Mandatory and Voluntary Carbon Markets

Transcription

1 Mandatory and Voluntary Carbon Markets Developing Global Carbon Market Structures and Protocols 2009 Contact:

2 Contents Executive Summary Carbon Market Overview Carbon Market Description Voluntary Carbon Market Standards Climate Registries Proposed Federal Legislation 1

3 Executive Summary

4 Executive Summary Introduction Carbon Market Viability Carbon Market Validity Inside Industry Perspective 3

5 Executive Summary (Cont d) Carbon Market Viability There is no doubt that the carbon trading markets are viable. There are two types of markets, compliance and voluntary. Compliance markets (those mandated by law, also called regulated markets) exist now in Europe and in the northeastern region of the United States compliance market volume was $63.7B, approximately double that of The vast majority of this is traded in Europe. Additional U.S. regional compliance markets are planned, being designed, and are a near certainty given existing legislation, e.g., that in California. Voluntary markets are those in which buyers purchase environmental benefits by choice rather than legal requirement. These markets were estimated at $330M in 2007, approximately triple the 2006 result. It is considered very likely, but not certain, that federal legislation will establish a U.S. carbon compliance market. (There is already a U.S. voluntary market.) This is the stated policy of the current administration. Today, most expect that this federal legislation will be passed in 2010 and will establish a U.S. carbon cap and trade market. This current forecast is a year later than previous estimates, primarily due to the recession. The main federal legislation now foreseen for 2009 in this arena is a federal Renewable Portfolio Standard (RPS). Such a law would require a certain amount of U.S. electric generation from renewable sources, but would not establish a carbon market. This potential legislation is now increasingly likely, given recent statements t t by the president to double alternative ti energy in three years. 4

6 Executive Summary (Cont d) Carbon Market Validity The validity of these markets is less certain. Compliance markets are generally cap and trade markets. As noted above, a cap and trade market for the United States has been proposed and is considered likely. In a cap and trade market, the amount of emissions allowed for each source is capped. If a source emits more than its cap, it must buy allowances to emit. If it emits less than its cap, it may sell them. Overall emissions from all sources taken together cannot exceed the cap. The price of emissions creates the financial incentive to invest in emissions reductions so that the cap can be met economically. The economic theory behind cap and trade markets is sound. Properly done, such markets can reduce emissions at the lowest marginal cost and highest economic efficiency. In other words, such markets can produce the biggest environmental bang for the buck. The potential pitfalls lie not in economic theory, but in political realities. Validity, in this case, is defined as meeting two tests: 1) a well-functioning, transparent market and 2) effectiveness in actually reducing emissions. To assess the validity of current and future U.S. carbon markets, it is instructive to look at analogous emissions markets. Cap and trade markets for SOX and NOX, two main fossil electric generation plant pollutants, in the United States are well established and have worked well, both as markets per se and in reducing emissions. i However, the recent experience in Europe with cap and trade carbon markets is less sanguine. Validity in emissions markets depends on three things: market rules, transparency, and supply and demand fundamentals. No major deficiencies are expected for market rules and transparency in the United States. Experience in the United States with SOX and NOX, and cap and trade markets elsewhere, should be sufficient i to ensure a reasonable market framework with adequate rules and transparency. However, supply and demand fundamentals are essentially the outcome of a political process to allocate or auction allowances. This political process worked well for SOX and NOX in the United States. But, it did not work well for carbon allowances in Europe. Allowances were over allocated, meaning that too many were given out. This resulted in a windfall gain for those receiving allowances, little actual carbon emission reductions, and high price volatility with allowances ranging from roughly $2 to $45/ton in the space of a few years. 5

