Environmental Markets

April 21, 2012


Environmental Markets

Regardless as to how you feel towards “global warming”, man-made or otherwise, I think we all share the thought that being conscious of our environment and how we treat man-made effluents is critical to our wellbeing as a society in general.  I personally feel “the jury is out” relative to man-made reasons for global warming and we very well may be in a cycle of planetary warming that will work itself out in a few thousand years.  That’s not the point!    You don’t live in a dirty house so why continue polluting a dirty planet?  There is not one state in our union of states that disregards laws governing littering and yet we seemingly overlook many of our major polluters.  Many many companies are now very conscious of their “environmental footprint” and work seriously  towards improving those conditions that provide rigorous compliance with EPA standards and local codes.  I applaud their efforts.    That’s not the reason for this blog.  The technology devoted to improving our environment is really fascinating and, I think as “card-carrying” members of this planet, we need to know more about those efforts.  It’s important that we keep up with the “movers and shakers” behind the very standards being developed and those in place right now.  I would like to present to you a document written by Mr. Greg Jackson.    His write up explains the very basic elements of how environmental markets work.  I have been given his permission to copy and present his document.   That work is presented at this time.  “His words” are in italics and are as follows:

The environmental markets have been actively trading on both compliant and voluntary levels for the last seven (7) years. The Kyoto Protocol was the first compliance driven agreement among 37 countries established by the (UNFCCC) United Nation Framework Convention on Climate Change.   The UNFCCC created benchmark emission reduction goals. Annex I initiated that effort in 2005 will conclude at the end of 2012. The reductions call for 5% annual reductions based on the emissions benchmark established in 1990. There are currently 34 countries that have selected to continue in 2013 with compliance guidelines established at the Durban Conference to insure Climate Change regulations would be in place.  These non-binding guidelines will become mandatory in May 2012. The European Union Trading Scheme will continue with the Clean Development Mechanism and Joint Implementation Programs to reduce total emissions by an additional 20% by 2020. Currently Certified Emissions Reductions from industrialized and non-developed nations are being traded through the aforementioned programs from entities adopting these programs.

The United States signed the Kyoto Protocol however never put in place compliant guidelines enabling emission reduction instruments to be traded within these markets. Therefore, credits originated in the United States would have to be traded within voluntary markets. The Western Climate Initiative is scheduled to begin January 1, 2013 with California and Quebec as the two participating parties in the first North American compliant cap and trade program. The trading platform will adhere to guidelines outlined in Bill AB 32, ratified in 2006 and recently upheld by election in November 2010 via Proposition 23. Prop 23 was overwhelmingly endorsed by 63% of the voters and has cleared the way for a statewide cap and trade program. The California Air Resources Board has cleared the way for the first compliant stateside cap and trade system. Phase I is through 2020 with targeted reductions of 17% overall. The resources board has acknowledged 4 crediting programs whose protocols were adopted from the Climate Action Reserve; Forestry, Urban Forestry, Ozone Depleting Substances, and Livestock. These programs will be eligible for carbon crediting through the abatement or reduction of carbon emissions. California represents 25% of the total U.S. GDP and will allow carbon sequestration projects that can be originated anywhere in the continental U.S., Canada, and some regions in Mexico. The Western Climate Initiative (WCI) will be the established platform that California and Quebec will adhere to for climate protocol. WCI member jurisdictions include 7 US states and 4 Canadian provinces:  Arizona, British Columbia, California, Manitoba, Montana, New Mexico, Ontario, Oregon, Quebec, Utah, and Washington. It is expected that states and provinces within the WCI will follow suit once the program is up and running. There is definitely a political element to cap and trade programs. It is somewhat difficult to predict what federal and state programs will be put in place in future years that could expand the areas of compliance. California Carbon Allowances are currently being traded on the Intercontinental Exchange. Pricing for the allowances began at $17 per allowance for the first transaction and then went as high $23. Point Carbon has forecasted carbon allowance prices to rise as high as $75 by 2020. The offsets are credits that are generated from emission reduction projects that are expected to price at approximately 70% of allowance prices.

