2003/87/EC on Greenhouse Gas Emission Allowance Trading” was created … member states are required to implement EC-approved national allocation plans (”NAPs”) … For these and other reasons, uncertainty remains with respect to the implementation of the European Union Emissions Trading System (”EU ETS”) … Although several bills have been introduced in the U.S. Congress that … On April 2, 2007, the U.S. Supreme Court issued its decision in a case involving the regulation of CO₂ emissions from motor vehicles under the U.S. Clean Air Act … the U.S. Environmental Protection Agency (the “U.S. EPA”) has a duty to determine whether CO₂ emissions … Ten northeastern states have entered into a memorandum of understanding under which the states coordinate to establish rules that require the reduction in CO₂ emissions from power plant operations within those states. This initiative is called the Regional Greenhouse Gas Initiative (”RGGI”) … A number of these states in which our subsidiaries have generating facilities, including Connecticut, Maryland, New York and New Jersey, are in the process of implementing rules … The Company’s Southland and Placerita businesses are located in California. On September 27, 2006, the Governor of California signed the Global Warming Solutions Act of 2006, also called Assembly Bill 32 (”A.B. 32″). A.B. 32 directs the California Air Resources Board to promulgate regulations … In addition, on February 8, 2008, the California Public Utility Commission issued a proposed recommendation that the State develop a GHG emission cap-and-trade program … In February 2007, the governors of the Western U.S. states (Arizona, New Mexico, California, Washington and Oregon) established the Western Climate Initiative (”WCI”). The WCI has since been joined by two other states (Utah and Montana) and two Canadian provinces (British Columbia and Manitoba) … The Company owns IPL which is located in Indiana. On November 15, 2007, nine Midwestern state governors (including the governor of Indiana) and the premier of Manitoba signed the Midwestern Greenhouse Gas Reduction Accord (”MGGRA”) committing the participating states and province to reduce GHG emissions through the implementation of a cap-and-trade program … The Company owns a power generation facility in Hawaii. On June 30, 2007, the governor of Hawaii signed GHG legislation. By December 1, 2009, Hawaii’s Greenhouse Gas Emissions Reduction Task Force will deliver to the legislature a work plan and regulatory scheme designed to reduce emissions of greenhouse gases …

Posted in Legislation, cap-and-trade, climate change, greenhouse gas emissions, regulation | 4 Comments »

Offsets the latest subprime?

Tighter standards used by the United Nations in its review of carbon offset projects has gotten another seller of emission reduction credits into trouble, the The Wall Street Journal reports.

First, the money quote:

“I guess in some ways it’s akin to subprime,” says Mr. Stuart, 43 years old, referring to the subprime-debt woes rattling the U.S. economy. “You keep layering on c— until you say, ‘We can’t do this anymore’.”

Mr. Stuart’s company, EcoSecurities, provided funding that allowed factories, power plants and farms in the developing world to install emission-cutting technology. The carbon-dioxide emissions that were prevented became tradable carbon credits that polluters in Europe could use to ‘offset’ emissions that exceeded their legal limits.

The booming business hit problems recently when the United Nations began to take a harder look at the projects they approved. They discovered many would have happened without EcoSecurities’ funding, meaning the projects failed the test of ‘additionality.’

The article didn’t mention it, but one problem with the U.N. offset program, which bears a strong resemblance to subprime, was the approval process.

As with subprime securities and the agencies that rated them (or, in the case of offsets, the verifier), there was a strong interest in waving projects through the checkpoint. With both subprime and carbon offsets, more projects meant more fees for the ratings agencies and verifiers. There was little incentive to properly stress-test either subprime securities or take a hard look at offsets.

Carbon offset projects aren’t about to spark a global financial crisis. There aren’t even likely to garner a second 1,700-word article in the Wall Street Journal.

However, tougher verification standards are likely to raise prices for creating offset projects, curtail smaller projects and drive more deals like the takeover for Econergy (see Carbon Observer’s comment here).

Smaller firms that develop offset projects are going to need a bigger partner or they may wither for a lack of funds.

Questions about EcoSecurities and AgCert will give critics of the entire concept more ammo. Still, demand for offsets is booming and Japan said recently it plans to buy 77 million offsets due to glitches in its nuclear power supply.

Of course, critics would say Japan and the other 36 countries that agreed to cut greenhouse gas emissions under Kyoto should be clamping down on their industrial polluters rather than funding wind turbines in Mongolia. And maybe this is a sign they may have to, which wouldn’t be such a bad thing.

