Introduction to Climate Change Policy: Preparing for the Journey. Chemical Strategies Partnership Chemical Management Services Conference

Transcription

1 Introduction to Climate Change Policy: Preparing for the Journey Presented to: Chemical Strategies Partnership Chemical Management Services Conference Presented by: Michael Mondshine, SAIC Inc. November 13, 2008

2 Presentation Overview Introductions National-level Initiatives Preparing for a Carbon-constrained Future Questions and Answers 2

3 Introductions Your Speaker Michael Mondshine Assistant Vice President for Climate Change Services 15 Years of experience working on greenhouse gas policy and emissions Named to the UNFCCC Roster of Experts on greenhouse gas emissions inventory preparation and baseline methods for JI and CDM projects Recently recognized by the Intergovernmental Panel on Climate Change for his contributions to their receipt of the Nobel Peace Prize Leads a practice of 25 professionals that provide emissions accounting, strategic planning, project design and implementation, project certification, metering, monitoring and verification, and project reporting 3

4 Introductions Our Company For almost four decades, Science Applications International Corporation (SAIC) has created solutions to complex technical challenges worldwide. A Fortune 500 corporation, we are one of the leading systems, solutions and technical services companies worldwide. Our Core Values and Purpose Our Successes 38 years of continuous growth $8.9 billion in annual revenues for FY 2008 Fortune 500 company No. 289 Superb staff of qualified professionals More than 44,000 personnel worldwide 10,000 employees with advanced degrees 19,000 with security clearances Key positions on initiatives of national importance Energy Environment National Security Health Critical Infrastructure Leading provider of contracted R&D services All figures current as of April

5 Introductions We Provide Climate Change Services to Government and Commercial Clientele Public Sector Clients DOE 1605(b) Program EPA Climate Leaders California Energy Commission California Climate Action Registry The Climate Registry NASA Defense Logistics Agency State of Maryland National Intelligence Council Regional Greenhouse Gas Initiative (RGGI) Inc. Commercial Clients Marathon Oil OGE Energy Chesapeake Energy Gas Technology Institute Sacramento Municipal Utility District Nebraska Public Power District ConocoPhillips Siemens AG Bank of America Chevron Natural gas associations (INGAA, AGA) American Council for Capital Formation Business Council for Sustainable Environment 5

6 National-level Initiatives

7 Regulatory Options for Controlling GHG Emissions Command and Control Emissions Performance Standard Low Carbon Fuel Standard Carbon Taxes Provides cost certainty but no certainty of required emission reductions Tax is a dirty filthy word Cap and Trade Provides certainty of emission reductions No cost certainty Cost minimization by allowing those with surplus reductions to sell to those with excessive emissions Substantial transaction costs Allocating Allowances Under a Cap and Trade Program Grandfathering Hands out allowances based on historical emission levels Traditional approach Ensures access to allowances by critical industries Rewards inefficiency prior to baseline year Massive wealth transfer to emitting sectors Auction Massive wealth transfer to government Ties-up capital that could be used for efficiency gains All have winners and losers! 7

8 Advanced Rulemaking on Regulating CO 2 Under Clean Air Act July 30, 2008: In response to Massachusetts v. EPA, the EPA issued advanced notice on how to regulate GHGs under the CAA Comments due January 2009, after inauguration Focuses on the framework by which EPA could regulate emissions, i.e., possible blueprint for future regulation Permits for new power plants and industrial facilities Cap-and-trade for limiting emissions across sectors Nationwide limit on GHG emissions Requests comments on draft endangerment finding and the wider CAA implications of an endangerment finding related to transportation EPA recommends using Section 111 of the CAA Focuses on efficiency upgrades at big industrial plants Would like to avoid using National Ambient Air Quality Standards (NAAQS) Limits emissions of individual pollutants; most stringent NAAQS would require issuance of thousands more permits under CAA Fear of legal quagmire and delays in permitting Key question: What is the threshold for including emitters; can it be less stringent than current CAA guidelines? Congressional reluctance for EPA to regulate GHGs first has increased pressure to pass a federal bill early 8

9 Dingell-Boucher House Bill Draft climate change legislation released on October 7, 2008 Expected guide for next year s house debate on climate change policy Cap-and-Trade System to cover 88% of U.S. GHG emissions, phasing in covered sectors: Electric utilities starting 2012 Petroleum producers and importers starting 2012 Large industrial plants starting 2014 Producers and importers of bulk gases starting 2017 Natural gas and local distribution companies starting 2017 EPA to regulate sources with < 25,000 metric tons of GHGs/year Proposed Cap: 6% below 2005 by 2020; 44% below 2005 by 2030, and 80% below 2005 by 2050 HFCs regulated separately under Title VI of CAA Performance standards for new coal-fired power plants Requiring carbon capture and sequestration for a portion of emissions Banking and borrowing allowed Strategic reserve of allowances may be auctioned if allowance prices reach a level TBD Domestic and International offsets permitted at an increasing level, including international deforestation Cap at 5% for the first five years, growing to 35% by 2024 Focus on establishing one comprehensive Federal Program Eliminates existing state GHG trading programs May preempt state motor vehicle GHG emission standards 9