The voluntary markets were impacted dramatically when federal cap and trade legislation stalled in the senate in 2009. The economic environment and passing of the health care initiative put a formal cap and trade program on hold.   Voluntary carbon offsetting went from being for the greater good of the public to a luxury line item. The economy has started to slowly correct and voluntary market transactions per Markit have continued to grow. Issuance activity was up to 27.8 million Verified Carbon Standard Credits an increase of 500,000 credits. Credits being traded from 2010 to 2011 were 3.6 million to 9.8 million or an increase of 6.2 million credits. The Gold Standard credits traded at premiums and most transactions were over the counter pricing from $8-$12. Companies such as Whole Foods, Google, Yahoo, and Wal-Mart are forward thinking companies that are either buying voluntary carbon offsets or actually funding projects that directly reduce emissions. The Bonneville Environmental Foundation was set up to offset emissions and list participants such as Chevrolet, The North Face, REI, NHL, MLS, Idaho Power, Silk and Oregon State University.  The Foundation has identified projects that yield certain credits to address the offset needs of these individual entities.

Renewable Portfolio States (RPS) continue to grow as there are now 34 with Renewable Portfolio Standards currently in place. The RPS mechanism generally places an obligation on electricity supply companies to produce a specified fraction of their electricity from renewable energy sources. Certified renewable energy generators earn certificates for every unit of electricity they produce and can sell these along with their electricity to supply companies. Supply companies then pass the certificates to some form of regulatory body to demonstrate their compliance with their regulatory obligations. Because it is a market mandate, the RPS relies almost entirely on the private market for its implementation. Unlike feed-in tariffs which guarantee purchase of all renewable energy regardless of cost, RPS programs tend to allow more price competition between different types of renewable energy, but can be limited in competition through eligibility and multipliers for RPS programs. Those supporting the adoption of RPS mechanisms claim that market implementation will result in competition, efficiency and innovation that will deliver renewable energy at the lowest possible cost, allowing renewable energy to compete with cheaper fossil fuel energy sources. California currently has the largest requirement that is 33%. Credits are traded in the form of Renewable Energy Certificates or Solar Renewable Energy Certificates.

In the early 1990s the United States realized the need for Renewable Fuel Credits to reduce the amount of fossil fuel consumption. Transportation accounts for the majority of fossil fuel use and incentives were put in place to offer renewable/alternative fuel credits. Corporate Average Fuel Economy is a standard that was adopted to improve the average fuel economy of vehicles in the mid 1970’s to try and reduce the fuel consumption after Arab Oil Embargo. Most recently the use of ethanol and various other biofuels have created renewable fuel credits or RINs. RIN is short for Renewable Identification Number and is a renewable fuel credit. A RIN credit is a serial number assigned to each gallon of renewable fuel as it is introduced into U.S. commerce. RIN credits were created by the Environmental Protection Agency (EPA) as part of the Renewable Fuel Standard (RFS) to track our nation’s progress toward reaching the energy independence goals established by the U.S. Congress. RIN credits are the currency used by obligated parties to certify compliance they are meeting mandated renewable fuel volumes. All gasoline produced for U.S. consumption must contain either adequate renewable fuel in the blend or the equivalent in RIN credits. EPA regulations require that the RIN be tracked throughout each link in the supply chain, as title is transferred from one party to the next. RINs are assigned and travel with renewable fuel until the point in time where the biofuel is blended with petroleum products to produce gasoline. Once the renewable fuel is in the gasoline, the RIN is separated and is then eligible to trade as an environmental credit.

 Overall, emission reduction credits are here to stay. The Climate Change initiative is considered to be gaining more traction with the WCI platform being established and is predicted to pick up steam on a national level as states begin to adopt their own regulations regarding greenhouse gas emissions. The Clean Air Act is still in force and additional GGE compliance could be implemented through the EPA.

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