Archive for the ‘carbon markets’ Category

A group of Midwestern governors signed on to a greenhouse gas emissions reduction plan. They propose to reduce emissions by 60-80% of 1990 levels by 2050. Details of the cap and trade program have not yet been determined. In the last post, I mentioned that all of the Midwestern states attended the meeting. Only IA, IL, KS, MI, MN, WI, and Manitoba signed the agreement however.

The governors also signed an “energy security and climate stewardship platform”. This calls for, inter alia, a regional regulatory framework for carbon capture and storage (CCS) by 2010, including capture, injection, monitoring, verification, and liability issues. By 2012, a multi-jurisdictional CO2 pipeline should be permitted. Eight coal-fueled facilities with CCS should be built by 2015: three IGCC using bituminous coal, two using sub-bituminous coal, two using lignite, and one post-combustion carbon capture facility at a pulverized coal plant. The governors also committed to having all new coal-fueled power plants employing CCS by 2020. This would result in a complete phase out of coal-fueled power plants not employing CCS by 2050.


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The Midwestern Governors Association is holding an energy summit today–“Unveiling a Midwestern Energy Security and Climate Stewardship Platform“. The Midwestern states (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI) are following in the footsteps of the Regional Greenhouse Gas Initiative (CT, DE, MD, ME, NH, NJ, NY, VT) and the Western Climate Initiative (AZ, CA, NM, OR, UT, WA, British Columbia, and Manitoba). The RGGI states already have a regional emissions cap and trading system underway, and the WCI states plan to have their greenhouse gas trading mechanism designed by August 2008. If the Midwest creates a similar system, more than half of the states will be involved in a regional cap and trade program. It will be interesting to see if the Midwestern reliance on coal for electricity generation leads to differences in the regional programs.

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A colleague and I have been looking at the issue of potential liability for sequestered CO2. Liability might be incurred if CO2 injected into the subsurface damages a resource such as oil, natural gas, or water, or if the CO2 leaks into the atmosphere. Liability is not an insignificant issue if carbon sequestration is to be done on a large scale. If carbon sequestration is to become one of the climate stabilization wedges envisioned by Pacala and Socolow (Science 305, 968 2004), 800 GW of baseload coal-fired power plant capacty would have to sequester a total of 1 Gt of CO2 annually. Currently only 0.01 Gt is sequestered each year. To make up one climate stabilization wedge, the equivalent of 3,500 Sleipner-sized projects are needed. Some people in the energy industry are concerned that such a large undertaking might lead to large lawsuits.

My colleague brought up a good point that is often only considered separately. The potential liability for injected CO2 might be much less and much less probable than liability for continued CO2 emissions. This is no longer an abstract issue. The New York attorney general has issued subpoenas to AES, Dominion Resources, Dynegy, Peabody Energy, and Xcel Energy asking them to explain why the climate change risks associated with plans to build coal-fired power plants have not been disclosed to investors. A group of investors, state treasurers, and environmental groups have petitioned the SEC to clarify that existing regulations require publicly traded companies to assess and disclose their financial risk from climate change. In addition, state public utility commissions have begun to deny permits to construct coal-fired power plants for similar reasons.

You could flip a coin, but I would bet on CO2 emissions becoming a liability.

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In a recent entry about the EU market, I questioned how long it would take the US to catch up. An article at Bloomberg.com today reports that the high rollers are all wagering that the US market will bloom like a mushroom after a spring rain. The more risk averse are banking on change as soon as a new administration takes over in DC, but there is already action in Congress. The large US banks are already hiring carbon traders, who are busy buying inexpensive certified emissions reduction credits (1 CER = 1 tonne of CO2 equivalent or tCO2e) created under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Most of the CERs are from China and India. The traders are counting on a 200-300% return on investment if the US carbon market takes off. One plan is to bundle carbon credits with power contracts. When US electric utilities are faced with carbon caps, the carbon credits will allow trader to sell power contracts at lower prices. We will see how it plays out. But with all the money queuing up, a large US carbon market appears to be a good bet.