10 Proposed Federal GHG Legislation EPA Mandatory GHG Reporting FY08 Appropriations Act authorized EPA to develop a mandatory GHG reporting rule using existing authority under the Clean Air Act (CAA) Require mandatory reporting of "above appropriate thresholds in all sectors of the economy." EPA flexibility on thresholds and frequency of reporting Must include emissions "resulting" from upstream production and downstream sources Upstream: fossil fuel and chemical producers and importers Downstream: direct emitters - large industrial facilities Requires all six GHGs Likely to use existing CAA reporting procedures Must build on existing State GHG reporting procedures Missed September 2008 deadline for proposed rule; final rule by June

11 Proposed Federal GHG Legislation 11

12 Lieberman-Warner Bill Key Aspects Overall, covers more than 85 percent of total U.S. GHG emissions Incrementally declining emissions cap 4 percent below 2005 levels by 2012 (5.775 billion metric tons in 2012) 30 percent below 2005 levels in percent below 2005 levels in 2050 (1.73 billion metric tons in 2050) Portion Auctioned 30 percent in 2012 (assuming all cost-containment allowances are purchased) 33 percent in 2012 allocated to non-covered entities 100 percent from Separate interest-free borrowed allowances that may be auctioned under annual Cost Containment Auction, maximum 6 billion allowances from Covered Entities Facilities that: Use >5,000 tons of coal annually Process, produce, or import natural gas Produce or import petroleum or coal-based fuel Produce for sale or distribution, or import more than 10,000 CO 2 e of chemicals Emit, as a by-product of HCFC production, more than 10,000 CO 2 e of HFCs Full and open trading, unlimited banking and borrowing of up to 15% of allowance obligation up to 5 years in advance at 10% annual interest 12

13 Lieberman-Warner Bill Politics S.2191 introduced October 2007; reported out of committee December 2007 Bill manager s substitute amendment released May 2007; renumbered S Floor debate began June 2, 2008 June 6, 2008, billed failed cloture vote with 48 yes, 36 no. An additional six likely yes votes were not present Both major-party candidates for the Presidency are vehement supporters of a Cap and Trade approach principal differences are in the allocation of allowances (McCain Grandfathering, Obama Auction) Post-Kyoto international agreement to be negotiated in Copenhagen, December 2009 United States likely to seek a post-kyoto target in line with domestic cap and trade targets Suggests law to be signed Fall

14 Lieberman-Warner Bill Impacts Allowance prices act very much like a tax on the end-user Gasoline Consumers 1 cent per gallon per each $1.00 per ton of carbon tax or allowance price Electricity Consumers 1 cent per kwh for each $16.00 per ton of carbon tax or allowance price Natural Gas Consumers Five plus cents per MMBTU for each $1.00 per ton carbon tax or allowance price 14

15 Lieberman-Warner Bill Aspects Pertinent to the Chemical Industry Chemical manufacturers whose products will release greater than 10,000 tons CO2e upon use are regulated Title VIII: Efficiency and Renewable Energy Efficient Manufacturing Program: Awards manufacturing facilities for achieving high levels of operational efficiency; $51 billion worth of allowances allocated through 2031 Carbon-intensive manufacturing industries will receive $213 billion through 2031 to help them adjust to the cap and trade program Allocates free allowances beginning in % to energy intensive manufacturing facilities, which include facilities that manufacture iron, steel, aluminum, pulp, paper, cement, chemicals, and other products listed by EPA International Reserve Allowance Requirement Imposed on major trading partners that are deemed to not be taking comparable action. The list of covered products has been expanded and now includes iron, steel, steel mill products, aluminum, cement, glass, pulp, paper, chemicals, industrial ceramics or any other manufactured product sold in bulk that generates, in the course of manufacture, a substantial quantity of direct and/or indirect GHG emissions 15

16 Lieberman-Warner Bill Impacts Potential Allowance Prices Source: National Energy Modeling System runs S2191.D031708A, S2191HC.D031708A, S219BIV.D031608A, S2191NOINT, D032508A, S2191BIVNOI.D033108A, and S1766_08.D031508A. 16

17 Lieberman-Warner Impacts (cont d) Coal Cost to Electric Generators $ per MMbtu 17

18 Lieberman-Warner Bill Impacts (Continued) Source: EPA Analysis of S Scenario 2 (ADAGE) Source: EPA Analysis of S Scenario 2 (ADAGE) 18