7 Executive Summary (Cont d) Validity (Cont d) As discussed later in this document, there is draft federal legislation, Warner-Lieberman, which is likely to form the basis for the actual legislation next year. (Please see Proposed Federal Legislation, later in this document.) Examining this legislation, on the one hand, the allocations to the power industry are very conservative, and would only be sufficient to cover half the coal electric generation output in the United States, to say nothing of natural gas or petroleum generation. This would mean that allowances would have to be purchased for most of the power in the United States, reducing carbon and driving up electricity prices, both significantly. On the other hand, there are a number of proposed safety valves, banking mechanisms, offsets, etc., which might deflect these price pressures and/or limit it the reduction in carbon. Moreover, a number of key terms of the legislation l are in play. Therefore, at present, the supply and demand fundamentals are unknown and unknowable. Nonetheless, these fundamentals, once established, will govern both the validity of the market. With present technologies, a market price for carbon allowances of roughly $40 to $80 per ton is required to create sufficient financial incentive so that emissions reduction in the power sector is economic and actually takes place. This represents a substantial ti increase to the price of electricity. iit and will have a material impact on U.S. GDP, already challenged by the credit crisis and recession. 6

8 Executive Summary (Cont d) Inside Industry Perspective Most industry participants expect a price on carbon and are modeling and planning accordingly. The prices they use internally tend to range from $12 to $30 over the next 10 years or so. (By comparison, allowances in the recently established northeast market sell for around $4 today.) However, everyone readily admits there is a wide uncertainty band around their estimates. We know of no sophisticated players assuming a zero carbon price in the United States. We know of no sophisticated players in the United States who believe they know what the future price will actually be or the shape of the ultimate federal legislation. Carbon markets are here to stay, and there will be a non-zero carbon price for years or even decades. The price level, volatility, and effectiveness in reducing emissions is uncertain and likely to remain so for several months, years, or longer. 7

9 Carbon Market Overview

10 Carbon Market Overview Market-based mechanisms such as emissions allowance trading have become widely accepted as a cost-effective method for addressing climate change and other environmental issues Dealing with environmental issues has moved out of the confines of corporate environmental departments into the realm of corporate financial strategy GHG emission reduction transactions can be classified as either allowance-based or project-based (offsets) Both allowance-based and project-based carbon transactions are measured and traded in standard units representing a quantity of CO 2 equivalent (metric tons of CO 2 equivalent = MTCO 2 ) The goal of any tradable permit program is to allow market forces to efficiently allocate emission mitigation resources so that the overall emission reduction goal is achieved at the lowest cost Emission i trading programs allocate benefits to entities that t reduce emissions i at low cost by allowing them to make additional emission reductions, thereby gaining emission allowances that they can sell to those facing high emission reduction costs Emission trading programs provide a profit incentive to devise lower cost emission reduction methods and technologies as well as environmentally sound land use changes that encourage long-term economic efficiency Allowance-based carbon transactions (also called emission allowances) are created by a regulatory or other cap-and-trade body and are initially allocated or auctioned to the user. Emission allowance transactions are based on the buyer s direct emissions Buyers must reconcile their emissions account at the end of each compliance period through direct and verified measurements to ensure compliance with their allocated/auctioned emission allowances 9

11 Carbon Market Overview (Cont d) Project-based carbon transactions (also called emission reduction credits or offsets) are created using methodologies/rules approved by the organization issuing these transactions from a project that can credibly demonstrate reduction in GHG emissions compared to what would have happened without the project Forestry offset projects are one category of projects that can provide emission reduction credits (see discussion later in this document) Other project categories include, for example, capturing landfill methane, conservation tillage practices, and alternative energy Emission reduction credits should be issued only after the reductions have been verified; these credits can then be used to offset direct emissions above an organization s allocated/auctioned emission allowances (hence the term, offset ) The purchase or sale of contracts for emission reduction credits typically carry higher transaction costs and risk than emission allowances The quality of projects for gaining emission reduction credits is directly related to the credibility of the organization issuing the credits, the methodologies/rules for establishing baselines and monitoring the project s performance, and the requirement for third-party verification Assuming sufficient quality, once emission reduction credits are issued and used to offset direct emissions, they provide an identical environmental improvement in reducing GHG emissions as emission allowances 10

