ENVIRONMENTAL MARKETS

May 16, 2015


Environmental markets have been actively traded on both compliant and voluntary levels for the last 7 years. The Kyoto Protocol was the first compliance-driven agreement between thirty-seven  (37)  countries.  This agreement was established by the United Nation Framework Convention on Climate Change (UNFCCC). The purpose of the UNFCCC was to create benchmark emission reduction goals.  Annex I to this agreement began in 2005 and will extend through 2012. The reductions call for five percent (5%)  annual reductions based on a benchmark established in 1990. There are currently thirty-four (34)  countries that were selected to continue into 2013 with compliance guidelines established at the Durban Conference.  These guidelines were to insure that Climate Change regulations would be in place.  These non-binding guidelines will become binding in May 2012. The European Union Trading Scheme will continue along with the Clean Development Mechanism and Joint Implementation Programs to reduce the 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 that have adopted 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 sixty-three percent (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 four (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 twenty-five (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 seven (7) US states and four (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.

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.

We are seeing significant effort to “clean up” our environment by reducing emissions by putting into effect compressed natural gas (CNG) fueling stations, propane fueling stations, hybrid automobiles, electric-powered automobiles, methane capture from wast sites, re-processing of oils and several other reclaim measures.  A much greater number of our population is beginning to recognize that we have one world–one Earth.  We had better take care of it.

 

 

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