19 Lieberman-Warner Bill Impacts (Continued) Source: EPA Analysis of S Scenario 2 (ADAGE) 19

20 Preparing for a Carbon-constrained Future

21 Preparing for a Carbon Constrained Future From Situational Assessment to Plan Execution Situational Assessment Assess Physical Risks to Business Operations from Climate Change Track Legislation and Regulations at the State and Federal Level Conduct Comprehensive GHG Inventory Forecast Future Corporate Emissions Levels Forecast Future Allowance Prices Assess Total GHG Regulation Cost Exposure Identify Market Opportunities Driven by Regulation Strategic Planning Build Cost-curve for Potential GHG Emission Reductions Including Allowances/Offsets Consider Relevant Adaptation Measures to Address Physical Risk Identify Cost-Effective Internal Reductions Perform Technology Assessments Carbon Cost Risk Management Approach Draft Integrated Plan for Adaptation, Mitigation and Market Participation Define Public-facing Climate Change Message Develop Public Outreach Plan Develop Government Relations Strategy Plan Execution Comprehensive Energy Management Clean Energy Procurement New Clean Energy Builds Biomass to Energy, Solar Thermal, Wind Revaluate Capital Stock Investments Based on Cost of Carbon LEED Building Design and Construction Purchase/Sell Offsets/Allowances through Web-Based Auction Platform Hedge Carbon Risk Using Options/Futures in Carbon or Energy Markets Register Emissions/Reductions with Relevant Authorities 21

22 Top 10 Things You Should Be Doing Now 1. Track state and federal statutes and regulations 2. Understand what the change in energy prices and the change in demand, as well as the cost of allowances, will be in the future economy 3. Understand your current emissions level 4. Forecast your future emissions, and the associated compliance costs of current and future emissions 5. Benchmark your emissions forecasts against key internal and external competitors 6. Understand how small changes in policy can affect your competitive position, and understand the many ways you can influence policy 7. Identify opportunities to reduce your profile 8. Re-rank potential capital projects and investments based on an understanding of carbon prices 9. Identify business opportunities associated with carbon, e.g., new technologies, new services, and trading carbon as a commodity 10. Communicate position to key stakeholders management, customers, shareholders, partners and suppliers 22

23 Situational Assessment Physical Risks Are the impacts of climate change critical to your entity s long-term core mission? Tourism Agriculture and forestry Health industry Water availability many industrial sectors Changing heating and cooling demands Winter sports Sensitivity to extreme events (insurance) Coastal location 23

24 Situational Assessment Emissions Inventories You can t manage what you can t measure Identify inventory methodology The Climate Registry California Climate Action Registry California Air Resources Board Climate Leaders DOE 1605(b) WRI API Compendium Know the pros and cons of different approaches for your entity reporting Equity share or management control basis De minimus emissions Organizational boundaries Base Period Certification Degree of accuracy e.g., 95% overall accuracy Cost consideration e.g., $2,000 to $20,000 per year Management system requirements 24

25 Situational Assessment Forecasting Future Emissions Must tie in with future business planning function Different business segments can be individually forecast and summarized Often best to develop GHG indicators for business e.g., GHG per unit of production or per unit of raw material input Tons 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 - CO 2 Equiv. Emissions Forecast Year 25

26 Situational Assessment Forecasting Allowance Prices A0692-VO-144 Annual Costs Attributable to Federal Cap and Trade Legislation For Sample Energy Intensive SAIC Customer Electricity (mwh) Natural Gas (MMBTU) Coal (MMBTU) Energy Used 13,994,405 60,614,432 15,153,608 Metric Tons CO 2 E 9,460,218 3,191,350 1,456,565 Value at $10 $94,602,178 $31,913,498 $14,565,648 Value at $20 $189,204,356 $63,826,997 $29,131,296 Value at $40 $378,408,711 $127,653,994 $58,262,592 Value at $80 $756,817,422 $255,307,988 $116,525,184 Based on U.S. Average Default Emissions Factors from the Energy Information Administration Total Costs = $141 Million to $1.13 Billion Annually 26

27 Strategic Planning Identify Cost-Effective Internal Reductions Industrial Co-generation Energy efficiency (e.g., lighting, process boiler efficiency) Process improvement Cement kiln modernization Steel mill modernization Fuel switching Improved leak performance and recovery SF 6 in power industry PFC in semiconductor industry Transport Biofuels Conventional ethanol (corn), cellulosic ethanol, biodiesel Life cycle energy reduction of conventional ethanol is debatable Natural gas GHG reduction partly offset by decreased efficiency Heavy-duty vehicles Hybrid vehicles Plug-in hybrid vehicles (PHEVs) Agriculture Soil management Decreased tillage Decreased use of fertilizers Livestock management Feed management, protein optimization Manure management Manure digesters and methane recovery Carbon Capture 27

28 Strategic Planning Developing Cost Curves for Internal Reductions - Refinery Case 28

29 Strategic Planning Shaping Policy Developments Understand the impacts to your business Understand the impacts to your competitor s business To have a seat at the table, you have to bring experience your interest is not enough. (David Hone, Group Climate Change Adviser, Shell International Ltd.) Look at your early action and offset opportunities and discuss their possible inclusion in future legislation Most likely early action crediting opportunities Agricultural digesters Control of unregulated landfills Industrial and commercial boilers other energy efficiency items Afforestation SF 6 reductions in power industry Perhaps yours? 29

30 Contact Us To discuss how SAIC s energy and climate change teams can help you Please contact Michael Mondshine Ph: michael.r.mondshine@saic.com or Steven Messner Ph: steven.d.messner@saic.com 30 SAIC, the SAIC logo, and "From Science to Solutions" are trademarks or registered trademarks of Science Applications International Corporation in the United States and/or other countries.