12 Carbon Market Description

13 Types of Carbon Markets In 2005, the global carbon market as a whole traded about U.S.$12 billion in notional value There are two major market categories, Mandatory and Voluntary The bulk of mandatory market transactions take place within the European Union Environmental Trading Scheme (EU ETS) Driven by Kyoto compliance commitments, emission allowances worth U.S.$9.1 billion in notional value were traded in 2005 in the EU ETS, representing nearly four times that of previous years volumes Voluntary carbon markets can be divided into two distinct components: the Chicago Climate Exchange (CCX) and a more disaggregated over the counter (OTC) market CCX is a structured and closely monitored cap and trade system that organizations join voluntarily Outside of CCX, one finds a wide range of voluntary transactions ti that t are not driven by an emissions i cap, and do not, for the most part, trade on a formal exchange Because this OTC market transacts on a highly fragmented deal by deal basis, it is extremely difficult for stakeholders to both track and navigate The CCX is owned by Climate Change PLC This holding company also launched the European Climate Exchange (ECX), which has since become a major exchange for allowances generated by the European Union Emissions Trading Scheme (EU ETS), the Chicago Climate Futures Exchange (CCFE) and the Montreal Climate Exchange In anticipation of the Northeastern U.S. Regional Greenhouse Gas Initiative (RGGI), CCX hopes to develop the New York Climate Exchange and the Northeast Climate Exchange In anticipation of an upcoming California cap and trade system, the CCX also plans to create a California Climate Exchange 12

14 Carbon Markets Offsets Defined A carbon allowance or offset is a financial instrument representing a reduction in greenhouse gas emissions. Although there are six primary categories of greenhouse gases, carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO 2 e). One carbon offset represents the reduction of one metric ton of carbon dioxide id or its equivalent in other greenhouse gases There are two primary markets In the larger compliance market, companies, governments, or other entities buy carbon allowances in order to comply with caps on the total amount of carbon dioxide they are allowed to emit In the much smaller voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from transportation, electricity use, and other sources The Kyoto Protocol has sanctioned offsets as a way for governments and private companies to earn Carbon Emissions Reductions (CERs) (climate or carbon credits) which can be traded on a marketplace. The protocol established the Clean Development Mechanism (CDM), which is intended to validate and measure projects to ensure they produce authentic benefits and are genuinely "additional" activities that would not otherwise have been undertaken Organizations that have difficulty meeting their emissions quota are able to offset surplus emissions by buying CDM-approved Certified Emissions Reductions. The CDM identifies over 200 types of projects suitable for generating carbon offsets, which are grouped into broad categories. The most common projects by category are renewable energy, methane abatement, energy efficiency, and fuel switching CERs are the carbon credits or offsets generated by CDM projects which have completed the registration process One CER is equal to one metric ton of carbon dioxide equivalent Issued CERs are generated and issued to projects for emissions abatement already undertaken Forward streams of CERs are credits yet to be generated by projects that are typically under construction, but which are expected to come online in Phase I of the Kyoto Protocol ( ) Secondary Market CERs refers to CERs which are offered with a guarantee of delivery by a rated entity such as a bank or fund Carbon offsets have several common features that affect how and where they can be used Vintage refers to the year in which the offset takes place Source refers to where the offset physically comes from and how the offset is measured Certification Regime refers to the registration eligibility and requirements for each offset 13

15 Commercial Carbon Market Development There are three primary market mechanisms that will expand in monetary value and transactional activity over the next five years : the compliance market, the voluntary market and the bilateral market Corporate understanding, skill, and activity in carbon market management are of prime importance Compliance Market (representing 1.6 billion tons of CO 2 reductions in 2006) The estimated value of the 2010 compliance market including the United States is $10 to $16 B (2006$) 1 Carbon offsets are certified and traded within the protocols of the European Union Emissions Trading Scheme (EUETS) Mandatory for European Union and the U.K. Agreed upon emissions caps allocated allowances (allocation issues have caused much price volatility in Europe) Spot and futures markets Tradable Carbon Offsets come from three sources Allowances CDMs (Clean Development Mechanism) JI (Joint Implementation) allows industrialized countries to invest in emission reduction projects in developing countries In the United States, tradable offset entities will likely be: Allowances and offsets Renewable Emissions Credits (RECs) or Green Tags White Tags (Energy Efficiency Credit) one White Tag represents 1MWh of saved energy 14