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The Environmental Law Prof pointed out several months ago that we should base regulations to limit CO2 emissions on the Montreal Protocol. She correctly called the Montreal Protocol an “effective regulatory approach” because it combines a stringent phased-in ban with trading during the phase down. She appeared to be a bit less optimistic about the Kyoto Protocol, and by implication the trading schemes associated with it.

Although there are still some skeptics, it appears that the European Union Emissions Trading System (EUETS) may also turn out to be an effective regulatory approach. Climate 411 reports that the EUETS naysayers usually focus on the short-term rise and fall of the current price of CO2, but often fail to consider that EUETS is still in the pilot phase because the Kyoto Protocol emissions reduction period does not begin until 2008. Another optimistic sign is that the carbon futures price has held relatively steady at $20-30 per ton of CO2 and is expected to be in the $30-40 range in 2008.

The cap and trade system in Europe seems to be providing some incentive for innovation, see the report 5852_harvestingthelowcarboncornucopiamarch2007.pdf. In regard to carbon capture and storage (CCS), the report states that the European Commission plans to publish a regulatory framework linking CCS to the EUETS. The methodology for allocating CO2 emissions allowances will also by revised. Existing coal-fired electricity generation plants will be allocated allowances on a CO2/kWh basis; new plants will have to be carbon neutral.

The US advocated for a cap and trade system within the Kyoto Protocol. The other parties accepted cap and trade, but the US eventually rejected the treaty. Now the EU is setting the lead in CCS. How quickly can the US catch up?

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In an 8 February 2007 entry, I discussed Maryland’s study of the Regional Greenhouse Gas Initiative (RGGI). Maryland’s 2006 Healthy Air Act required the state to become a full member of RGGI by June 2007. At the time, Maryland participated only as an observing state. Now Maryland is a full member of RGGI, and will participate in the cap and trade scheme. Emissions trading will initially be limited to electricity generation plants.

Maryland’s governor O’Malley also signed an executive order establishing a Maryland Commission in Climate Change. The Commission is charged with developing a plan to address the drivers and causes of climate change and prepare for the likely consequences and impacts of climate change.

One thing that strikes me from the report by the University of Maryland’s Center for Integrative Environmental Research is how little will actually change by joining RGGI. The study predicted that Maryland might reduce CO2 emissions by 10%. The reduction will have only a minor effect on generation however. Coal units can expect slightly lower profits; gas units will have somewhat higher profits. Energy efficiency and electricity imports will make up any difference in demand. There appears to be no anticipated role for different generation technologies.

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Here are links to two articles and their comments from Gristmill: for carbon taxes ; for cap and trade .

In the 9 February 2007 issue of Science, Daniel P. Schrag (Harvard Dept. of Earth and Planetary Sciences) writes:

Compared with the cost of most renewable energy sources, increasing the cost of electricity from coal by 50% to add sequestration seems like a bargain. When one includes the distribution and delivery charges, electric bills of most consumers would rise only 20% or so. So why is this not a higher priority in climate change legislation? Most legal approaches to climate change mitigation have focused on market mechanisms, primarily cap and trade programs. A problem is that the cap in Europe and any of the caps under discussion in the U.S. Congress yield a price on carbon that is well below the cost of capture and storage. Even if the cap were lowered, power companies might hesitate to invest in the infrastructure required for sequestration because of volatility in the price of carbon. Thus, it seems that another mechanism is required, at least to get carbon sequestration projects started.

Given the current questions about sequestration technology, the current economic realities that make it unlikely that many companies will invest in sequestration over a sustained period, and the political realities that make it unlikely we will see in the next few years a price on carbon high enough to force sequestration from coal, what can government do to make sure that carbon sequestration is ready when we need it? … By creating a competitive bidding process for long-term sequestration contracts, the United States can ensure that the most cost-efficient strategies will be used while testing a variety of capture and storage options including retrofitting older pulverized coal plants.

“Preparing to Capture Carbon”, Science, vol. 315, Issue 5813, pp. 812-813.

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