GHG Emission Reduction CREDIT TRADING and Ecoysystem Management What We Have Learned, Where We Go From Here At the University of Washington, March 5, 2002 Aldyen Donnelly, President, the Greenhouse Emissions Management Consortium email@example.com
So What is the Kyoto Protocol, Really? • The Kyoto Protocol (“KP”) is a convention that establishes a global system of national GHG Quotas, called “AAUs”. • Any one nation’s AAU supply governs its absolute combined rights to: • produce, transport fossil fuels + • consume fossil fuels + • produce beef, pork + • produce rice
How Do We Decide If We Should/How Much to Spend on GHG Emission Reductions?
How Do Future Regulatory Risk Scenarios Translate into a “Market-Will Bear” ERC Price? Note: Once “share value at risk” is large, capital flees the sector and, possibly, the region.
Among Annex B Market Players, Who Will Import and Who Will Export ERCs, in the Long Run? 0.9 Fossil fuel consumption-related tCO2e/USD $1,000 equivalent GDP 0.6 0.3 0.0
Conclusion: What Types of ER Projects is GEMCo Developing or Interested In? For example… • Agriculture and Forestry: Canada, Canada/US boundary, all types of projects. • Mobile Sources: North America, (people) trip reduction, transit; (freight) long haul modal switching from road back to rail; (technology) after market and OEM engine techs enabling cleaner fuel use in trucks, after market conversions of SUV fleet to natural gas. • Buildings: (programs) building retrofit strategies; (technology) municipal planning tools, solar, PV and heat pump supply systems. • Enabling Technology: all regions, coal mine vent gas methane to electricity; heat exchangers, small stationary generation, HFC134a and R12 recycling strategies, etc.
What is the Historical Loss of Canadian Prairie soil C in Our Traditional Service Regions? …i.e. What is the Maximum Potential One-time Carbon Gain?
What Do Realistic Land Use Conversion Targets Look Like for the Land Areas Outlined in Red?
What has to be Estimated/Measured to Support a Forestry-based ERC trade? “Before-” and “After-Project” carbon, nitrogen storage rates and emissions (including fossil fuel used in forest management and product transportation), amortized over normal life of the stand.
Insufficiently stocked land, natural regeneration, high erosion in earlier periods, 40% probability of forest fire in 6th period yielding loss of 2/3 of natural new growth… X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 C C C C C C C C C C C C C C C C C C C C C C C C X X X X X +2 - 7.3 - 18.3 +6 - 3.7 +1- 11 =-71.9 +4 - 11 +1 - 11 - 18.3 +2 – 7.3 T/ha
Restocking Insufficiently stocked land, less erosion in earlier periods, management results in more new biomass production per hectare planted than would result from natural regeneration, 20% probability of forest fire in 6th period yielding loss of 2/3 of natural new growth… CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 CO2 C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C +5 - 11 – 36.6 +8 – 3.7 +2 - 7.3 =- 110.3 +10 – 3.7 +3 – 29.4 – 40.3 +1 - 7.3 T/ha = - 38.4 -0.7 -18.3 -2 +4.7 Or -0.55/year over the life of the stand +13.3 -16.4 -22 +13.6
What is an Emission Reduction Credit (ERC)? • Defined in the contract, this depends largely on the Emission Reduction/Removal Measurement, Verification & Reporting Protocol. • Contractually, “credit” means any and all benefits the seller might, in some future, be allocated or earn as a direct result of achieving an ER (e.g. reduced tax liability, allowance supply, etc.) • Note: when an entity transfers title to 10 tCO2e in ERCs to a buyer, the seller must add 10 tCO2e to their GHG inventory for all domestic and international public reporting purposes (voluntary and mandatory). • Note: when a country approves export of ERCs/CERs, it must formally agree to add an equivalent volume of GHG emissions to the national inventory for all reporting purposes.
Contracting Principals in the Context of Sequestration Projects • Existing science suggests carbon sequestration potential that ranges from a “minimum” to a “maximum” impact on carbon stocks, including consideration of estimation error and natural disasters. • A Buyer and a Seller first agree to work with a set of “Reference Case” lifecycle (say, 70 years for forestry) “base” or “before-project” case and “after-project” case carbon stock curves, which combine to produce “minimum” to “maximum” annual average GHG emission removal forecasts for the project. • The Buyer and Seller then agree on a set of curves on which to base a contract. In the contract, the seller commits to implement the project and to deliver evidence of carbon stock changes to the buyer; the buyer typically pays an advance to partially finance the project and commits to make additional payments on the future delivery of evidence that the project has been maintained and carbon stocks have changed. • The term of the contract is usually shorter than or equal to the stand lifecycle (70 years) . The seller likely must report project progress annually or over slightly longer reporting periods.
