Developing Offset Projects in a U.S. Pre-Compliance Market: Smart Investment or Unwise Policy Gamble Potential Carbon Markets & Utah Agriculture Utah.

Developing Offset Projects in a U.S. Pre-Compliance Market: Smart Investment or Unwise Policy Gamble

Potential Carbon Markets & Utah AgricultureUtah State UniversityOctober 8, 2009

Regulatory Risks

• What are the areas of certainty regarding offsets in a US cap and trade system?

• Offsets will be allowed as part of cap-and-trade system– Limitations on offsets vary significantly

• House of Representatives Bill (Waxman-Markey) -- 1 Billion tonnes domestic during first year

– Approved project types • Significant number of ag-related project types in Senate Bill (Kerry-

Boxer) including agricultural, grassland and rangeland sequestration and management practices, manure management and biogas capture

– US based projects

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Regulatory Risks

• What are the areas of uncertainty related to offsets in a US cap-and-trade system?

• Timing of implementation of cap-and-trade

• Project Start-Date– Kerry – Boxer -- Jan. 1, 2009

• Early Action– Kerry-Boxer -- Jan. 1, 2001 and are registered

• Registries and Methodologies– Chicago Climate Exchange, Climate Action Reserve,

Voluntary Carbon Standard, American Carbon Registry

3 Blue Source | A Leading Climate Change Portfolio

Agricultural Project Types

• Methane collection, combustion and avoidance projects involving organic waste streams that would have otherwise emitted methane in the atmosphere, including manure management and biogas capture and combustion;• Projects involving afforestation or reforestation of acreage

not forested as of January 1, 2009• Forest management resulting in an increase in forest carbon

stores, including harvested wood products• Agricultural, grassland, and rangeland sequestration and

management practices, including – Altered tillage practices, including avoided abandonment of such

practices,– Winter cover cropping, continuous cropping and other means to

increase biomass returned to soil in lieu of planting followed by fallowing;

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Agricultural Project Types Continued…

• reduction of nitrogen fertilizer use or increase in nitrogen use efficiency;• reduction in the frequency and duration of flooding of rice

paddies;• reduction in carbon emissions from organic soils;• reduction in greenhouse gas emissions from manure and

effluent;• reduction in greenhouse gas emissions due to changes in

animal management practices, including dietary modifications;• planting and cultivation of permanent tree crops;• practices to reduce and eliminate soil tillage;• reductions in greenhouse gas emissions through restoration of

wetlands, forestland, and grassland; and• sequestration of greenhouse gases through management of

tree crops;

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Agricultural Project Types Continued…

• Changes in carbon stocks attributed to land use change and forestry activities, including—– management of peatland or wetland;– conservation of grassland and forested land;– improved forest management, including accounting for

carbon stored in wood products;– reduced deforestation or avoided forest conversion;– urban tree-planting and maintenance;– agroforestry; and

– adaptation of plant traits or new technologies that

increase sequestration by forests.

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Protocol Developments related to Agricultural Projects

• Kyoto – CDM

• Province of Alberta

• Voluntary Carbon Standard

• Chicago Climate Exchange

• Climate Action Reserve

• American Carbon Registry

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How Buyers/Emitters Manage the Regulatory Risk: A Portfolio Approach

• Offset a material portion of the risk using a portfolio approach– Multiple vintages, projects, types of offsets, project start-

dates• Execute transfers on recognized registries such as the

Climate Action Reserve (CAR), American Carbon Registry (ACR) and Voluntary Carbon Standard (VCS)

• Purchasing offsets today provides a hedge against increasing prices and uncertainty about the availability of offset supply• A secondary voluntary market exists today for offsets that

are not eligible for compliance purposes in the future

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Pre-Compliance Transaction Trends

• According to New Carbon Finance, Aug-Sep 2008 pricing:• $10.75 / tonne for Climate Action Reserve offsets• $7.25 / tonne for Voluntary Carbon Standard offsets• $4.00+ for “other” offsets

• Compliance eligibility risk -- offsets with a lower perceived eligibility risk command a premium price (more established offset types with recent start dates)• Product specification regarding standard and registry are

also fundamental determinants of price • Potentially have 1-2 more years of pre-compliance trading

with uncertainty relating to offset criteria

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Chicago Climate Exchange

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Blue Source’s Offset Portfolio

• Blue Source’s VER portfolio is the largest in North America:

– Carbon Capture and Storage (CCS)– Coal mine methane – Wastewater treatment– Landfill gas– Agriculture– Forestry– Industrial Gas Destruction

Blue Source has $500M in capital from Och Ziff Capital Management Group to invest in VER projects and CO2 pipeline infrastructure projects.

11 | Blue Source | A Leading Climate Change Portfolio

Blue Source’s Strategic Alliance with Goldman Sachs

• Blue Source views a significant pre-compliance market emerging • Blue Source expects credit to become more important in

transactions• Goldman has a significant client base of large emitters and

potential pre-compliance purchasers• Goldman Sachs has the ability to see the marketplace and

create products to meet the need

12 | Blue Source | A Leading Climate Change Portfolio

Contact Information

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Lauren KimbleVice President, [email protected] Lake City, Utah