Carbon Management Strategies
September 29, 2009
Presentation Overview
Regulatory Drivers for Change
Why Set Targets for Emissions Reductions?
Evaluate Opportunities for Reductions
Identifying and Implementing Offset Projects
Next Steps
The Pathway to GHG Reduction
Regulatory Drivers for Change
A Driver: American Clean Energy and Security
Act (ACES) of 2009 (aka Waxman-Markey)
Title I - Federal Renewable electricity standard, carbon capture and storage technology, coal power plant performance standards, low carbon fuel standards, and smart grid advancement
Title II - Building, lighting and appliance energy efficiency and mobile source efficiency standards
Title III - Cap and Trade (establishes both allowance and offset trading programs)
Title IV - Proposals to preserve domestic competitiveness and support workers, provide assistance to consumers, and support domestic and international adaptation initiatives
Title V – Agricultural and Forestry Related Offsets
Drivers for Change: Cap and Trade is Coming
ACES - Title III Cap and Trade
GHGs included- CO2, CH4, N2O, HFCs, PFCs, SF6, and NF3
Cap and Trade defined as a system which enforces an economy-wide limit on greenhouse gas emissions through the implementation of renewable energy, and reduces emission limits over time
http://energycommerce.house.gov/index.php?option=com_content&view=article&id=1633:the-american-clean-energy-and-security-act-of-2009-hr-2454&catid=169:legislation&Itemid=55
Entities covered
Large stationary sources with GHG emissions > 25,000 tons/year GHGs (most water utilities are likely less than this threshold)
Producers / Importers of all petroleum fuels
Sellers of natural gas
Producers of “F-gases”
Other specified sources
ACES - Title III Cap and Trade
Establishes national U.S. emission caps relative to 2005
Proposed US Emission Caps
3%
17%
42%
83%
0
20
40
60
80
100
120
2005 2012 2020 2030 2050
Baseline
Reduction
Federal Reporting Program – EPA GHG MRR
Mandatory Reporting Rule Signed by EPA on Sept 22
In general, applies to any facility with emissions > 25,000 tpy CO2-e total emissions from listed source categories
Approximately 40 listed source categories, of which 11 were deferred while EPA works on monitoring and verification issues
Scope 2 emissions and Scope 1 mobile emissions not included
Annual reporting due, calendar year reports due by March 31 of following year
Adaptation Planning is Coming, Too!
ACES calls for development of a National Climate Change Adaptation Council (under Title IV)
• Responsible for:
– Periodic National Vulnerability Assessments
– Providing policy-relevant scientific information, research products, decision tools, and technical support related to Climate Change impacts and adaptation
Vulnerability Assessments
• Regional and national vulnerability to Climate Change impacts
• Strategies to adapt
• Priorities for further research
What is Adaptation?
Climate change adaptation includes changes in society’s policies, practices, systems, infrastructure, and operations to manage risks and impacts resulting from existing and future climate change effects
Adaptation is complementary to mitigation, which reduces Greenhouse Gas emissions to reduce future climate change effects
ACES Adaptation Planning
Within 1 year of publication of each National Assessment, each Federal agency shall complete an agency climate change adaptation plan detailing the agency’s current and projected efforts to address the potential impacts of climate change
• Review of impacts – current and future
• Description of priorities for building adaptive capacity
• Review of the agency’s current efforts to address Climate Change
• Description of initiatives including
– Strategic objectives
– Resources
– Timelines
– Benchmarks and methods
What do Regulatory Drivers mean for Water Utilities?
Based on regulation, entities covered
Large stationary sources with GHG emissions > 25,000 tons/year Scope 1 GHGs
However, unlikely that most water utilities will be > 25,000 tons/year of direct GHG emissions
For example, mid-sized water utility in the Bay Area (wholesaler with significant source water pumping) generated approximately 10,000 tons/year of Scope 1 GHG emission in 2006.
Therefore, unlikely that most water utilities will be regulated.
However, water utilities may have an opportunity to participate in the market through sale of carbon offsets.
Emissions
Prior to Cap
Emissions Trading:
Regulatory Allowance Surplus
Emissions After
Cap in Effect
Allowance Surplus
Available to Sell or BankEmission reductions via
technology, maintenance,
reduced production, etc.
Emissions Cap
Compliance
Period
Emissions Trading:
Regulatory Allowance Deficit
Emissions
Prior to CapEmissions After
Cap in Effect
Allowances Deficit
Need to Buy Allowances or OffsetsEmissions Cap
Emission decrease insufficient
Compliance
Period
Why Set Targets for Emissions Reductions?
Why Set GHG Emission Reduction Targets?
Though regulatory drivers may not currently apply:
Setting a Reduction Target drives organizational innovation
Environmental stewardship & public perception improve
Climate-related targets have a positive influence on employee morale.
In all cases internal communications are important—increasing employee understanding of climate change helps:
• Gain buy-in to the target
• Generates new ideas on how to improve environmental performance.
“Action” Benefits of Targets:
• Gives Action Plan a tangible, specific goal
• Allows measurement of progress and credit for results.
