The Looming Price on Carbon: Market vs. the Social Costs

This article was first published by the CleanTech Alliance Washington, on January 11, 2016

There is a great deal of momentum in Washington and around the globe to put a price on carbon. The basic precept is that by monetizing carbon pollution, the market will adjust, moving operations away from a costly source of energy to one that is more affordable. Yet, fossil fuels are entrenched in our society, and the resistance to pry ourselves away from fossil fuels is huge. So much of our infrastructure and way of life has been built around the combustion of these polluting energy sources. The largest suppliers have even stooped to lying and manipulating public opinion to continue fossil fuel’s stranglehold on our way of life.[1] So finally, if society does set a price, what should that price be? Certainly, a price that will quickly move the markets away from fossil fuel sources in a substantive way is most desirable. Yet, a balanced approached is called for, in order not to upset business processes too abruptly.

What then would that price be in order to move the market, and are there other considerations? Will the market reflect the real cost of mitigating the damage done by the unbridled dumping of greenhouse gases (GHGs) into the atmosphere? Such damage includes compromised human health, decreased agricultural productivity, property loss from increased risk of floods and storms, and in the value of ecosystem services[2] lost due to climate change. This is the Social Cost of Carbon (SCC).

The Environmental Protection Agency (EPA) uses different models and discount rates to estimate the SCC[3]. The values that the EPA provide are wide-ranging. For 2015, the modMissouri floodingels set the SCC from $11 to $105[4]. The $105 value comes from the worst-case scenarios; the $11 figure is where minimal damage will be realized. Because of the inherent uncertainties in predicting outcomes from global climate change, the other values published along this bell curve of potential outcomes may turn out to be more realistic. These values are $36 and $56 for 2015[5]. In 2020, these middle-outcome estimates rise to $42 and $62. In 2030, they rise to $50 and $73. The worst-case scenario sets the SCC at $123 and $152, respectively for 2020 and 2030. If you live in Missouri this winter, you are living through an example of a worst-case scenario. Thus, we can see the Social Cost of Carbon on our society can be very high, indeed.

Is or should the market price be the same or similar to the actual SCC? And perhaps a bigger question is: how should we allocate the revenues from the price we put on carbon pollution? The proposed revenue-neutral Carbon Tax, I-732[6], here in Washington, sets a price at $25, to increase by 3.5% per year up to $100, after an initial first-year $15 price. The funds raised through this tax will lower our sales tax by 1%, eliminate the B&O tax for WA manufacturers, and fund the Working Families Rebate, benefiting 400,000 households.

In California, under the Cap and Trade, the next allowance auction price for February 2016 will be $12.73. The price is slowly rising from the initial $10. In this system, funds raised flow into the Greenhouse Gas Reduction Fund (GGRF). This fund is allocated to various state needs through legislative action. California ensures that a significant portion (25%) of these revenues go to projects that support disadvantaged communities. Québec, which shares an allowance auction with California, uses the proceeds for a “Green Fund” that finances various initiatives outlined in the province’s 2013-2020 Climate Change Action Plan. These initiatives include public transit, research and innovation, green energy, and dealing with municipal solid waste.

Another effort to put a price on carbon in Washington comes from an Executive Order by Governor Inslee. This sets a Cap, enforcing a 5% reduction in emissions every three years, affecting facilities emitting over 100,000 metric tons annually. This Clean Air rule also provides for alternative mechanisms to meet compliance. Companies can purchase allowances from another Cap and Trade system, such as the California/Québec allowance auction. Other mechanisms for compliance will include specific types of verified carbon offsets. The rule is still incomplete, but right now, the state collects no revenue from compliance, except the filing fee that funds the program. The final rule is due to be published this summer.

Finally, the Alliance for Clean Jobs and Energy intends to pursue an alternative carbon pricing mechanism as a 2016 ballot initiative. The Alliance is looking to support a fund that would be akin to the CA GGRF or the Québec Green Fund. It will soon release the draft text.