16 Commercial Carbon Market Development (Cont d) Voluntary Market (representing 91 million tons of CO 2 reductions in 2006) There are several international as well as North American voluntary markets Carbon offsets are certified and traded within the protocols of the Chicago Climate Exchange (CCX) The Western Climate Initiative, a regional greenhouse gas reduction initiative by states and provinces along the western rim of North America, includes a voluntary offset scheme Credit mechanisms that use offsets may be incorporated in proposed schemes such as the Australian Carbon Exchange Over the Counter (OTC) transactions VERs refer to the emerging market for carbon credits outside the Kyoto Protocol compliance regime The voluntary market is presently smaller and less liquid than the compliance market The voluntary market is led by the private sector, not public policy Some market opinion is that the wider scope of the voluntary market will outstrip the mature market size of the compliance regime VERs are derived from project-based emissions reductions from a wide range of technologies and project types There are generally three sources of VERs at the moment; pre-registration CDM, "special situations," and small-scale projects The voluntary market has evolved a simplified process based on the CDM project cycle, but to lower cost, with less rigorous standards VER protocols may be defined by the entity that produces them VERs must have clear measurement and be verifiable VERs must have a clear audit trail As the voluntary market protocols evolve, grandfathering VER offsets will become a key issue Enterprises that have not clearly followed CDM protocols to certify VERs may lose them Enterprises that have not participated will have protocols for VERs dictated to them 15

17 Commercial Carbon Market Development (Cont d) OTC or Bilateral Market (or Private Transaction Market) There are bilateral trade mechanisms currently available European Union allowances Carbon offsets RECs (Green Tags) Energy efficiency credit (White Tags) A creative hedging mechanism of swaps may emerge for astute players in the coming years Enterprises that are energy long but carbon footprint challenged may arrange swaps (energy for offsets) with enterprises that are energy short but long in carbon offsets or carbon offset potential For example, a utility with substantial coal generation and a paper company with substantial energy needs and forest-based offsets could structure a deal in which energy and offsets are swapped. Both parties become relatively indifferent to carbon price and carbon-related energy price changes 16