Posted in carbon credits, climate change, greenhouse gas emissions | 3 Comments »

Credit crunch to crimp climate change investment?

Powerful price signals should be driving investors to carbon dioxide-cutting investments.

Carbon offset prices in traded on the Chicago Climate Exchange topped a record $6 per tonne this week. Prices for permits to emit greenhouse gases in Europe rose to the highest level in more than a year, at more $35 per tonne.

Trading Emission’s bid for rival renewable energy developer Econergy, which became public on Friday, seems to be part of the recent rush into the sector.

But in part, the larger company said it bid because the credit crunch would undercut Econergy’s ability to develop its projects, which are mostly based in Latin America.

The expense of renewable energy projects is beyond dispute.

The much-hailed Solana thermal plant in Arizona, which was recently announced and will cost $1 billion to build, outstrips the cost of the priciest coal plants many times over in per-unit terms.

As the credit crunch bites, smaller developers pushing technology with a short history are going to find it difficult to fund projects.

Congress revived an extension to a renewable energy tax break for up to eight years. Unfortunately, it tacked it onto a housing bill that may be rejected by the White House. Without that credit, developers including those behind Solana have warned they may kill off their plans.

This is the exact opposite of what’s needed right now, particularly as policy-makers look for ways to fight the credit crunch.

The situation is almost certain to change as all three candidates for president are touting climate change plans, but global warming isn’t really a problem solved at a leisurely pace.

Posted in carbon credits, climate change, greenhouse gas emissions, solar power | 21 Comments »

Shell wants credit for carbon captured (assuming they catch it)

The head of Shell Oil Co.sketched out two possible scenarios for the energy sector over the next 40-odd years on Monday. One was clearly framed to frighten, and Jeroen van der Veer called it the Scramble scenario. Leaders fear dwindling supplies of energy and begin to gobble up all available sources, relying on coal and local biofuels. Policy-makers pay little attention to curbing consumption or greenhouse gas emissions until supplies run short and environmental shocks jolt leaders into action. Prices spike.

In the friendlier Blueprint scenario, which describes much of what’s happening today, various coalitions take hold to address energy supplies and greenhouse gas emissions. Innovative policies evolve from local initiatives while national governments address efficiency and taxes.

Van der Veer then delivered his ‘but wait’ moment. To get to the Blueprint and avoid the Scramble, we need to provide some incentives for a much-hyped technology that many argue could render coal-fired power plants nearly carbon neutral.

Speaking about carbon capture and storage (or CCS, also known as carbon capture and sequestration), Jeroen van der Veer said that government action is needed to support and stimulate investment in capturing and storing carbon dioxide if it is to be used quickly on a scale large enough to affect global emissions.

“For instance, the Blueprints scenario assumes CO2 is captured at 90% of all coal- and gas-fired power plants in developed countries by 2050, plus at least 50% of those in non-OECD countries. Today, none capture CO2.”

A lot of the cheery carbon scenarios for halting and reversing climate change rely on the large-scale commercialization of this technology. At the end of Inconvenient Truth, Al Gore tells listeners they will be hearing a lot about CCS in the coming years, vaguely hinting “you heard it here first” about some cure-all for global warming.  It also forms an important part of Princeton professor Robert Socolow’s  strategy for breaking fight of climate change into manageable wedges.

Rather than state the need for government cash or tax breaks, Van der Veer said emissions trading markets should recognize and give credit for carbon captured and stored in the ground, thereby stimulating investment. Sounds pretty reasonable and simple.

None being currently captured is something of a problem, obviously, for Shell’s Blueprint.

The company’s point person for leading the push into the technology questioned its near-term viability. It’s pretty difficult to give credit for capturing carbon dioxide and burying it underground until someone can prove it stays there and doesn’t leak back into the atmosphere. The energy spent transporting the captured carbon dioxide might well negate much of the benefit of capturing it in the first place. And so on.

One positive point might be that Van der Veer wanted a carbon credit for CCS rather than a tax break. With Europe’s cap-and-trade system to cut greenhouse gases putting a price on carbon dioxide emissions, currently more than $30 per tonne, it would give Shell a predictable form of pricing for its continued research into the technology.

Barring that, Scramble anyone?