So, the question remains: will the funds raised from putting a price on carbon be enough to address the SCC? With the current carbon pricing, the answer is not yet. Hang on folks, we’re in for a wild ride, but unlike the Dorothy who got caught in a tornado, we can’t click our heals together to find our way home. We’re already home – and we can’t start taking significant action soon enough. Oh Auntie Em, where are you now when we need you the most?

 

[1] http://www.thenation.com/article/exxon-knew-everything-there-was-to-know-about-climate-change-by-the-mid-1980s-and-denied-it/

[2] https://en.wikipedia.org/wiki/Ecosystem_services

[3] http://www3.epa.gov/climatechange/EPAactivities/economics/scc.html

[4] Price per metric ton of CO2 emissions (MtCO2)

[5] These values are for only CO2 and separate studies have been made on methane – a 25X more potent GHG than CO2.

[6] http://carbonwa.org/policy/

Carbon Accounting in the Cap & Trade and Carbon Tax Age

This article was originally published on November 12, 2015 by the WA CleanTech Alliance

Here in Washington, and in the rest of the world, there is a hot debate over putting a price on carbon. Beyond the merits and outcomes of a cap and trade system or a carbon tax, greenhouse gases must be measured and accounted for in order to assign a price to it. This process must be rigorous and verified.  Regardless of the emission source, the “currency” of carbon is measured in metric tonnes of carbon dioxide (CO2) equivalents (MtCO2e). This measurement accounts for the fact that some greenhouse gases (GHGs), like methane and nitrous oxide (yes, laughing gas that your dentist might administer) have a global warming potential significantly higher than CO2, itself.

Carbon offsets are an environmental trading mechanism that provides for GHG mitigation projects that would not exist without the addition of carbon finance. This test of “additionality” considers local, federal and other jurisdictional regulations, as well as project performance (activities that are beyond “business as usual”). Though currency is always counted in MtCO2e, the source of carbon credits can vary greatly. There are projects located here in Washington and throughout the world.

Around these GHG accounting systems, active carbon markets have developed. After some ups-and-downs since the 1990s, carbon markets have now matured. Carbon offsets registered at the major carbon registries can be trusted to represent real reductions. These high-valued carbon credits are known generically as verified emission reductions (VERs). Credits are serialized, with each carbon unit unique and traceable. Only VERs are considered to be valid in the compliance markets (CA Cap and Trade, EU ETS, RGGI, etc.), and, often, only certain types of VERs will be accepted by these governing bodies. The voluntary carbon markets are more open, as there are literally hundreds of different mechanisms for carbon offsetting, different protocols and locations where this work is being performed. Registries such as The Gold Standard Foundation (GSF) and the Verified Carbon Standard (VCS), with its partnership with the CCB standard (Climate Community and Biodiversity), offer assurance that not only do the projects reduce GHGs emissions, but also have a positive economic and social impact on their communities.

Carbon-offset projects can provide new educational opportunities, economic stimulus, better public health, creation of community co-ops, improved forests and watersheds, wetland preservation, power-grid enhancements, and improved waste management and agricultural practices. Even a U.S.-based landfill gas-destruction project can be configured to additionally generate renewable energy. Carbon-offset projects provide some of the best examples of sustainable development, all enabled by carbon finance.

Carbon offsetting is no substitute for doing sustainability work locally. Facilities need to continue to be more efficient, use less fossil fuels (including diesel and natural gas), and invest in solar and other renewables when it makes sense.  However, there remains an unavoidable carbon footprint. For example, when an airline is more efficient, it saves fuel, which in turn lowers operating costs. Even a modest one-to-two percent gain in efficiency represents a significant monetary savings. Yet, when 98 percent of an airline’s carbon footprint is from fuel consumption, a massive carbon footprint still remains. The same situation is true for the vast majority of industries actively working to reduce fossil-fuel consumption. Until zero emissions are achieved, it is possible to achieve carbon neutrality through the purchase of high-quality carbon offsets.