• Helps prioritize actions
Target Framework
Time Frame
• Near-term (1 – 3 years)
• Long term (5 – 20+ years)
Objective
• Aspirational
• Results-based
Scope
• International / Domestic
• Sectoral / company-wide / business unit / facility-wide / process specific
Target Setting Approaches
A “top-down” target-setting process sets the level for the whole water utility at once, without a sector by sector analysis.
• Kyoto reduction commitments
• Industry bench-marks
Under a “bottom-up” process, the water utility target level is based on analysis of potential reductions in individual sectors
• Short-term, cost-effective reductions
• Efficiencies of upcoming projects
• Technology implementation
• Management system improvements
Optimizing Assets and Products
Potentially reduce costs through more carbon efficient operations
• Many GHG reduction opportunities have net positive payback due to energy savings or other cost reductions
• If reductions qualify as offsets, potential revenue stream
Design carbon reduction programs with ambitious targets
• Couple energy and carbon efficiencies to maximize gains
Cut costs and reduce carbon emissions throughout your supply chain
• Design clear mandates, key performance indicators when selecting and negotiating with suppliers
Building “Shareholder” Value
Completing the GHG emissions inventory will provide actual numbers from which to develop sustainability goals, set reduction targets, or report externally
• Carbon Disclosure Project (Goals and Objectives)
• Global Reporting Initiative (Sustainability Reports)
• Various voluntary programs or registries (Inventory Numbers)
Allows water utility to report with confidence to stakeholders and customers;
Meets evolving standards of ‘fiduciary responsibility’ and materiality expectations of investors, customers, etc.
Evaluate Opportunities For Reductions
Energy Efficiency Projects
Completion of a GHG Inventory:
• Allows for analysis of fossil fuel use (stationary and mobile sources) and utility usage (e.g. electricity and steam);
• Allows identification and ranking, by facility, state, or region, of assets that are large emitters of GHGs and heavy users of energy;
• Evaluation of energy use allows firm to evaluate cogeneration options, alternative fuels, or the purchase of renewable energy certificates, if desired;
• Guide recommendations for future capital allocations (i.e. process upgrades, expansions, new plants, etc.)
• Facilitates benchmarking amongst industry peers.
Process of Generating a Reduction Project
Quantify emission reductions by:
• Define the emission reduction project
• Determine the baseline scenario for each project activity
• Determine boundaries
• Quantify emission reductions
• Monitoring/reporting/verification
• Adhere to specific policy-related considerations, as applicable
Additionality Requirements for Offsets must be observed (to be discussed)
Water Utility Reduction Opportunities
Building Energy Efficiency
Efficiency of motors, pumps, hydraulic systems
Alternative Fuels
Renewable Energy
Management of Mobile Sources
Land Use, Land Use Change, Forestry (LULUCF)
External Projects
Purchase of Carbon Offsets / RECs
Abatement
cost <$50/tonU.S. mid-range abatement cost curve – 2030
Source: McKinsey analysis
*
*
*
*
*
*
*
*
*
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CostReal 2005 dollars per ton CO2e
* * * * ** * * * * *** * *
-23*
Residential
electronics
Commercial
electronics
Residential
buildings –
Lighting
Commercial
buildings –
LED lightingFuel economy packages
– Cars
Commercial
buildings – CFL
lighting
Cellulosic
biofuels
Industry –
Combined
heat and
power
Existing power
plant
conversion
efficiency
improvementsConservation
tillage
Fuel economy
packages – Light
trucksCommercial
buildings –
Combined
heat and
power
Coal mining –
Methane mgmt
Commercial
buildings –
Control
systems
Distributed
solar PV
Residential
buildings –
Shell
retrofitsNuclear
new-
build
Natural gas
and petroleum
systems
management
Active forest
management
Afforestation of
pastureland
Reforestation
Winter
cover crops
Onshore wind – Medium
penetration
Coal power plants – CCS
new builds with EOR
Biomass power –
Cofiring
Onshore wind –
High penetration
Industry –
CCS new
builds on
carbon-
intensive
processes
Coal power
plants – CCS
new builds
Coal power plants –
CCS rebuilds
Coal-to-gas
shift – dispatch of
existing plants
Car hybridi-
zation
Commercial
buildings –
HVAC
equipment
efficiencySolar CSP
Residential
buildings –
HVAC
equipment
efficiencyIndustrial
process
improve-
mentsResidential
water heaters
Manufacturing –
HFCs mgmtResidential
buildings –
New shell
improvements
Coal power plants–
CCS rebuilds with EOR
Potential
Gigatons/year
Commercial
buildings –
New shell
improvements
Afforestation
of cropland
Onshore wind –
Low penetration
Reducing Costs through Carbon-Efficient Operations
4.2 gigatons/yr
Negative or No Life-Cycle Costs
Developing an Offset Project
Carbon Offsets
Tradable commodities typically representing the reduction or sequestration of one metric ton of CO2-e
Compliance-based or voluntary instruments
Certified Emission Reductions (CERs) in the Kyoto Protocol Clean Development Mechanism (CDM)
Utility could sell offsets
Utility could invest in actions outside of its boundaries to create reductions
However, must satisfy offset accounting standards. In addition, methodologies specifically for that project type must exist for
the voluntary or compliance offset trading program
Emissions Trading:
Regulatory Allowance Deficit (A Reminder)
Emissions
Prior to CapEmissions After
Cap in Effect
Allowances Deficit
Need to Buy Allowances or OffsetsEmissions Cap
Emission decrease insufficient
Compliance
Period
Offset Accounting Standards: Additionality
New projects that otherwise would not have occurred
Regulatory Surplus
• Not required by law, regulation, permit, etc.
