Overview of Carbon Markets and US Federal Proposals to Regulate GHGs

American College of Construction Lawyers and Princeton University Joint Symposium

November 6, 2009

Jean-Philippe BrissonClimate Action Reservejphilbrisson@gmail.com

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Carbon Market Drivers

EnergyEfficiency

ScientificData

“Green”Jobs

EnergySecurity

Risk- Adjusted

Cost

Governmental response in theform of new policies and regulations

Carbon markets created by the adoption of cap-and-trade programs

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International, Regional and National Responses

. .

Australia Operational for 2010?

Canada 2007 Alberta program

EuropeEU ETS cap-and-trade program started in 2005

JapanJapanese industry has accepted to

meet voluntary targets

United States RGGI effective 2008, California AB-32

scheduled operation in 2012; multiplicity of proposals at federal level

International1992 UNFCCC and 1997 Kyoto Protocol

Global Carbon Market Trends

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Global Carbon Market Trends

World Bank, State and Trends of the Carbon Market 2009 (May 2009)

2006 2007 2008

MT CO2eUS $

MillionMT CO2e

US $ million

MT CO2eUS $

million

Allowance 1,134 24,699 2,108 49,361 3,276 92,589

Offset 611 6,536 876 13,646 1,535 33,487

TOTAL 1,745 31,235 2,984 63,007 4,811 126,345

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Four Key Developments in the US

• Massachusetts v. EPA (2007)– Carbon dioxide is a “pollutant” – EPA intends to finalize

• Finding that GHGs are pollutants that “endanger public health and welfare”

• GHG emission standards for new motor vehicles

– Implications of making GHGs “pollutants subject to regulation”

• PSD requirements for new or modified “major sources”

• Rise of state and regional programs• Emergence of tort lawsuits against emitters

– Connecticut v. AEP

– Native Village of Kivalina v. Exxon Mobil

– Comer v. Murphy

• Federal legislation

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Federal Legislation

• 110th Congress– Ten proposals introduced

– Lieberman-Warner

• reported out of Senate EPW Committee December 5, 2007

• Considered by full Senate in June 2008

• 111th Congress– Waxman-Markey (American Clean Energy Security Act)

• Adopted by the House of Representatives June 26, 2009

– Kerry-Boxer (American Clean Energy Leadership Act)

• Reported out of Senate Committee November 5, 2009

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Introduction to Cap-and-Trade

Emissions Cap

Entities within the cap can buy, sell, bank or borrow allowances to

cover their actual emissions

ALLOWANCES within the Cap

The “Right” or “Authorization” to Emit”

$ $ $

Offsets

Additional Reductions of Emissions Outside the Cap to Create Offsets

New York methane capture at landfill

Californiaredwood forest

Project

Brazil project under Kyoto?

Marginal abatement cost

is lower than allowance price

for same environmental

benefit

OFFSETS outside the Cap

Project-based Emissions Reductions

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Federal Legislation – Key Design Elements

• “Economy-wide” cap-and-trade program– 20% below 2005 by 2020; 42% below 2005 by 2030; 83% below 2005 by 2050

• Use of domestic and international offsets permitted– Results in cost containment

• Allocation of allowances– Utilities, for ratepayers– Energy-intensive, trade-sensitive industry– Promotion of clean energy, energy efficiency– Promotion of carbon capture and sequestration (CCS)

• Border tax for energy-intensive imports from uncapped countries

• Allowance reserve for moderating volatile allowance prices

• Limited preemption of state and regional cap-and-trade programs

• Preclusion of EPA GHG regulation under the Clean Air Act (Waxman-Markey only)

US Carbon Market Relative to Existing Market

0

1000

2000

3000

4000

5000

6000

RGGI CaliforniaAB-32

Canada EU Kerry-Boxer

Me

tric

To

nn

es

CO

2e

(m

illio

ns)

Offsets Allowances

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Potential Cost of Waxman-Markey

• Economic analysis ran by Environmental Protection Agency and Congressional Budget Office– Key differences in methodologies

Source: Pew Center on Global Climate Change, Climate Policy Memo #3: Cost of the American Clean Energy and Security Act of 2009 Found to Be Small According to Government Analyses (June 2009).

Source 2020 2030 2050

Allowance PriceEPACBO

$16$22

$26-27NA

$69-70NA

Annual Household Cost

EPACBO

$49-61$175

$99-312NA

$123-174NA

Annual Economy-Wide Cost billions $

EPACBO

$100$22

$100-200NA

$500-700NA

Future Gasoline Price Increase

EPA$0.13(2015)

$0.25 $0.69

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Potential Impact on Large US Emitter

• Assumption– Annual GHG emissions of 100 million MTCO2e

Potential Annual Cost of Compliance

Number of free allowances given to emitter

Allowance Price

$10 $30

100 million $0 $0

50 million $500 million $1,500 million

25 million $750 million $2,250 million

Climate Action Reserve Statistics

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• Account-holders: 150• Total projects listed and registered: 89• Climate Reserve Tonnes issued: 1.65 million

Chicago Climate Futures ExchangeClimate Reserve Tonne Futures – Dec 2009 Delivery

Offset Projects Listed with the Climate Action Reserve