Contracting Principals in the Context of Sequestration Projects, continued… • At the end of each reporting period, on receipt of proof that the stand has been maintained as agreed, the Buyer pays for ERCs equal to the lesser of (1) the estimated lifecycle annual average carbon increment indicated in the Reference Case, and (2) the estimated actual carbon increment stored over the last reporting period. This procedure can apply regardless how short the contract term is. • In all contracts, the seller must guarantee to deliver some minimum volume of CO2 “offsets” or removals based on the contractually-defined measurement, verification and reporting procedure. • The Buyer can permit the Seller to “put” over-banked ERCs to the Buyer at the end of the contract term, if, by then, it is clear that future risk of carbon discharges to the atmosphere was over estimated in the Reference Case. The Buyer can also allow a “put” of incremental carbon revealed if the science and standard carbon estimation methods mature and suggest higher sequestration rates over the contract period. A seller’s “put” provision embeds the buyer’s obligation to pay for additional carbon if the seller can prove it has been stored.
Contracting Principals in the Context of Sequestration Projects, continued… • The Seller has no obligations to the Buyer after the end of the term of the agreement. The Buyer offers no warrantees the Seller may not face penalties for GHG discharges that may occur after the end of the term of the agreement. • The contract must address the implications of evolution of scientific understanding over the contract term. If government develops a formal ERC trading regime and dictates a measurement, verification and reporting protocol that differs from the contract protocol, what responsibility does the seller have to adopt the new procedure? What responsibility does the buyer have to cover incremental costs of the new procedure? Who has to cover tonnes lost/who owns tonnes gained due to scientific progress?
What Types of ERCs Do We Not Buy? • Unaudited, by a professional in a position of fiduciary trust (partial liability transfer). Typically, acceptable audit wording is negotiated in the contracting stage, not later. • Already Paid for by Government, even if government is currently willing to assign title to the landowner transfer • Indirect, unless third party source/sink owner has assigned rights to vendor. • Avoided, unless vendor is highly credit worthy and guarantees delivery of future rights to emit.
Putting “Avoided ERs” in Context…to forward sell an avoided ER, the seller has to have some confidence that they will be assigned future rights to discharge GHGs, which rights they will not need. Those rights will be in short supply. GEMCo will not buy forward an “avoided” tonne unless the seller guarantees delivery of a future right to discharge. Few sellers can afford to accept the risk implicit in such a guarantee. THEQuestions: (1) How will this budget be shared? } (2) How will the obligations to cover deficit be allocated?
What About Project Scale? How much of the Buyer’s Budget Will Get to the Project Owner?
What About Project Scale? How much of the Buyer’s Budget Will Get to the Project Owner?
The Permanency Debate: There is No Such Thing as a Permanent GHG Reduction or Removal
Where Should Senior North American Governments Go From Here? • National environmental policies should be based in credible ecosystem inventories: Federal governments should invest in national inventory upgrades and support regional authorities to develop improved local inventories, including criteria pollutant and GHG emissions. • Feds should use Accelerated Capital Depreciation as a tool to jump start the market (in Canada, reintroduce Class 34 and a GHG-variation on Class 27). • Permits incorporating Performance Standards and GHG reporting requirements should be introduced for all new GHG sources. • Language should be included in all permits for New Sources expressly stipulating government’s unilateral right (but not obligation) to amend the permit, at any time(s) over the operating life of the New Source, to require an up to 100% offset of lifetime GHG emissions. • Governments should resist the temptation to formalize new source GHG offset standards in advance of formulating a more comprehensive national GHG mitigation plan in consultation with all key stakeholders. • Credit generation standards for sinks, area and mobile sources should be approved and published.
The Greenhouse Emissions Management Consortium (“GEMCo”) Suite 101 - 1965 West Fourth Avenue Vancouver, BC V6J 1M8 www.gemco.org ph: 604-731-4666 fax: 604-731-4664 email: Aldyen Donnelly at <firstname.lastname@example.org> Brian Williamson at <email@example.com>