18 Carbon Markets Get Real European Carbon Markets Enter a New Phase At the beginning of this year, the European Union entered Phase II ( ) of its GHG Emissions Trading Scheme (EU-ETS). Only 7% of credits are auctioned over Phase II; the balance is allocated to emitters as deemed appropriate by individual countries (which was problematic in Phase I). Despite ratcheting down the number of allowances, prices have been relatively low, as emissions decreased due to a softer economy and more gas-fired generation driven by lower oil and gas prices. A key development has been a link between the worldwide Kyoto Protocol trading scheme and the EU-ETS, which will facilitate transactions involving Certified Emissions Reductions (CERs) from carbon offset projects. One trend to watch: Emerging distinctions between the quality of different offsets and their CER values. The key achievement ement of EU-ETS ETS Phase I was setting up markets and methods; it is difficult to make the case that EU-ETS has materially reduced GHG emissions...yet. Total Traded Volum me (in Tons) EU Carbon Prices Ranged from (roughly $US 20-45), Softened in Phase II (2008), and the Allowance-Offset Spread is Narrowing CER = Certified Emissions Reductions EUA = EU Allowances 20,000, Total CER Volume Total EUA Volume 18,000,000 Dec08 CER Settle Dec08 EUA Settle 30 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 Source: European Climate Exchange EU 2008 CO 2 e transactions through late October: 2 billion tons (equivalent of over 100% of total EU Phase II allowances Dec Settl lement Price (in Euros) Regional Greenhouse Gas Initiative (RGGI) Auctions Begin The first auction of RGGI GHG allowances occurred in September. The first RGGI compliance period begins on Jan. 1, Total RGGI allowances for 2009 are 188 million tons CO 2 e. Initial prices for allowances were higher than expected $3.07 per ton versus an auction reserve price of $1.86/ton. Most had expected lower prices because of over-allocation as well as reduced economic activity (yielding lower expected emissions levels). Some RGGI states were unable to participate pending finalization of their respective rules on allowance and GHG compliance programs. Most states plan to use a substantial portion (70% to 100%) of auction proceeds for energy efficiency, but some have indicated a willingness to pass back receipts beyond some threshold dollar per ton to consumers in rate relief, which environmentalists oppose. RGGI Auction Schedule Auction Sept. 25, 2008 Dec. 17, 2008 Mar. 18, 2009 Offered (in millions)* ? of 188 States missing (not offering) NY, NJ, DE, NH None None Allocation year , 2012 Note: GHG means greenhouse gas; CO 2 e means CO 2 equivalent. *Volume is in tons of CO 2 e Sources: Regional Greenhouse Gas Initiative; European Climate Exchange; Evolution Markets; Platts; SNL Financial; The Economic Times (London); The European Union; The Wall Street Journal; BusinessGreen.com; World Resources Institute; The Climate Registry 17

19 Transaction Volumes and Values, 2006 and 2007 Mandatory and Voluntary Carbon Market volumes have steadily risen since the inception of the markets Note: Where numbers do not add up in this and other tables, values reflect rounded numbers Source: Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, World Bank 18

20 Voluntary Carbon Markets in Perspective Although substantial, the Voluntary Markets are dwarfed by the Mandatory Markets Voluntary Market EU ETS Mandatory Market Australian (New South Wales) Market Source: Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, World Bank 19

21 Global OTC Carbon Transactions in 2007 There are a wide variety of Voluntary Market transactions Source: Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, World Bank 20

22 Voluntary Carbon Markets Price Volatility There has been a significant amount of carbon price volatility Source: Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, World Bank 21

23 Voluntary Carbon Market Standards

24 Standards for Voluntary Carbon Credits The creation of standards and registries is a fundamental step in the settling of voluntary OTC transactions While the regulated markets (EU ETS, NSW, etc.) and CCX were launched with such foundations already built, the OTC market is incorporating these structures as it grows organically Once in place, the standards being built in the marketplace can be used as building blocks for registries. In turn, evolving registry infrastructure is critical for the movement of carbon credits across emerging exchanges Some key developments in 2007 and 2008 are: A significant rise in the number of third party standards Retail specific standards are fading away in desirability, in favor of more broadly recognized, third-party standards About 87% of credits transacted in the OTC market in 2007 were verified by a third party About 14% of credits sold on the voluntary OTC market were CDM issued CERs, and about 7% of credits sold on the voluntary OTC market were CCX issued credits The most utilized OTC market project standards were (in order): The Voluntary Carbon Standard (VCS) VER+ Gold Standard for VERs Meeting a third-party standard does not appear to garner credit, a premium in the marketplace as some of the highest price credits on the market do not utilize any standard 23

25 Standards for Voluntary Carbon Credits (Cont d) In 2007, the majority of credits (66%) transacted on the OTC market were non CCX voluntary offset credits These credits are often generically referred to as Verified (or, in some cases, Voluntary) Emission Reductions (VERs) However, credits sold on the voluntary OTC market can also be sourced directly from regulatory or CCX project-based credits, as well as regulatory or CCX allowance-based credits As an example, several U.S.-based retailers sell and retire CCX sourced offset credits Alternatively, the U.K. retailer, Pure, advertises that it only sells Kyoto compliant credits, such as CDM credits The CDM and the CCX have their own screening process, so the choice of suppliers to utilize these credits can also be considered a choice to use these markets third-party verification standards The OTC market in 2007 included credits transacted from the following markets: 14% CDM Certified Emissions Reductions (CERs) 7% CCX sourced Carbon Financial Instruments (CFIs) Less than 0.5% of JI Emission Reduction Units (ERUs) Few EU ETS Allowances (EUAs) Third-party standards are important to both buyers and sellers on the OTC market because they help establish legitimacy and fundability of VERs. In 2007, the rise of third-party standards seems to have led to more VERs in the marketplace. The share of VERs transacted on the OTC market increased by about 8 percentage points in 2007 from