We must move our civilization off of fossil fuels before it is too late. Meanwhile, mitigating unavoidable emissions through the purchase of carbon offsets is a moral response to a daunting global emergency.

So… what’s an offset?

 

This post was originally published on February 23, 2014

Last fall I was asked to present at a local community college on Carbon Offsets; what they are, how they work, and what would be the benefit of purchasing offsets. Another conversation I had with a family friend, a project manager and engineer for one of those big multinational energy companies, had me again explaining, if not defending, the value of carbon offsets. My friend’s view was that all carbon offsets are a joke, fictitious, and that no offsets are real. Thinking that my friend was desperately ill informed, I did my best to set him straight. From this interaction and from my experience of teaching this topic to students and faculty at the community college, I realized that there is a need and interest for general education on this topic.

spray of wild flowersStandards that define how to create and verify carbon offsets have been developed through multi-stakeholder international processes. Institutions that register offsets provide project developers a defined framework for carbon offset creation. The necessary principles and characteristics of carbon offsets have been set. Carbon offset projects will be relevant, complete, consistent, accurate, transparent and conservative in the determination of the amounts of offsets that are created during a defined period of time. Offsets are generated from the carefully measured destruction, avoidanceor sequestration of greenhouse gases.

Offset projects include a gambit of types, technologies and locations, with new protocols coming online all the time. Recently, the American Carbon Registry has approved a new offset protocol for theRestoration of Degraded Deltaic Wetlands of the Mississippi Delta, where offset credits support the restoration of an important local resource. This project would represent the sequestration of carbon (CO2).

In the diverse panoply of offsets, offset generation from the destruction of landfill gas (LFG) is quite common. LFG is typically around 50% methane, a very potent greenhouse gas. In this type of project regime there cannot be any local legal requirements to collect and destroy landfill gas. Therefore, without the generation of offsets as a financial mechanism, uncontrolled evolution of the polluting landfill gas would continue unabated. This important concept is described as additionality.

All offset projects have to be additional, as the fate of the greenhouse gases involved (destruction, avoidance or sequestration), would not be realized without the mechanism of a carbon market.

Other project types include the controlled destruction of ozone-depleting substances, destruction of methane from controlled livestock waste-management practices and many others. Projects that avoid greenhouse gas emissions may include fuel switching to less greenhouse gas intensive fuels or changing to less fossil fuel intensive agricultural practices. Direct capture and storage (CCS) for the sequestration of CO2 from the atmosphere or from a specific industrial process are still being proven as viable technologies. I see CCS projects as science projects – big ones – but I’m not aware of any protocols approved by any of the major carbon registries for this new set of technologies.

Forest projects are a proven way to successfully sequester carbon and typically run over a long timescale, creating carbon credits every year the project is running. REDD+ is one type of forest project that incorporates the role of conservation with community needs.  The enhancement of forest carbon stocks and the sustainable harvesting of forest products improves local economies and correspondingly, the social fabric of local communities.

Trusted and salable carbon offsets are verified by an independent, expert and accredited third party. This is akin to financial reporting that is also verified by an independent third-party accounting firm. Third-party assurance is critical, as a company won’t invest in any carbon offset that is not demonstrated to be real and permanent. Companies using offsets to hedge a current or future regulatory regime of greenhouse gas management minimize risk in offset purchases of real verified offsets. Verification is built into the process, universally, for all offset generation that have this internationally accepted high level of integrity.

The generation of carbon offsets, using rigorous and accepted methodologies, is a money maker for the project owners, consulting engineers, foresters, and others involved in project creation and verification. The value of carbon offsets “fuels” carbon markets internationally, providing a trusted mechanism for organizations to meet their greenhouse gas emission reduction goals. Carbon offsets enhance local economies, remove greenhouse gases from our environment, and can improve the social fabric of local communities.

It is through the confidence in the carbon markets, in the value of a particular carbon offset, that millions of dollars have traded hands, and millions of tons of greenhouse gases have been diminished from our atmosphere.