Posted in cap-and-trade, carbon capture and storage, carbon credits, climate change, greenhouse gas emissions | 1 Comment »

Grim news for climate investors who look back

Some very discouraging news this week from researchers who published a commentary in the journal Nature. The rather dense, wonkish piece and the accompanying story basically concluded that the estimates of greenhouse gas emissions developed by the United Nations in 2000, which provided the foundation for most policy-making to address the problem, are seriously flawed. The U.N. scenarios, for example, forecast that Chinese carbon dioxide emissions would rise 2.6-4.8 percent this decade. They are currently running about 11-13 percent.

 The European Union said this week that carbon dioxide emissions rose last year, putting a question mark on the bloc’s system of capping emissions and allowing companies to trade permits to emit greenhouse gases.

And finally AgCert, a developer of carbon offsets for Europe’s commercial market, has more or less been taken over by creditors, wiping out holders of the London Stock Exchange-listed shares in a bid to salvage something to pay its debts.

The company originally helped farmers prevent the release of emissions from farm waste ponds (pictured above, the before and after) and sold credits for the captured greenhouse gases in Europe, where in addition to permits, polluters can buy carbon dioxide offsets.

However, some of the projects developed by AgCert, which was rated as one of the best eight carbon offset firms by Clearn Air Cool Planet, didn’t win necessary approval and it ended up selling 7.2 million offsets, more than it developed. Forced into the market as a buyer to meet its commitments to supply offsets, AgCert’s business came undone.

It’s not a pretty outcome, but it could have been worse. AgCert’s offsets were approved the United Nations, which has been criticized for being too lenient. This suggests that’s not true.

And in the background, prices for European Union Allowances, the permits to pollute, rallied all week. That sends a powerful price signal to investors. On Friday, prices for shares of solar power companies also blasted higher, which will no doubt catch a lot of attention. Looking back, the news this week was disappointing, but markets indicate there’s still plenty of optimism.

Posted in cap-and-trade, carbon credits, greenhouse gas emissions | 2 Comments »

We can solve it (but don’t mention the cost)

An Al Gore-led campaign will be rolling out ads on TV and the web over the next few weeks to press leaders to act on climate change.

We Can Solve It’s slick website urges the usual assortment of personal choices regarding lightbulbs and public transit. More importantly the ads will urge viewers and readers to demand action. The website mentions the tools are available to halt and reverse climate change by plowing investment into renewable energy and improving our power grid, among many other things. 

Inconvenient Truth and now the We Can Solve It campaign are selling a relatively pain-free set of solutions based on funny-looking lightbulbs and unplugging the TV at night. At the end of his film, An Inconvenient Truth, Gore casually mentions that by following the recommendations of Princeton University professor, Robert Socolow, we can lick climate change.

Socolow presses for much larger changes than Gore’s film or current campaign make clear. The We Can Solve It website hints at the pain the effort will involve, by reminding Americans they defeated Hitler and ended slavery, although the website doesn’t mention the extraordinary cost of either effort.

Socolow is best known for breaking down the fight against climate change into manageable ‘wedges.’ These include doubling nuclear power output (which means 100 new plants; the United States hasn’t had a new plant in a generation), increasing the number of wind turbines 50 fold to 2 million, doubling fuel efficiency of cars while cutting the miles driven in half and converting 1/6 the world’s cropland to biofuels while changing the rest to no-till production. There’s plenty more here.

That sort of stuff is going to hurt and it would probably be better in the long run to say that up front.

We’ve already seen unintended consequences of rushing into biofuels, with food prices skyrocketing as farmers convert land to energy production. One way to avoid similar problems going forward would be to tax carbon, or institute a cap-and-trade system, and let the entrepreneurs and innovators figure out the best way to manage the transition. Otherwise we’re likely to get wind turbines generating tax credits rather than electricity.

That said, there are encouraging developments.

Pacific Gas and Energy said on Tuesday it signed an agreement for 900 megawatts of power, enough for 630,000 California homes. The deal with Bright Source Energy (their solar thermal plant is pictured above) wouldn’t have happened if California hadn’t set a benchmark for renewable energy. By not stipulating the type of renewable energy, the state unleashed engineers to find the cheapest way to provide that power. Bright Source says it eventually expects to generate power for 10 cents per kilowatt hour, about half of photovoltaic solar power and about what U.S. consumers pay in the more expensive states.

Posted in cap-and-trade, climate change, regulation, solar power | 3 Comments »