Implementation Barriers
• investment barriers
• technological barriers
• institutional barriers
Common Practice
• Not a usual activity
Offset Accounting Standards: Additionality, continued
• The assurance of additionality is required to produce a credit for transaction.
Projects only receive marketable credits for doing better than “business as usual” and showing that they have resulted in a net reduction of
carbon in the atmosphere.
Sequestration without
project: “business as
usual”
This reduction
is creditable.$
Sequestration with
project
Offset Accounting Standards: Permanence
Permanence: For example, a critical issue with offset projects like forests is guaranteeing the permanence of their atmospheric benefits as a carbon sink.
• The carbon stored by forest projects, can be re-emitted in the future. Therefore, it may not result in a permanent reduction in atmospheric greenhouse gases. When a reversal occurs, the credit issued to project becomes invalid.
• Several instruments have been developed to manage the risk of reversals, including reserves of credits, aggregation schemes, and insurance mechanisms. These can ensure that liabilities are covered and the necessary incentives are maintained, while allowing flexibility for project
developers.
Offset Accounting Standards: Transparency and
Governance
Transparency and Governance. The issue of market transparency and fairness is paramount to the success of any fledgling carbon offset market. Without ensuring trust in the market and the integrity of the underlying commodity, trade will not occur and the market will fail.
• International compliance markets and voluntary carbon markets in the United States have made strides in recent years on issues of accountability and standards of assurance for forest and land based offset projects.
• Providing for impartial, third-party monitoring, verification and assurance of eligible
land-based projects is essential.
Project Life Cycle
Project
Initiation
Project
Definition and
Evaluation
Data Analysis
& Modeling
Preparation of
Project
Documents
Listing on
Registry
Verification (&
Monitoring)
Carbon
Offsets
Issued
Project development cycles for offsets depend heavily on the requirements
of the cap and trade framework, but typically involve the following steps:
Waxman Markey Early Offset Supply
Bill requires Administrator to issue one credit for each t/CO2e emissions reduced, avoided, or sequestered if:
• The offset project was started after Jan 1, 2001
• The reduction occurred after Jan 1, 2009 and before the date 3 years after the bill’s enactment (whichever is sooner) and;
• the offset credit was issued under any State, tribal or voluntary GHG emission offset program that the administrator determines:
– was established prior to Jan 1, 2009
– has developed offset project type standards, methodologies, and protocols through a public consultation process
– has publicly published standards, methodologies, and protocols that require credited emission reductions to be permanent, additional, verifiable and enforceable;
– requires that all credits are registered with individual serial
numbers.
Waxman Markey—Role of Offsets
EPA Administrator to publish list of eligible offset types, establish oversight program.
• 9 member Offsets Integrity Advisory Board (OIAB) to provide a list of recommended offset project types to Administrator within 90 days of bill’s passage.
• In 2017 and every 5 years thereafter, OIAB shall submit a public scientific review of offset and deforestation programs including methodologies.
International offsets allowed
Maximum 2 billion tons of offsets (1 billion domestic, 1 billion international)
Waxman Markey and Offsets
Currently proposed U.S. legislation in the Congress, Waxman-Markey H.R. 2454, includes provisions to:
• Establish an Offsets Integrity Advisory Board to “provide recommendations . . . regarding offset project types that should be considered for eligibility . . .” (Sec.731 (c)(1);
• Promulgate regulations establishing a program for the issuance of offset credits (Sec. 732 (a) and refers to “projects that result in reductions or avoidance of greenhouse gas emissions or sequestration of greenhouse gases.” (Sec. 732 (b) (i)).
• Designate the U.S. Department of Agriculture to manage a land-based offset program including Agricultural offsets and Forestry offsets. This has implications for Forestry, Ag Methane, etc.
U.S. Offset Markets
Next Steps
Short Term Steps towards Strategy Development
1. Understand and quantify your CO2e emission sources from supply chain to distribution – develop your baseline.
2. Analyze your position with regulations - need for allowances or ability to develop offsets.
3. Identify other drivers for action, including environmental stewardship goals.
4. Consider your data collection strategy carefully; integrate systems where possible. Avoid the temptation to create “data islands”.
5. Analyze, prioritize and publicize your emission reduction priorities.
6. Set ambitious goals and initiate positive return emission reduction projects now.
7. Incorporate your GHG reduction strategy into your CIPs and design projects.
8. Develop and implement external communication plan.
Questions?