26 Standards for Voluntary Carbon Credits (Cont d) Types of Standards Used, OTC 2007 Source: Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, World Bank 25

27 Standards for Voluntary Carbon Credits (Cont d) Standards in the Voluntary Carbon Market Source: Forging a Frontier: State of the Voluntary Carbon Markets 2008, Ecosystem Marketplace, New Carbon Finance, World Bank 26

28 Climate Registries

29 Registries Building on the establishment of standards, a new feature of the voluntary carbon market infrastructure is sprouting up across the globe, namely, carbon credit registries. These registries are designed to track credit transactions and ownership as well as reduce the risk that a single credit can be sold to more than one buyer When dealing with a commodity as intangible as a carbon credit, such registries are crucial, but they have not been prevalent in the OTC market until recently. As the builders of registries have broken ground to construct registry infrastructure over the past year, OTC buyers and sellers have become increasingly aware of their relevance and role in the marketplace Registries i provide a host of market services, including tracking credit sales and ownership, increasing i market efficiency through information sharing, and protecting against double counting Registries are typically classified into two categories: emissions tracking registries, which track buyer entities emissions and reductions, and carbon credit accounting registries, which report on transactions of credits, allowances, and offsets 2007 saw the premier of several new project registries, and at least several more were in the works in 2008 The most utilized registries in 2007 were the CCX, CDM/JI, and TUV SUD BlueRegistry Emissions tracking registries track organizations GHG emissions and reductions, primarily preregulation or early action emissions reductions, and help entities set baselines This type of registry is measuring the beans, not tracking the trades. Because these registries help companies establish baselines and account for emission reductions, emissions tracking registries are a critical tool for regulated or voluntary cap and trade systems The development of the Climate Registry and the Western Governors Association (WGA) Midstream Oil and Gas Registry are examples of efforts in the U.S. during 2008 Carbon credit accounting registries are designed specifically to track the trades Carbon markets are creating a substantial new commoditized, fungible asset class, with carbon credit accounting registries designed to keep track of this asset class Accounting registries track only verified emission reductions after they have become carbon credits, often utilize serial numbers as an accounting tool, and generally incorporate screening requirements such as third-party verification to a specific offset standard 28

30 Proposed Federal Legislation

31 Proposed Federal Legislation The Warner-Lieberman bill has garnered significant support and is seen as the starting point for eventual legislation The terms are stringent in terms of limited allowances for power but allow some safety valves, banking, etc. It is unknown which of these two factors would govern. The balance between these factors will determine the price of allowances and the actual effectiveness in reducing carbon emissions Allocated power sector allowances are initially insufficient for the coal generation in the United States, meaning that allowances would have to be purchased Allocations to the power sector are phased out entirely by 2035, meaning all allowances would have to be purchased One of the biggest issues is the balance between allocation and auction and the basis on which allowances are required This issue is very divisive in the electric utility industry, and there will be significant winners and losers, depending on the outcome 30

32 Lieberman-Warner Closer to a Winning Political Coalition... Aspect Date introduced d August 2007 Covered GHGs Sectors covered Point of regulation Detail Carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N20), hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride Economy-wide: electric power, transportation, and industry 75% of US GHG emissions Large sources downstream at emitter Transport emissions at refinery Fuel-gas producers and importers Scale of emitters covered 10 MW 10, metric tons CO 2 e or 100 mmbtu/hr. Start date 2012 Target emissions caps level in : 10% below 2005 (rolls clock back to 1996) Penalties for non-compliance Allocation vs. auction Source: Resources for the Future; ScottMadden research : 30% below : 50% below : 70% below 2005 None specified Allocation with phase-in of auction Electric power allocated allowances phased out by

33 Lieberman-Warner Closer to a Winning Political Coalition... (Cont d) Aspect Detail Banking permitted Yes Permissible offsets Domestic sequestration Agricultural, forest, and wetlands; geologic Up to 15% Other domestic programs International offsets Yes, subject to a 15% limit permitted International participation If another nation has not taken commensurate action, importers of GHG-intensive products will be required to obtain allowances equal to domestic producers of products Potential ti relief mechanisms and Board ( Carbon Fed ) can increase the 15% limit it in first 2 years if prices are higher h than safety valve established range In subsequent years, loan limits can be relaxed or additional credits made available to avoid significant harm to the economy Additional credits must be offset in later years to meet target reductions Yearly cap targets can be suspended in extreme cases; must be made up in following years Source: Resources for the Future; ScottMadden research Aggressive goals, but plenty of potential escape clauses 32

34 Lieberman-Warner Closer to a Winning Political Coalition... (Cont d) Proposed Initial Allocation 2035 Allocation Auction, 24% Electric Power, 20% Entities (incl. Elec. Co-ops), ops), 10% Industry, 20% Recognition for Early Action, 8% Load-Serving Entities (incl. Elec. Co-ops), 10% Auction, 52% Transportation, 2.5% Agriculture/ Interior, 7.5% Assistance to States, 4% Coal Mines, 4% Transportation, 2.5% Note: Estimates 1 ton of CO 2 per MWh and 85% capacity factor Source: Resources for the Future; U.S. Climate Action Partnership; ScottMadden research Industry, 20% Nuclear Hydro 106 GW 123 GW Nat Gas 443 GW Coal 336 GW Oil 64 GW Coal Mines, 4% Assistance to States, 4% Agriculture/ Interior, 7.5% Note: Co-ops receive credits for 2005 levels plus planned growth Unspecified portion of industry allowances reserved for new entrants Initial allocation to the electric industry at 2012 is about 1 billion tons of CO 2, which is the roughly equivalent to nearly 140 gigawatts of coal-fired capacity* which in turn represents almost one-half of existing coal-fired capacity* 33

35 Federal Legislation The (Second) Biggest Issue Generator Allowances Load Serving Entity ( LDC ) Allowances Auction Fossil Heavy Fossil Light DIS-ADVANTAGED; highly incented to improve Neutral or Relatively ADVANTAGED The How s Allocate (grandfather) or auction carbon offsets? If allocate, based on historical emissions/fuel (input) or on historical power output? Reward or penalize past emissions? Allocate, then auction; resets? Which sectors; power only; all? Regionally, nationally, and/or globally? Where will auction revenues go; to which good? How to align with technology developments? Allocate (and/or Grandfather) Fossil Heavy Fossil Light Relatively ADVANTAGED; disincented to improve Neutral; Relatively DIS-ADVANTAGED Fossil Heavy Fossil Light DIS-ADVANTAGED; incented to improve ADVANTAGED; perhaps w/windfall! Based on Historical Emissions or Fuel Inputs Historical Power Output/Consumption 34

36 Contact Us For more information on Carbon Markets, please contact us. Jere Jake Jacobi Partner and Sustainability Practice Leader ScottMadden, Inc. Stu Pearman ScottMadden, Inc. Partner and Ten Piedmont Center Energy Practice Atlanta Leader 2626 Glenwood Avenue Suite 805 Suite 480 Atlanta, GA Ten Piedmont Center, Raleigh, Suite NC Atlanta, GA Phone: Phone: Mobile: Mobile: Prepared by : Katy Cagle, Jere Jacobi & Stu Pearman